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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

by zaidf 11y 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 11y 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 11y 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."
  - vonklaus 11y ago
    Well, maybe getting an early payout caused them to lose the hustle. They turned the engine off, handed the keys back to the investors and walked. It would have been harder to shut down the company if they saw 0 upside, and all their sweat equity evaporated.
    - zaidf 11y ago
      You seem to suggest that shutting the company down was definitively a worse outcome for investors vs. keeping it going. It isn't that black and white. For example, if they kept the company going and spent the remaining millions and still failed(most common outcome), it is a worse outcome than shutting it down now and returning the millions.
      - vonklaus 11y ago
        To clarify, the outcome of any company is unknowable, as is the future of everything. When you take a look at the guys from airbnb trying to make rent selling cereal and renting out an air mattress, that's the hustle. I am just suggesting that, hypothtically, if these guys were that hungry they would do anything to save the company. I saw Byttow's interview with Kevin Rose, he seemed passionate and intelligent, I don't want to discont their work. I just think that there are some people that won't (or financially can't) quit until the repo guys carry out their office. The people with that drive have a high correlation with success.
        girvo 11y ago
        They also have a high correlation with failure, burn-out and destroyed lives.
    - tdaltonc 11y ago
      I have no doubt that there are people who are demotivated by fuck-you-money in the bank. I also have no doubt that there are people who have their ambition liberated by it. Hopefully a good investor can tell the difference before they write the check.
- deleted 11y ago
  [deleted]
- zaidf 11y ago
  You realize companies like Secret more than likely had acquisition offers that could have been north of $6M? It is fairly common to turn down a larger acquisition offer for raising a funding round that lets you take some cash off the table. In that case, if anything, the founders may have believed a bit too much in their company(by opting to cash out only partially instead of selling outrightly.)
abalone 11y ago
You're conflating valuation changes with cashing out. There's not problem, ethically, if a valuation swings rapidly either way. But cashing out ahead of a massive failure is a totally different move. That sort of thing in the public markets would prompt an SEC investigation for insider trading (despite it being "their money"). In the startup world it comes down to, these are not folks investors should be trusting.
- zaidf 11y ago
  In the startup world it comes down to, these are not folks investors should be trusting. Or "trust these guys: if they fail, they won't bullshit you and just give you the money they have remaining back." It's all about perspective. Luckily, most investors don't think like you. Ones that do don't survive that long in the business.
  - abalone 11y ago
    You mean, except for the $6M they kept for themselves. I'm the sort of founder that thinks it's my duty to return value to shareholders. I should make money when my investors make money. I would argue that is the only perspective that survives the long term in business. Riding hype waves to enrich one's self without producing real product, that's not sustainable. I know we're all founders here and would love to get the kind of deal the Secret guys negotiated (or Groupon, etc.). But it's not healthy for our industry. Basically the arguments in support of these guys is, well the investors knew what they were getting into. But that could be said for any scammy move by a founder. If they're trying to "do the right thing" they should return all the money to investors, minus a reasonable salary.
    - zaidf 11y ago
      I'm the sort of founder that thinks it's my duty to return value to shareholders. You can be a founder that thinks it is your duty to return value to shareholders and still take money off the table. In fact, there are situations where not taking money off the table hurts your shareholders. Example: you're a poor founder with $400K in loans and 0 in saving, you're running a startup with good traction. You get a $20M acquisition offer and you accept it thinking it lets you clear debt and not be super poor anymore. Problem? Your investors barely get their money back so an exit you consider successful is not that successful of an exit for your investors. Now imagine the investors let you take $1M off the table to clear debt and get a little comfortable. Now when the $20M offer comes in, it is easy for you to turn it down because you aren't in debt and you have a decent life. As a result, you end up building a $500M company. Your investors come out ahead because the equity they got for $1M cash you took off the table made them $10M, not to mention it gave you the mindset to turn down the $20M acquisition offer. For many funds, they would rather you fail trying to make a company that is valued at $500M than be successful in building a company that is only worth $20M. Letting founders take cash off the table can help founders think as big as their investors do about the max potential of the business.

by zaidf 11y ago

smt88 11y 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 11y 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."
- vonklaus 11y ago
  Well, maybe getting an early payout caused them to lose the hustle. They turned the engine off, handed the keys back to the investors and walked. It would have been harder to shut down the company if they saw 0 upside, and all their sweat equity evaporated.
  - zaidf 11y ago
    You seem to suggest that shutting the company down was definitively a worse outcome for investors vs. keeping it going. It isn't that black and white. For example, if they kept the company going and spent the remaining millions and still failed(most common outcome), it is a worse outcome than shutting it down now and returning the millions.
    - vonklaus 11y ago
      To clarify, the outcome of any company is unknowable, as is the future of everything. When you take a look at the guys from airbnb trying to make rent selling cereal and renting out an air mattress, that's the hustle. I am just suggesting that, hypothtically, if these guys were that hungry they would do anything to save the company. I saw Byttow's interview with Kevin Rose, he seemed passionate and intelligent, I don't want to discont their work. I just think that there are some people that won't (or financially can't) quit until the repo guys carry out their office. The people with that drive have a high correlation with success.
      - girvo 11y ago
        They also have a high correlation with failure, burn-out and destroyed lives.
  - tdaltonc 11y ago
    I have no doubt that there are people who are demotivated by fuck-you-money in the bank. I also have no doubt that there are people who have their ambition liberated by it. Hopefully a good investor can tell the difference before they write the check.
deleted 11y ago
[deleted]
zaidf 11y ago
You realize companies like Secret more than likely had acquisition offers that could have been north of $6M? It is fairly common to turn down a larger acquisition offer for raising a funding round that lets you take some cash off the table. In that case, if anything, the founders may have believed a bit too much in their company(by opting to cash out only partially instead of selling outrightly.)

abalone 11y ago

You're conflating valuation changes with cashing out. There's not problem, ethically, if a valuation swings rapidly either way. But cashing out ahead of a massive failure is a totally different move. That sort of thing in the public markets would prompt an SEC investigation for insider trading (despite it being "their money"). In the startup world it comes down to, these are not folks investors should be trusting.

zaidf 11y ago
In the startup world it comes down to, these are not folks investors should be trusting. Or "trust these guys: if they fail, they won't bullshit you and just give you the money they have remaining back." It's all about perspective. Luckily, most investors don't think like you. Ones that do don't survive that long in the business.
- abalone 11y ago
  You mean, except for the $6M they kept for themselves. I'm the sort of founder that thinks it's my duty to return value to shareholders. I should make money when my investors make money. I would argue that is the only perspective that survives the long term in business. Riding hype waves to enrich one's self without producing real product, that's not sustainable. I know we're all founders here and would love to get the kind of deal the Secret guys negotiated (or Groupon, etc.). But it's not healthy for our industry. Basically the arguments in support of these guys is, well the investors knew what they were getting into. But that could be said for any scammy move by a founder. If they're trying to "do the right thing" they should return all the money to investors, minus a reasonable salary.
  - zaidf 11y ago
    I'm the sort of founder that thinks it's my duty to return value to shareholders. You can be a founder that thinks it is your duty to return value to shareholders and still take money off the table. In fact, there are situations where not taking money off the table hurts your shareholders. Example: you're a poor founder with $400K in loans and 0 in saving, you're running a startup with good traction. You get a $20M acquisition offer and you accept it thinking it lets you clear debt and not be super poor anymore. Problem? Your investors barely get their money back so an exit you consider successful is not that successful of an exit for your investors. Now imagine the investors let you take $1M off the table to clear debt and get a little comfortable. Now when the $20M offer comes in, it is easy for you to turn it down because you aren't in debt and you have a decent life. As a result, you end up building a $500M company. Your investors come out ahead because the equity they got for $1M cash you took off the table made them $10M, not to mention it gave you the mindset to turn down the $20M acquisition offer. For many funds, they would rather you fail trying to make a company that is valued at $500M than be successful in building a company that is only worth $20M. Letting founders take cash off the table can help founders think as big as their investors do about the max potential of the business.