

Facebook, TipJoy, the Deal that Didn’t Happen and the Hire that Did - pakafka
http://mediamemo.allthingsd.com/20090822/the-odd-tale-of-facebook-tipjoy-the-deal-that-didnt-happen-and-the-hire-that-did/

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startingup
Basically it appears like Facebook made the rational calculation that hiring
the developer at retail is a lot cheaper than buying the company wholesale.

That is consistent with what I have argued in HN comments: with the glut of
start-ups (50 from YC alone this year?) prices will drop towards replacement
value. The replacement value of a start-up amounts to a hiring bonus for its
developers. This is likely true even with substantial user traction.

We saw much the same thing in the implied valuation of iLike - after
liquidation preference, developers basically get a hiring bonus, if they stick
around. And iLike had 10 million monthly users on Facebook.

So unless a start-up has a plausible path to independent profitability, it is
going to be subject to the brutal laws of a buyer's market. In other sectors
this effect has been well observed: take enterprise software for example.
There are public companies with $100+ million revenue that trade for basically
not much more than cash on hand.

~~~
pg
Note to the reader: don't believe every plausible-sounding explanation of
events you read on a comment thread.

~~~
trapper
I'd like to know why you think this isn't close to reality. There are tons of
startups out there with no path to independent viability. Why wouldn't
potential acquirers simply wait until the founders run out of what little
money they have on hand then snap it up for a pittance? Or simply hire the
developer?

If someone can get something to market in three months the first try, it's
going to be much quicker on the second try, especially if they don't have to
deal with all that "other" stuff (marketing, business dev, launch plans etc).

~~~
pg
_I'd like to know why you think this isn't close to reality._

Because I was there in person when reality took place.

~~~
startingup
These are what outsiders know: a) Facebook and many acquirers looked at the
company and passed b) Company ran out of money c) Facebook hired the
developer, who also posts in the blog that his idea would work far better as
part of Facebook or Twitter. I am not asserting that (a) and (c) are directly
connected. It is perfectly possible that the people who looked at the
acquisitions aren't the same ones who made the hire and the two sets of people
may not even have talked to each other.

However the one thing no one outside Facebook can _really_ know is _why_ they
passed on the acquisition. My reasonable guess is that they figured it would
be cheaper to hire ( _some_ , not necessarily the same) developers and do it
themselves. Are you asserting that it is outside the realm of possibility for
them to have thought that way? Or that future acquirers, facing similar
choices, would not calculate that it would be cheaper to hire developers after
they run out of money?

~~~
pg
"However the one thing no one outside Facebook can really know is why they
passed on the acquisition."

I know exactly why they passed on the acquisition, and it was not because they
thought it would be cheaper to hire someone.

It's strange to watch you keep insisting on this. You said something mistaken
when there was no evidence, and now that evidence has emerged contradicting
you, instead of changing your theory, you fight to find a way to make the
facts conform to it. It's like watching a creationist respond to geology.

~~~
startingup
I will accept that Facebook did not think this way (ie. it is cheaper to hire
developer than acquire). But to be fair to me, until this parent comment,
nowhere had you actually mentioned that you knew exactly why Facebook passed
on the acquisition. Until you mentioned that fact, it was reasonable to assume
that one party in a negotiation does not know all the motivations of the other
party.

Having said that I would still let my thesis stand while withdrawing the
Tipjoy incident as any kind of evidence of that thesis: given the
proliferation of start-ups and the buyer's market, it is reasonable for
acquirers to think that way.

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ivankirigin
This completely doesn't tell the whole story, and those of you commenting
should realize that.

~~~
pakafka
Ivan, I'm noting your comment, and Paul's, on my post. But the offer I made
multiple times to you and Abby still stands -- if there's more info that you
want to get out, I'm happy to chat. pk

~~~
mattmaroon
This is my favorite online "journalism" technique ever. When someone you want
a scoop from won't comment, just make a bunch of crap up and then when they
get angry say "hey feel free to comment".

~~~
pakafka
What part is made up?

~~~
ghshephard
"Some basic, undisputed facts: ... he and his wife are shutting TipJoy down
and returning what’s left of the $1 million they had raised to their
investors."

Do you have any sources, documentation or other reason to believe that TipJoy
raised $1 million?

~~~
pakafka
Re: Tipjoy's Series A. Multiple reports pegged it at $1M.
[http://www.techcrunch.com/2008/09/24/tipjoy-
raises-1-million...](http://www.techcrunch.com/2008/09/24/tipjoy-
raises-1-million-for-its-simple-micropayment-platform/)
[http://www.thedeal.com/dealscape/technology/angel-
investor/e...](http://www.thedeal.com/dealscape/technology/angel-
investor/exclusive-betaworks-leads-1-m.php) Are you saying those reports are
wrong? Or that the company didn't call down the entire round?

Re: Comments. I reached out to Ivan and Abby more than 24 hours before I
published the story. I understand why they'd be reluctant to respond, and I
told them that.

I appreciate the back and forth on this board -- Paul's comments have been
particularly enlightening -- but I'm going to bow out now. Please contact me
directly if you have specific comments or questions. Thanks. pk

~~~
Goladus
From your article:

 _You could see why some of TipJoy’s backers, which include BetaWorks, the
Accelerator Group, ex-Googler Chris Sacca and the Y Combinator start-up
factory, might cry foul._

Have any of them actually cried foul? I recommend following up with them if
you are really interested in the facts.

------
il
So basically Facebook got the same benefit as if they had acquired the
company(the talent) for less money and the investors got screwed.

~~~
tipjoy
Debatably, they got less than half the talent, thank you very much!

~~~
webwright
Abby > Ivan? :-)

------
medianama
I would like to hear PG's (or other investors) views on this.

~~~
pg
Facebook didn't do anything wrong. Tipjoy was out of money. They'd been
talking to several potential acquirers, including Facebook, but those deals
all fell through. So the Tipjoys were going to have to get jobs somewhere.
Since they were worried about money and Ivan admired the hackers at Facebook,
I asked FB if they'd offer him a job, and they did.

It doesn't portend anything for the future of startups, as this story seems to
imply. If your startup tanks, you have to get a job somewhere, and lots of
hackers get jobs at Facebook. There are several other YC alumni working there.

~~~
amichail
Comparing this to voting, most people vote because they want to be seen in a
good light by their friends and family (and some vote because they don't
understand probability). Perhaps some sort of similar social pressure could
have been employed with TipJoy.

~~~
cyunker
My contribution voting makes as much difference as it should: 1 person = 1
vote.

By your logic, I guess I shouldn't worry about my carbon footprint.

~~~
amichail
Whether you should worry about your carbon footprint depends a lot on what
your friends and/or family think of the issue. On a practical individual
level, it's all about looking good in front of your friends and/or family.

------
byrneseyeview
It's like the Zeno's Arrow of stories: we get half the remaining story every
time.

------
khangtoh
This is an really interesting situation. What I'm really curious about is
how/where IP of Tipjoy would eventually end up? Ivan doesn't own those IP,
TipJoy does.

Assuming Facebook had initiated the acquisition, I can only imagine they're
after 1) The technology/IP behind Tipjoy 2) The talents

I find it hard to believe that Facebook would fork out $5M just for the
"talent", so I think that was more of a technology buy for Facebook.

So if that's the case, Ivan would be threading into an unfavorable situation
since their investors technically own parts of TipJoy and would want to
protect TipJoy's technologu and IP. I do think there's a potential that those
investors could file claims against Facebook and Ivan if he does end up
working on Facebook's payment system.

Again, I'm not pointing out anything against Ivan but I do want to know as
entrepreneurs, if we do get into such a situation, what sort of risks/factors
could arise from this?

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medianama
This is clearly a conflict of interest. The founder should have disclosed the
terms of employment offer to the investors (if not general public)

~~~
gruseom
On what basis are you saying that they didn't?

Edit: Well, now we know. "No basis" actually turned out to be an
understatement. <http://news.ycombinator.com/item?id=779693>

Edit 2: just noticed that it was you who asked the question. Credit where
credit's due.

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_pius
Well, that thickens the plot considerably.

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sanj
Ivan & Abby, are you both heading west? I'll miss having another startup here
in Arlington.

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johnnyg
Isn't a startup's founder obligated to act in the best interest of the
inventors whose money and risk made the venture possible?

~~~
nostrademons
There's no evidence that they didn't.

FaceBook held all the cards here - all they had to do was wait until TipJoy
ran out of money, then snatch up one of the founders when he goes looking for
a job. Which is what they did. What else would you have the founders do?

Just highlights the importance of bargaining position. Make deals when you
don't need them, because you won't be able to when you do.

~~~
plainspace
_Just highlights the importance of bargaining position. Make deals when you
don't need them, because you won't be able to when you do._

I think this is the real take home here.

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sown
Wow. What a ride it must have been. I wish to be part of such a ride someday.
:)

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far33d
Sad to see another entrepreneur leave Boston.

