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"Secret will hand its remaining cash back to investors" Minus the $6M the founders took off the table? If they keep it.. if ever there were a case for blackli

• ucha 12y ago
  The whole point of taking money off the table is to keep it when the company goes bust. What you're describing is more similar to a loan where the collateral would be a slice of equity.
  • DaniFong 12y ago
    That is absolutely not true. The much more sensible reason is to take enough off the table to align investors and the management by (a) making sure the management isn't worrying about personal cash day to day, and (b) allowing the managers to prefer a home run swing rather than an early acquisition. It's always controversial, and never more so in my memory than here.
  • abalone 12y ago
    What? "The point" of selling equity for cash is to get liquidity. That is the justification for allowing founders to do it early, not to reward them when their company goes bust. In fact, when executives sell a bunch of stock right before public companies announce bad news or go bust it often warrants an insider trading investigation.
    • jonknee 12y ago
      What else would you want that liquidity for? Paying off the founders lets investors worry less about them wanting to sell before the investors want to sell (the investors don't have 99% of their net worth in the startup like the founders likely do). It would be nuts to try and claw back that money. The founders surely had remaining equity which is now worthless, everyone is taking a hair cut. > In fact, when executives sell a bunch of stock right before public companies announce bad news or go bust it often warrants an insider trading investigation. They didn't just do this, the last round was in July 2014. It was a flash in the pan.
      • zaidf 12y ago
        Also, the $6M cash could have also been worth $600M. In that case, would the OP want the investors to give some money back to the Secret founders..?
    • zaidf 12y ago
      executives sell a bunch of stock right before public companies announce bad news or go bust it often warrants an insider trading investigation Secret isn't a public company. Secret's investors are insiders themselves.
    • nostrademons 12y ago
      The point of selling the company is to get liquidity. The point of founder cash-out rounds is to align incentives between the founders and investors. Investors have an incentive to see the company "Go big or go home", because they spread their bets across a whole portfolio of companies. Founders have an incentive to play it much safer, because their whole net worth is locked up in one company and without cash-out rounds, they have a strong incentive to take the first acquisition offer that leaves them financially independent rather than shoot for the one that maximizes the VC's financial outcomes. I'm not close enough to Secret to know whether the system functioned as intended here. It's possible (and suspicious, given the timing of the rounds and subsequent redesign that trashed their brand) that Secret rode the hype machine, cashed out at the top of the Secret bubble, and left investors holding the bag. But it's also possible (and likely, given public statements made and their hiring behavior) that this was a good-faith investment by VCs seeking a return in a company that honestly thought they were on to the next big thing and cashed out so that their risk-tolerance would be aligned as they shot for the next big thing. In that case, the founder cash-out functioned exactly as intended, it just didn't have the outcome anyone was hoping for.
• tdaltonc 12y ago
  The investors got exactly the behavior they wanted. They let (encouraged? obliged?) the founders to take money off the table so that they would double down on a high-risk/high-reward go-big-or-go-bust strategy. The Founders did that, and the dice broke against them. They absolutely should not give the money back, and no one should give them a hard time about keeping it.
• zaidf 12y ago
  1. What do you mean "if they take it..."? It is their money. They gave away personal equity that was at the time worth $6M for the cash. 2. It is ridiculous to assume they pulled any move. Startups are a high risk gamble and the VCs who put money in them know it better than anyone else does. So they didn't pull a move on anyone. 3. Let's say a company raises $1M on a $3M valuation. Then in one year the valuation goes up to $300M. Would you be calling for blacklisting of those investors? Because by your logic, they should know the company was going to be so successful and should have given the founders a better deal.
  • smt88 12y ago
    I agree that there isn't necessarily anything unethical about this. The investors knew what they were doing. However, founders who would pocket $6M from a not-even-close-to-profitable company are probably not good founders, or they don't believe in the company. Either way, their behavior doesn't inspire confidence.
    • tdaltonc 12y ago
      I think that you are totally wrong about these founders in particular and what taking money off of the table revels about founders generally. Most founders are extremely protective of their startup. It's their baby, and their livelihood. They'll do anything to keep it alive. Most "poor"(<$5M in the bank) would prefer a 'safe' acquisition to gambling on being a world changer. A good accusation can change a persons life forever $10M verses $100M? Who cares? Either way it's a lifetime worth of fuck-you-money. But investors what entrepreneurs to "go big." So if an investor finds a company and team that they think has a chance of making it they will give the founders fuck-you-money. It says, "ok, your safe, nothing can hurt you. Now take the chance of building a company that can change the world!" When you see a founder take a big chunk of cash from an early round, you shouldn't think, "they don't believe in what they're doing." You should think, "These investors (who know these founders a lot better then I do) think that they are so awesome, and have such a high chance of doing something transformative, they are basically giving them enough money that they will never have to worry about money again."
• Gaussian 12y ago
  That's silly. Everybody involved understood why the founders would choose to do this. It has everything to do with risk and opportunity and likely nothing to do with some kind of malevolent avarice. And bailing while returning a significant sum to investors takes courage. It's easier to sit in board meetings and pound the table and tell them how you're going to turn things around, even if you don't believe it.
  • duderific 12y ago
    > It's easier to sit in board meetings and pound the table and tell them how you're going to turn things around, even if you don't believe it. I don't know if that's true. They have $3 million in the bank "off the table" money -- given that, it's probably easier to chill for a while and then start another company than waste time on a company you don't like anymore.
• deleted 12y ago
  [deleted]
• Frondo 12y ago
  Founders acting in their own self-interest? That sounds like capitalism in action to me.
• geojageojawg 12y ago
  > If they keep it.. if ever there were a case for blacklisting founders, this is it. Hell no to this horrific and toxic idea that we should blacklist anybody who sells equity and then fails. Can you please identify yourself, so we can all be well-informed that if we go into business with you, we're going into business with somebody who believes in the public shaming and blacklisting of those who take chances and fail? You're not cool dude. Not cool at all. And I say that as somebody who always thought secret was disgusting and value-destroying.
  • lmm 12y ago
    Taking a chance and failing is one thing. But $6m is an absurd amount of money. That's never-work-again money (I'm not sure why they'd even mind being blacklisted). People in my neighbourhood would literally kill for less (and in a few tragic cases did).
    • sshumaker 12y ago
      Are you serious? After taxes that's maybe 1.8mm each. That's great, but certainly not never-work-again, especially in SF where the median one bedroom goes for 3300/month. When doing FU calculations, you have to figure out how much you can earn from investing it, then factor in cost of living increases over the next 40 years. Put it another way, if they invest and get 4% annually that's like earning a salary of 72k. Good luck living on that in SF with rent increases. (Starting salary for a new CS graduate at bigco in the Bay Area is like 105k).
      • lmm 12y ago
        Maybe not in SF, but if you don't have to work again there's no need to live in SF. 72k/year is well above the median national salary; it's absolutely retirement-level money.
    • avn2109 12y ago
      This is not even close to never-work-again money unless you want to live Cambodia or something. There is no portfolio in the world that gives a >75% chance of a safe, comfortable lifetime of first world retirement with that amount of pretax capital. We're not even in the ballpark.
• prostoalex 12y ago
  I'm assuming there was full understanding that some of the money will go to founders, with usual arguments - "brings long-term focus", "takes care of day-to-day expenses", "encourages building for the long-term instead of flipping a company", etc. With that said, with Odeo, one thing that went down in history books is how Evan Williams graciously purchased the shares out of his personal fortune, thus making every investor even.
  • nostrademons 12y ago
    The irony is that if Evan Williams had not bought back the shares and had instead started Twitter out of the same corporate entity, the investors would've done a whole lot better. Instead of breaking even, they'd be sitting on a few billion.
    • prostoalex 12y ago
      The way the story gets told in "Hatching Twitter" is that some of those investors (SV Angel is the one called out by name) said "Cool, we'll take the money back, but this is earmarked for your next project", which still got them into early TWTR.
• kzhahou 12y ago
  I wonder if the non-founder employees that took cash off the table during that financing round, will get to keep it? ...oh, right, only founders get to do this. Everyone else (who had <1% equity to begin with) gets zilch.
• carrotleads 12y ago
  Investors motto is "Go big or go home" Here they are going home and saving some money too. Would you have the same view if Secret went on to make billions and require the Investors to pay the equity back to the founders. 6m could have been a billion there. The only negative is if investors think the founders lacked imagination to put the money to use with a innovative Pivot. Maybe there was no pivot in sight and then the best option is to return the rest of money and keep the 6m money the Investors gave up earlier for their big bet.
• bsder 12y ago
  The point of letting the founders take some off the table is that the investors want to swing for the home run rather than a safer acquisition that the founders would probably take. In fact, the investors probably let the founders take some off the table precisely to prevent the cashout. I suspect that Secret had an offer in hand from someone, but the investors wanted a bigger return. The problem is that the little people who also had stock/stock options never got the opportunity to cash out and they would have almost certainly made the same choice as the founders.
• picks_at_nits 12y ago
  Nope. Why did the investors allow the founders to take cash off the table? To align interests. Meaning, to swing for the fences instead of making safe, conservative decisions and building a lifestyle business that would minimize the chance of shutting down. With the money off the table, the founders would have the freedom to try risky things, to manage the company such that the chance of failure was very high but the payoff for an unlikely success would be even higher. The company shutting down is exactly the outcome everyone expects to be a likely outcome. The investor has a portfolio of such investments, and does not care that the founders cashed in. The one hit they get will pay for all the founders they pay out. In fact, investors won't want to blacklist these founders. The message that would send is, "even if you get to take money off the table, you should still manage conservatively, because you will be screwed for life if you have to shut your company down." Investors do not want founders to be terrified of shutting down.
• rajacombinator 12y ago
  As others have pointed out, you're obviously wrong here. The investors are big boys who knew what they were getting into when they let the founders take money off the table. If anything, the founders are being stand up guys by returning the investment money rather than "pivoting" into the ground.