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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 wo
by ucha 11y 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 11y agoThat 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 11y agoWhat? "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 11y agoWhat 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 11y agoAlso, 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 11y agoexecutives 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 11y agoThe 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.