4 ms·

- Exorbitant loss of upside Great entrepreneurs are known for their passion to pursue their dreams at virtually any cost, and sub-prime VCs smell their blood an

- Exorbitant loss of upside Great entrepreneurs are known for their passion to pursue their dreams at virtually any cost, and sub-prime VCs smell their blood and desperation. Those companies become owned by VCs quickly and because of the investors' lack of relevant operating experience yields a further deflation of the valuation of the company. We've seen many companies with end-game founder stock way below 5%, which is unlikely to become life-changing. So, why would you take the scrutiny of the CEO job with that outcome in mind? Always think about that, is it better to own 100% of a company worth 10 million bucks or 5% of a company worth 200 million? I would rather own completely the smaller business and have fewer people to answer to and focus on a more niche (often times more interesting) problem.

diego 18y ago
Except that if you own 5% of a company worth 200 million you should be able to quit and walk away with 10 million (for the standard definition of "own" and "worth"). If you own a company worth 10 million you can't really quit. If you sell it, chances are that the acquiring company will want you around for years so you'll be in the above situation but with golden handcuffs.
- mediaman 18y ago
  It depends on how you manage it -- there are people who chain themselves to the business, but if the business is really worth $10mm (and not just because of inflated hope, let's say it has $2-3mm in sales and maybe $500k-$1mm in ebitda) you can bring in operators who, when smartly recruited, take a huge amount of stress off the founder and allow you to run the business part time, once you've instilled a good operating culture.
  - anamax 18y ago
    > $2-3mm in sales and maybe $500k-$1mm in ebitda) you can bring in operators who, when smartly recruited, take a huge amount of stress off the founder and allow you to run the business part time That's just barely big enough to go part time. Folks who can competently run such biz aren't cheap - they're at least $200k (fully burdened), taking a significant fraction of the $500k-$1M. And, even then part-time is an illusion because it takes time to figure out that you've got a good one and the good ones tend to move to greener pastures.
    - mediaman 18y ago
      I agree with you that hiring that talent at that level of EBITDA will take a big chunk of your profits. But there are one of two types you'll hire. One is if your business is not going to grow much (say, <9% a year). I'm not sure that requires a $200k person. Perhaps there are some low revenue, low growth businesses that do require someone that expensive. I'd be genuinely interested in examples, for a thought exercise if nothing else. The other is if your business will grow, and will experience the challenges associated with that. Maybe not insane growth, but perhaps 10-50% a year. Then you do need that more expensive person who has grown a company to be bigger then yours is today. If it is the latter case, then the percentage of profits you give to that person will decrease with time.
- tptacek 18y ago
  You say that if you sell a 10MM company, chances are you'll be handcuffed to the acquirer. This seems like pure supposition on your part. I know plenty of people who wound up handcuffed to their VC-backed team, due to vesting, incentive packages issues after shatteringly bad valuations, or just terms and conditions of the deal. The same forces seem to be at play in the 200MM case as in the 10MM case, with the significant difference that in the 200MM case, the interests of the board aren't aligned with the interests of the founders. This is all a big moot point, of course, because you aren't going to build a 200MM company.
  - diego 18y ago
    It's not supposition, I'm speaking from experience. For a tech startup, 10M is a price point at which you have a small team and a product with a few man-years of development behind it. Acquiring the product without the team is only worthwhile when the product is a brand. Otherwise, the team/product combinmation is what gives the company most of that value. To name one example: in 1999 my company paid $13M for a company with 11 people, most of them developers. The company failed to offer them an interesting package so they quit after the acquisition. A team on our side was left to deploy the software. After a few weeks we decided it would be easier to develop the same functionality from scratch. On the other hand, the assumption was that you 'owned' 5% of the 200M company. If you are handcuffed, then you own less. If you owe the bank 70% of the value of your house, only 30% is yours. Same with vesting.
    - tptacek 18y ago
      I respect your experience, but I don't understand how your example has anything to do with $13MM vs. $200MM. In neither case is the CTO, VP/E, or MTS more or less necessary to the acquiring company. You can "own" 5% or 100% of 200MM, but if an acquirer thinks they need you to execute on the acquisition, they're going to keep you, right?
      - diego 18y ago
        The idea is that if you own 5% of a company worth 200M and you quit, the remaining 95% ownership of the company cares enough about it that they will replace you and move on. In this scenario there is no acquisition, and you walk away without making the company lose any significant value. I've seen that happen: one of the fully vested founders of the company I worked for left on a sabbatical. After six months he decided he didn't want to come back. By then all his functions had been taken over by other people. He sold some of his stock, kept the rest and went back to grad school. The point is not so much the size as the fact that you can walk away more easily if you own a small fraction of a company without causing a significant drop in value.
rjurney 18y ago
I'm reading '4 Steps to the Epiphany' http://www.cafepress.com/kandsranch http://www.cafepress.com/kandsranch and one thing that is really nice about it is that it breaks markets down by type, such that one kind of product would be silly to take VC because it can get to profitability in only a year, whereas another would have to, because it will likely take 5 years to be profitable. Which is really interesting, because it tells you what kind of products to build if you want to own 100% of a $10 million company, don't want to take or can't find VC, etc.
akeefer 18y ago
I've also seen companies fail precisely because the founders were unwilling to give up any control. They may have thought they were choosing between 100% of 10 million and 5% of 200 million, but by being unwilling to give up any control at all they doomed themselves to 100% of 0. In fact, I'd say that the most common mistake I've seen/heard about is often people focusing way, way too much on their personal stake and control, thus crippling the ability of the business to expand.
tptacek 18y ago
The 10MM bplan retains the option of becoming a 200MM bplan, because they didn't shackle themselves to a VC-led investment board. You can always take funding later, if you need it. The opposite isn't true.

diego 18y ago

Except that if you own 5% of a company worth 200 million you should be able to quit and walk away with 10 million (for the standard definition of "own" and "worth"). If you own a company worth 10 million you can't really quit. If you sell it, chances are that the acquiring company will want you around for years so you'll be in the above situation but with golden handcuffs.

mediaman 18y ago
It depends on how you manage it -- there are people who chain themselves to the business, but if the business is really worth $10mm (and not just because of inflated hope, let's say it has $2-3mm in sales and maybe $500k-$1mm in ebitda) you can bring in operators who, when smartly recruited, take a huge amount of stress off the founder and allow you to run the business part time, once you've instilled a good operating culture.
- anamax 18y ago
  > $2-3mm in sales and maybe $500k-$1mm in ebitda) you can bring in operators who, when smartly recruited, take a huge amount of stress off the founder and allow you to run the business part time That's just barely big enough to go part time. Folks who can competently run such biz aren't cheap - they're at least $200k (fully burdened), taking a significant fraction of the $500k-$1M. And, even then part-time is an illusion because it takes time to figure out that you've got a good one and the good ones tend to move to greener pastures.
  - mediaman 18y ago
    I agree with you that hiring that talent at that level of EBITDA will take a big chunk of your profits. But there are one of two types you'll hire. One is if your business is not going to grow much (say, <9% a year). I'm not sure that requires a $200k person. Perhaps there are some low revenue, low growth businesses that do require someone that expensive. I'd be genuinely interested in examples, for a thought exercise if nothing else. The other is if your business will grow, and will experience the challenges associated with that. Maybe not insane growth, but perhaps 10-50% a year. Then you do need that more expensive person who has grown a company to be bigger then yours is today. If it is the latter case, then the percentage of profits you give to that person will decrease with time.
tptacek 18y ago
You say that if you sell a 10MM company, chances are you'll be handcuffed to the acquirer. This seems like pure supposition on your part. I know plenty of people who wound up handcuffed to their VC-backed team, due to vesting, incentive packages issues after shatteringly bad valuations, or just terms and conditions of the deal. The same forces seem to be at play in the 200MM case as in the 10MM case, with the significant difference that in the 200MM case, the interests of the board aren't aligned with the interests of the founders. This is all a big moot point, of course, because you aren't going to build a 200MM company.
- diego 18y ago
  It's not supposition, I'm speaking from experience. For a tech startup, 10M is a price point at which you have a small team and a product with a few man-years of development behind it. Acquiring the product without the team is only worthwhile when the product is a brand. Otherwise, the team/product combinmation is what gives the company most of that value. To name one example: in 1999 my company paid $13M for a company with 11 people, most of them developers. The company failed to offer them an interesting package so they quit after the acquisition. A team on our side was left to deploy the software. After a few weeks we decided it would be easier to develop the same functionality from scratch. On the other hand, the assumption was that you 'owned' 5% of the 200M company. If you are handcuffed, then you own less. If you owe the bank 70% of the value of your house, only 30% is yours. Same with vesting.
  - tptacek 18y ago
    I respect your experience, but I don't understand how your example has anything to do with $13MM vs. $200MM. In neither case is the CTO, VP/E, or MTS more or less necessary to the acquiring company. You can "own" 5% or 100% of 200MM, but if an acquirer thinks they need you to execute on the acquisition, they're going to keep you, right?
    - diego 18y ago
      The idea is that if you own 5% of a company worth 200M and you quit, the remaining 95% ownership of the company cares enough about it that they will replace you and move on. In this scenario there is no acquisition, and you walk away without making the company lose any significant value. I've seen that happen: one of the fully vested founders of the company I worked for left on a sabbatical. After six months he decided he didn't want to come back. By then all his functions had been taken over by other people. He sold some of his stock, kept the rest and went back to grad school. The point is not so much the size as the fact that you can walk away more easily if you own a small fraction of a company without causing a significant drop in value.

rjurney 18y ago

I'm reading '4 Steps to the Epiphany' http://www.cafepress.com/kandsranch http://www.cafepress.com/kandsranch and one thing that is really nice about it is that it breaks markets down by type, such that one kind of product would be silly to take VC because it can get to profitability in only a year, whereas another would have to, because it will likely take 5 years to be profitable. Which is really interesting, because it tells you what kind of products to build if you want to own 100% of a $10 million company, don't want to take or can't find VC, etc.

akeefer 18y ago

I've also seen companies fail precisely because the founders were unwilling to give up any control. They may have thought they were choosing between 100% of 10 million and 5% of 200 million, but by being unwilling to give up any control at all they doomed themselves to 100% of 0. In fact, I'd say that the most common mistake I've seen/heard about is often people focusing way, way too much on their personal stake and control, thus crippling the ability of the business to expand.

tptacek 18y ago

The 10MM bplan retains the option of becoming a 200MM bplan, because they didn't shackle themselves to a VC-led investment board. You can always take funding later, if you need it. The opposite isn't true.