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One of the most interesting economics lessons from the Secret shutdown relates to the $6 million of stock sold by the founders to investors. Because the founde

One of the most interesting economics lessons from the Secret shutdown relates to the $6 million of stock sold by the founders to investors. Because the founders had taken some money off of the table, presumably now sitting in the form of a money market account + a red Ferrari, they probably didn't have to ride the Secret company all the way down to zero - they could see that the app wasn't going to be the next Snapchat or WhatsApp, and now that they had a few million dollars, their time was suddenly worth a lot more - they could take some of that money, create a prototype, and shop it around to get more funding. Compare that to an app like Path, which has raised lots of money, but hasn't gotten traction anywhere except Indonesia. Now they're using their late round investment dollars to try to see if a GIF selfie app, a chat app, or a concierge/customer support service will take them to the next level. Of course, that's just what they've launched - presumably there are lots of mobile app prototypes that haven't seen the light of day. Will Path's investors get their money back? I don't know. Secret's investors at least have their money back to fund more app ideas, after they've shown some promise.

boling11 11y ago
It's an interesting point, although Path may not be the best counter example since Path's founder is well off from being early at Facebook.
philipn 11y ago
Yeah, I'm not sure there's really a whole lot we can glean from the purchase of founders' stock here. To an outsider, it feels unfair, but I agree that without it the founders would have likely spent that $25M down to zero.
- MCRed 11y ago
  How does it feel unfair to sell stock to investors? In the current scheme new shares are issued and everybody gets diluted, so the founders have less economic interest (as does every other employee). If the founders take some money off of the table, then they're just selling their shares directly--- and there's less dilution. (It's not the case that they're just pocketing some of the proceeds from the investment.) In that case the employees will be diluted less than they would be if the same investment amount was made and the founders didn't sell any of their shares. So it's better for employees. Ideally, though, I think all employees including founders, should be able to sell some of their vested shares in each round of funding. Maybe %10?
- toast0 11y ago
  $6M seems like a lot to take out of a $25M round, but if the investors were ok with it, and the founders were ok with it, how is it not fair? Earlier investors don't seem happy about it, but I'm not sure how much weight that has; early investors often have to accept new terms during a fund raising round; for better or worse.
  - pbiggar 11y ago
    Does it? They sold $6/160 = 3.75% of the company, likely about 15% of their holdings. Seems reasonable given the valuation.
nedwin 11y ago
You think Dave Morin hasn't taken any money off the table? You're kidding yourself.

boling11 11y ago

It's an interesting point, although Path may not be the best counter example since Path's founder is well off from being early at Facebook.

philipn 11y ago

Yeah, I'm not sure there's really a whole lot we can glean from the purchase of founders' stock here. To an outsider, it feels unfair, but I agree that without it the founders would have likely spent that $25M down to zero.

MCRed 11y ago
How does it feel unfair to sell stock to investors? In the current scheme new shares are issued and everybody gets diluted, so the founders have less economic interest (as does every other employee). If the founders take some money off of the table, then they're just selling their shares directly--- and there's less dilution. (It's not the case that they're just pocketing some of the proceeds from the investment.) In that case the employees will be diluted less than they would be if the same investment amount was made and the founders didn't sell any of their shares. So it's better for employees. Ideally, though, I think all employees including founders, should be able to sell some of their vested shares in each round of funding. Maybe %10?
toast0 11y ago
$6M seems like a lot to take out of a $25M round, but if the investors were ok with it, and the founders were ok with it, how is it not fair? Earlier investors don't seem happy about it, but I'm not sure how much weight that has; early investors often have to accept new terms during a fund raising round; for better or worse.
- pbiggar 11y ago
  Does it? They sold $6/160 = 3.75% of the company, likely about 15% of their holdings. Seems reasonable given the valuation.

nedwin 11y ago

You think Dave Morin hasn't taken any money off the table? You're kidding yourself.