
FanDuel founders to receive no cash from sale to Paddy Power Betfair - sparkzilla
http://www.heraldscotland.com/business_hq/16333124.fanduel-founders-to-receive-no-cash-from-sale-to-paddy-power-betfair/
======
brudgers
In some ways, this story sheds light on the _philosophical_ differences
between private equity firms like KKR [1] and venture capital. At least when
it comes to the fat parts of the Bell curve (and ignoring outliers), private
equity investments tend to be premised on gaining control of the companies
accepting investment and seek return on each investment. The fat part of the
venture capital investment Bell curve (and ignoring outliers) is looking for
fantastic returns from a few companies and tends not to seek control of the
companies it invests in.

To put it another way, founder friendly private equity is not really a thing
and venture capital is a philosophy that is rare outside Silicon Valley
(though it has become more common in the last decade or so). Venture capital
is playing long odds based on possible future value, private equity seeks to
buy current assets at a discount. This sort of outcome would be a hit to a
venture capital firm's reputation. It's not an unexpected outcome when private
equity invests.

[1]:
[https://en.wikipedia.org/wiki/Kohlberg_Kravis_Roberts](https://en.wikipedia.org/wiki/Kohlberg_Kravis_Roberts)

~~~
JumpCrisscross
> _private equity investments tend to be premised on gaining control of the
> companies accepting investment and seek return on each investment_

Put another way, losing money on a PE deal is terrible. Losing money on fewer
than half of one's VC investments is positively great. When FanDuel sold, it
didn't have enough upside left to justify pure venture capital. It was a
distressed sale whose alternative was closing down shop. In this timeline,
employees got a few more years of cash salaries. On the net, they did better
with KKR _et al_ than they would have without.

~~~
hn_throwaway_99
> In this timeline, employees got a few more years of cash salaries.

I think most of their employees would have easily been able to get jobs
elsewhere.

~~~
dajohnson89
That's really a toxic assumption to make.

~~~
pyrophane
What do you mean by that?

I'm not disagreeing with your statement, but "toxic" is a strong word and I'd
like for you to elaborate.

~~~
bookofgreg
Some people find it hard to get jobs even in a strong tech market, even if
they are brilliant due to a variety of circumstances including random chance
that is interviews or finding the position in the first place. Blanket
statements like this gloss over the human hardships involved for some, and
encourages general lack of empathy among our community.

~~~
exolymph
Ironically, if the initial commenter had fleshed out their position like you
did, I think the reception would have been much more empathetic.

~~~
dajohnson89
Sorry, it's just I was on mobile. And as someone below pointed out, it was a
pretty emotional response for me. Apologies for the unsubstantiated and harsh
allegation.

I just really object to how casually OP waved off people losing their jobs.

------
JumpCrisscross
TL; DR FanDuel was sold for less than its liquidation preference, so common
stock holders got nothing.

~~~
stickfigure
I'm curious - what happens to the current set of employees in this situation?

Presumably some of them have vested stock, and it just got zeroed out. If
there's ever a good time to ragequit, this seems like the appropriate hour.

~~~
scurvy
Stock is worth zero, but good employees will get retention packages to stick
around with the new company.

~~~
gaius
_but good employees will get retention packages to stick around with the new
company_

Maybe. Often acquisitions are just for the customer list. Betfair is located
in London (and Dublin for tax purposes IIRC), it has no office in Scotland.

~~~
vvvv
This acquisition was made to bolster their US strategy. CEO of FanDuel is
becoming the head of the combined US entity.

------
startupdiscuss
Quick math here:

“the aggregate value being paid for FanDuel “is approximately $465m”.”

“2014 and 2015 respectively led $70 million and $275m” (345 million)

“Mr King is expected to receive a payment of up to $11.3m as a result of the
Paddy Power Betfair deal. The firm’s current chief technology officer Robin
Spira is due to make up to $3.5m, its legal officer Christian Genetski stands
to make up to $6.2m, and it chief financial officer Andy Giancamilli is due to
receive up to $5m” (Those add up to $26 m)

So it looks like the investors got just over 7% return on a venture
investment. (Which is not an unusual ask for preferred shares).

~~~
brudgers
The difference is that the returns of a venture capital fund come from the
performance of a few portfolio companies. The returns of a private equity fund
come from the performance of most companies. Private equity investors, like
KKR here, are happy with the 7% premium return because they usually get it
from each investment. The 7% return from liquidation preference would be a
poor performing investment in a venture capital portfolio. Another way of
looking at it is that the hit to reputation that a venture capital firm would
take on this outcome isn't worth the 7% return at the expense of founders. The
money is in the 10x to 100x deals.

~~~
sonnyblarney
7% is a bad return when you risk-adjust this kind of deal.

So many ways it could go wrong. There are less risky ways to make . 7%, with a
lot less work.

------
gkoberger
There's a lot more here, including responses from the founders:
[https://twitter.com/Suhail](https://twitter.com/Suhail)

Seems the founding CEO spent 10 years there and got nothing, but a new CEO of
6 months walked away with $11MM.

~~~
barbegal
The new CEO had previously been CFO since 2014. If his actions turned an
unsalable company into a company that could be sold for $465 million then I'd
say he's probably worth the $11 million. And the founding CEO surely drew a
reasonable salary despite the company making a loss.

~~~
gkoberger
Yeah, to be clear, I'm not saying anyone did anything wrong.

~~~
bsder
Possibly, but how many more of these deals will it take until the employee
pool goes away permanently?

If you have the skills to be good at a startup, you can go to one of the big
boys for a _lot_ of cash.

~~~
Eridrus
I think this says more about top end compensation, rather than startup
compensation. The effect is going to be top end employees not really being
early employees at startups, but that's not necessarily bad.

------
Bahamut
Stories like this seem to validate that people should choose real liquid
equity of public companies over the paper equity of startups when considering
employment.

~~~
greglindahl
If you like lower risk and lower gain, sure.

The most important thing is being educated. Every time this topic comes up on
HN it appears that many people are unaware that liquidation preferences are a
thing and many sales that are down-rounds have no money falling on common.

~~~
hn_throwaway_99
> If you like lower risk and lower gain, sure.

Given how much the big tech companies are paying though, especially when it
comes to RSUs, I'm not sure this calculus makes sense anymore, _especially_
for early employees. Founders may do exceptionally well on many cases, but for
most early employees at startups there really isn't that much potential upside
in most cases, compared to the guaranteed earnings you can get at a top tech
company.

~~~
Gibbon1
My take is over the last 30 years the return for early employees has become
progressively worse. To the point where the best case scenario you only break
even vs a traditional job.

------
WheelsAtLarge
Just because you founded a company, it does not mean you get a cut of the
final sale.

Starting a company is hard. You can struggle to make it profitable, never get
there, and end up deeply in debt years later.

Fanduel became relevant mainly because of the marketing it was able to
purchase without that it would have fallen by the wayside. You need lots of
money for that.

The founders must have needed cash at a critical time so they must have had a
reason to put their shares second to the shares of the equity firm.

It makes no sense to feel bad for them. They knew what they were doing and
they got more time out of the business than they would have gotten otherwise.

Yes, it's not the greatest outcome but it really is,"just business."

~~~
yummybear
Well yeah, legally - financially. Still, it doesn't seem "fair".

~~~
evgen
It may not seem 'fair', but the reality is that the company that the founders
had equity in died in the 2015 round of financing. It was replaced with a
company which needed to make a big bet (lots of ad spending) to stay strong in
this particular market and the bet did not pay off. If you take $200M+ of
financing then the people writing the check are expecting you to exit no lower
than $1.5B -- ~$500M is, to use the parlance of this particular company, a
single when the team needed a home run.

~~~
Drdrdrq
If it doesn't seem fair, it usually isn't. Maybe not even if founders knew
this could happen and accepted it willingly (which I doubt they did). This is
just the more powerful and experienced squeezing out the weaker ones to grab
as much profit as possible.

~~~
evgen
It was completely fair if you actually look at the probable course of events.
In 2014 FanDuel needed money, a lot of money. They had a valuation approaching
a billion but were losing ground to DraftKings and as the space was heating up
they needed to grow fast. What probably added urgency to this need to grow was
that both companies were starting to court various teams and leagues for
partnerships, and no one wants to partner with the also-ran. FanDuel picked up
the NBA and a handful of NFL teams, but DraftKings got the NHL and NFL (and
the NFLPA) so DraftKings was still pulling ahead. Then in late 2015 New York
and other states put the brakes on the entire industry by declaring it illegal
sports betting. FanDuel has just accepted a big chunk of money and now their
ability to continue operating was suddenly called into question. I have no
idea what choices they made at this point, but it is pretty clear they made
the wrong ones. An attempted merger with DraftKings was called off when the
DoJ indicated it had anti-trust worries, and since 2016 when various state
laws were changes it seems DraftKings has tacked hard into becoming an online
sports book with partnerships with various casinos (including several in New
Jersey, which coincidentally is challenging the constitutionality of the
national gambling restrictions in the Supreme Court) while since 2016 we see a
whole lot of not much from FanDuel. My guess is that when the DraftKings
merged died they started spending the war chest trying to buy growth with an
eye towards an exit. This is also when new management stepped in, so it is
possible that the investment round was a proxy investment in a potential
DraftKings buyout and when that died the company had to start looking around
for a fast exit.

And please spare us all the 'powerful' squeezing out the weaker BS; the
FanDuel founders would have had incredibly high-priced legal counsel for an
investment round of this size and knew exactly what the upside and downside
was for every possible variation of success.

~~~
jkaplowitz
> (including several in New Jersey, which coincidentally is challenging the
> constitutionality of the national gambling restrictions in the Supreme
> Court)

An update on that: New Jersey won, 6-3, with Kagan joining the conservative
wing of the court in this majority. The conclusion is that Congress and the
states each have concurrent power to regulate sports gambling. Congress hadn't
actually done that directly, but rather had banned states from legalizing it.
That's been struck down.

Opinion analysis from the excellent SCOTUSblog:
[http://www.scotusblog.com/2018/05/opinion-analysis-
justices-...](http://www.scotusblog.com/2018/05/opinion-analysis-justices-
strike-down-federal-sports-gambling-law/)

------
joelrunyon
I met Nigel + Leslie at a conference in 2010 I believe as they were starting
to talk about raising funding and shifting to the US Markets.

Was always impressed with their growth, but it seems to be a good reminder to
be wary of the cost of that growth.

------
goatherders
I suspect the founders took some cash off the table in prior rounds.

------
naturalgradient
Can someone familiar with the current funding climate say if standard deals at
all levels involve liquidation preference nowadays? As in, if Im considering a
seed-round, will there be any sophisticated investors doing no preference?
Have talked to some investors in the scene (UK) but cannot seem to get a clear
picture on this.

Is declining to accept a liquidation preference at seed level a red flag for
any serious investor? What about subsequent rounds?

~~~
kenneth
As an investor who invests at the Seed to Series A stage, I can tell you that
a non-participating 1x liquidation preference is standard. I would refuse to
invest in any deals that didn't include it, but won't be asking for anything
more.

I think it's a pretty fair term. It prevents investors getting screwed by a
sale for less than the round valuation, which could look quite attractive to a
founder who could get their first million, screwing their investors in the
process.

~~~
walshemj
In the USA or UK ?

The UK tends to have stronger protection for employee shares -not that there
haven't been some dodgy deals BAXI getting taken over by carpetbaggers and
screwing the owners is a well know case in the UK.

And I have been on the receiving end of losing $1,000,000 at Poptel if only
ICANT weren't such a bunch of ass%^&&S and the CoOp had been a bit more tech
savvy - still water under the bridge.

Poptel was a worker co op btw so I had .5%

~~~
kenneth
This is in the USA. While I've invested in a few foreign companies, I'm not
familiar with how other countries deviate generally from SV norms.

------
opportune
Is there any reason for founders to ever deal with these investors ever again?

Unless the investors were trying to retire, this seems incredibly short
sighted.

~~~
hluska
From the perspective of a founder, I would be quite nervous about accepting an
investment and drawing any kind of salary if the deal didn't include
liquidation preferences. They are so standard (at least in North American
tech) that if they were missing, I'd worry about their competence.

Structuring a deal without LPs would mean that founders could push for
extremely early exits, cash out with modest (though life changing) returns and
investors could lose most of their investments. Adding that kind of risk would
make it even harder for first time founders to raise a round.

~~~
opportune
I posted this in another reply, but it’s not the liquidation preferences
themselves so much as the fact that it was the investors pushing for
liquidation at a price point that precluded the founders from getting any
money

~~~
sokoloff
Isn't that a bit like asking why they sold for $465M instead of demanding
$930M? Presumably, they sold for the highest amount they could get. If the
company falls off the hockey stick, there may be no better time than right now
to sell it for what you can get.

~~~
opportune
$465M was right at the point where investors still got ROI while investors got
nothing. It’s not like they took a loss. If I were a founder I would be beyond
pissed that the investors sold right in the band where they made money but not
the founders and employees. Granted, I don’t know the exact terms of their
contract nor the full context

~~~
evgen
Alternative explanation is that the company was already sinking. It had
dropped past the point where founders and employees were going to get anything
out of the deal and was started to approach the point where investors would
lose money. Investors stepped in at this point and dumped the company to
prevent an even bigger loss. It is unlikely the investors were waiting around
for the valuation to drop to this point for the sole purpose of screwing the
other parties.

------
dpeck
If you're shocked or surprised by this, you should give Venture Deals, Third
Edition: Be Smarter Than Your Lawyer and Venture Capitalist by Brad Feld &
Jason Mendelson a read.

[https://smile.amazon.com/Venture-Deals-Smarter-Lawyer-
Capita...](https://smile.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalist-
ebook/dp/B01M3UIVW3/ref=tmm_kin_swatch_0?_encoding=UTF8&qid=1531078548&sr=8-1)

------
carlsborg
“Under FanDuel’s management incentive scheme, there has been a sixtyfold
increase in total shares and a corresponding dilution in the rights to them.
This distribution increases investors’ ownership in the company from 54 to 71
percent of the 4.4 million total shares, The Herald reported.”

Why would a merger blocked by the FTC trigger a clause like this?

From here : [https://www.legalsportsreport.com/14930/fanduel-equity-
inves...](https://www.legalsportsreport.com/14930/fanduel-equity-investors/)

------
21
I'm sympathetic towards regular people people being legally scammed by nasty
contracts, but how did that happen here?

This was not a clueless Joe being forced to sign a non-negotiable contract
with a giant company. Presumably those clauses and investment contracts were
negotiated between lawyers of both parties. Why did they accept such clauses?

~~~
JumpCrisscross
> _Why did they accept such clauses?_

They're super standard and for the most part make sense.

Liquidation preferences say if your firm is worth $90 million, and I invest
$10 million, I get my $10 million back before you ( _i.e._ the common stock
holder) get anything. If the firm sells for $200 million, I get $20 million
and doubled my investment. If the firm sells for $20 million, I get $10
million back and the common splits the remaining $10 million. If the firm
sells for $9 million, I get it all. This makes sense because management (a)
owns lots of common stock and (b) manages the company. As a risk-sharing
measure, it makes sense for the people closest to the operations (and
extracting a cash salary) to bear more downside risk.

Drag-along rights are the corporate equivalent of collective action clauses
[1]. They exist to prevent a person who holds two percent of the company from
preventing shareholders who own 60% from selling. (Approving mergers requires
supermajorities in most jurisdictions.)

[1]
[https://en.wikipedia.org/wiki/Collective_action_clause](https://en.wikipedia.org/wiki/Collective_action_clause)

 _Disclaimer: I am not a lawyer. This is not legal advice. Consult with a
lawyer before negotiating fundraising terms._

~~~
paulsutter
You're describing participating preferred (that is, investors get paid out
once as preferred and again after conversion to common). A liquidation
preference is more common than participating, where the preferred investors
get paid out (for example) at least 2X their investment (can be any
multiplier, the highest I ever heard was 5X).

Most investments in Silicon Valley are clean deals, with a liquidation
preference of 1X and nonparticipating preferred. Companies without a clean
deal usually were too thirsty for unicorn status ($1B valuation) or had
difficulty raising money.

~~~
JumpCrisscross
> _You 're describing participating preferred_

I'm describing non-participating preferred, which as you point out is far more
common.

Here's how it would go with participating preferred. As before, I invest $10
million at a $90 million pre-money valuation. If the firm sells for $200
million, first I get back my $10 million. Then I convert to common and get 10%
of the remaining $190 million, or $19 million. Before I got $20 million (10%
of $200 million). Now I get $29 million. (In the down round scenario, the
outcome is the same.) Participating preferred is--nowadays--increasingly
confined to distressed finance.

TL; DR Participating preferred gets to have its cake and eat it too. Non-
participating preferred must choose between (a) its preference or (b)
converting to common.

~~~
paulsutter
I misread your comment, thanks

These terms are by no means confined to distressed finance. Many unicorns got
their “billion dollar” number using adverse terms such as these

Which explains this outcome, Fanduel was a “unicorn”:

[https://seekingalpha.com/article/4010443-fanduel-unicorn-
bac...](https://seekingalpha.com/article/4010443-fanduel-unicorn-back-fast-
track)

------
smarri
Feels like the old maxim, learn from the mistakes of others. I wonder what
they could have done differently? Seems like raising capital to promote the
business was necessary due to competition, but ultimately the amount they
raised was their trojan horse.

------
olliej
I will reiterate my prior statements: if you take a job that pays you (in
part) in stock, with no path to sell it pre-IPO, you should never accept
anything other than the highest class of preferred stock. If the company is
unwilling to give you that, then you should assume that their, or their VC,
long term plan is to screw you.

At this point there have been enough cases where startups have clawed back the
shares the issues, never gone public even when they’ve “made it” so you can’t
sell your stock, or in this case outright stolen from their employees by
changing the company charter to retroactively devalue all the stock that they
used to pay their employees.

[edit: charter is not spelled “charta”. I’d swear I used to be able to
spell...]

~~~
JumpCrisscross
> _you should never accept anything other than the highest class of preferred
> stock. If the company is unwilling to give you that, then you should assume
> that their, or their VC, long term plan is to screw you_

If this is your mentality, don't work for a start-up.

Employees don't get preferred stock. _Founders_ don't get preferred stock.
Your downside protection is your cash salary. Asking for preference as a non-
capital contributing stakeholder conveys a fundamental mis-understanding of
start-up financing's tradeoffs. (I would be highly suspect of a company
throwing preferred stock at employees. It smells like something between
incompetence and a scam.)

~~~
olliej
Based on this article alone anything other than preferred stock isn’t viable.
Unless executive have skin in the game - say no executive can make money off a
sale of the company or a funding round unless all the employees who have been
paid in stock have been given first rights to convert their stock before any
member of the executive or founder team. This seems reasonable, as it prevents
the founders or executive board from doing what happened here: theft.

~~~
ChuckMcM
Actually, if a company exits at some multiple of the money raised, the common
stock will have some value. But it is true that once a company has raised more
than 50 million or so things become less likely. That is why I advise people
to value their options at zero in terms of financial plans.

~~~
sk5t
Possibly--factors such as liquidation preferences > 1x, dividends due on
change in control, and ordinary debt can still leave nothing for common.

------
forkLding
Quick question to those in the know, what payment is the founding team getting
then, the one mentioned at the end? Is that some kind of executive termination
pay?

~~~
asg
That's not the founding team, that's the current executive team -- who are
getting a "retention bonus". All the founding team seem to have left the
company (but presumably still hold shares)

~~~
forkLding
True so basically founding team didn't get anything after 10 yrs?

------
segmondy
Gee, not even $500k or a mil?

My heart breaks for them.

This is why VC's are called vultures. They claim they want you to have skin in
the game, yet the founders get screwed. I know folks are thinking but the VCs
are not making much, so what? Their entire game is to make it all up from
another startup 100x which is why they take massive equity for $$$ invested.

~~~
ericb
Arguably, this is why this may be a foolish move for them. If the next 100xer
avoids them based on a history of penny pinching on non 100x deals, they've
been penny wise and pound foolish.

------
harveynick
Possibly worth noting that the actual story being sold here is essentially:
_Scottish_ entrepreneurs screwed out of company by _non-Scotish_ investors.

------
wand3r
“Answer this survey question to continue reading the article”.

1\. This is terrible UX and while I understand the need to make money this
roadblock does nothing but increase bounce rate.

2\. “Continue” is pretty deceptive unless you count the article headline as
part of the article.

3\. I assume this survey is trash but I am going to take it as an experiment
then report back.

4\. I wish HN would develop a policy on articles that rely on subscriptions or
other inputs to actually read. I don’t think they should be banned but they
should be paywall flagged so they can be turned off. Its better for comments
(people actually read article) better for users not downloading data they
can’t use and then being disappointed they can’t participate

Edit: it was a demographics survey for a giftcard drawing that would probably
be sold onwards to a marketing firm if you provide an email. I guess it’s not
too much to ask for but I suspect many people will be unwilling to do it
because they are skeptical, not interested enough or simply have no idea how
long it will take and arent willing to invest the time.

~~~
antonvs
The survey didn't come up for me. That kind of thing makes policies against
this more difficult.

------
_bxg1
I literally can't parse the semantics of this headline

~~~
verbify
FanDuel founders = The founders of FanDuel

To receive no cash = will not receive any money

From sale to = as a result of the sale of (FanDuel)

PaddyPower Betfair = to the company Betfair, which itself is owned by
PaddyPower

The founders of FanDuel will not receive any money as a result of the sale of
FanDuel to the company Betfair, which itself is owned by PaddyPower.

~~~
_bxg1
I figured it out, I was just making a lighthearted joke

~~~
verbify
I'm another victim of Poe's law.

~~~
_bxg1
I think I'm the victim, given how many downvotes I'm getting...

~~~
sparkzilla
As the writer of the headline, you get a pity upvote from me.

------
protomyth
_THE PRIVATE equity backers of Scottish technology business FanDuel have
completed their boardroom coup by ensuring that none of the firm’s founders or
employees will be able to share in the proceeds of its impending sale to Paddy
Power Betfair._

That's slightly more people than just the founders. I'm sure the employees
were expecting some compensation.

~~~
barbegal
In a company which isn't generating a profit such as FanDuel employee equity
is pretty much worthless. If you get offered equity in a startup you should
value it at nothing unless the financials are very solid and the employees
between them have a sizeable stake such that their interests are well
represented at the board level.

~~~
protomyth
I was commenting on a headline that could of added two extra words and
conveyed that this isn't just a founder problem but something that has
affected all of the employees also.

