

Don’t “Pull A Patzer” And Other Lessons Learned On Our Trip Down Sand Hill Road - edw519
http://techcrunch.com/2010/02/28/dont-pull-a-patzer-and-other-lessons-learned-on-our-trip-down-sand-hill-road/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+Techcrunch+%28TechCrunch%29&utm_content=My+Yahoo

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strlen
This is a good contrast to those who speculated that Patzer sold because he
was forced by VCs. That isn't a surprise, though: general wisdom is that if
you take VC funding, you should at least be open to the idea of building-up a
company and (ultimately) taking it public; VCs have the right to block an
exit.

~~~
gphil
> VCs have the right to block an exit.

I don't know too much about the terms of VC funding, why is this the case?

~~~
strlen
> I don't know too much about the terms of VC funding, why is this the case?

VC model breaks down if they don't get back at least ten times more than what
they've put in. With upper tier VCs, I believe that's even higher.

Angels are looking for a multiplier on their return too, _but_ generally the
money they invest is so small, they won't bother blocking most exists.

Ironically, this sort of approach might lead to more "quick flips" (which Mint
acquisition wasn't) than anything: you have built a highly innovative product
which is starting to pick up some traction; you can sell it for $30mm to
Google (netting yourself ~$2-4mm after taxes, effectively a life changing sum)
or you can get (further) VC funding and try to swing for the fences. However,
your chances of _any_ exit have now been decimated.

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rgrieselhuber
Why would you only net $2-4mm after selling for $30mm? (even after taxes!)

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strlen
After giving money to angels + seed funding + possibly series-A VC funding,
having an employee option pool (especially if "employees" include non-founder
CFO/CEO/COO) and a second co-founder, you can expect _at max_ 20% percent
(usually of common stock, vested with over time). Add to that taxes and (if
you took series A or serious seed funding) liquidation preferences and 10%
return sounds fairly generous.

~~~
joshu
strlen, i'm not really sure you know what you're talking about here.

seed funding + series A in a reasonable case is likely to have sold 35% of the
company. another 15-25% for option pool leaves 50% or more for the founding
team.

similarly, a reasonable liquidation preference is 1x. i doubt you would see
aggressive liquidation preferences on something hot enough to then exit
quickly via acquisition anyway.

in this case, it's also possible if the founding team has done reasonably that
they still control the board, thus making your explanation of "vcs can block
an exit" a bit weak at this juncture, as well.

sure, it CAN go badly like you said, but i don't think that's the average
case.

~~~
strlen
Upvoting, great counter point. The percentages (pre-dilution founder
percentages, especially) have been what I've personally seen in start-ups I've
worked in / consulted for / friends' start-ups. In one case of the founders
had only 13%, other two had 20% -- rest going to funders/option pool; in
another case -- where there was a "professional CEO" brought in -- one of the
founders had <10% and no seat on the board (with only _one_ founder being on
the board at all). Granted these may be abnormal cases (the VCs weren't top
tier either).

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simon_
This is why VC's are becoming amenable to letting founders take money off the
table. (See: <http://www.avc.com/a_vc/2009/09/founder-liquidity.html>)

~~~
staunch
I wonder if it would have helped. Patzer was probably choosing between $40
million (or whatever) today and $80 million (or whatever) in a few years. The
VCs would own more and he'd own less, so even with a bigger exit he's not
looking at all that much more. During that time catastrophe could strike and
wipe him out completely.

~~~
gsmaverick
He also has a good job in which Inuit is giving him some free rein to
innovate.

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jasonkester
Usually when somebody coins a new word, they pick a word that's not a word
yet.

Patzer is a fairly well-used term in the chess world. It makes for some
confusing headlines here on HN when you try to parse them using the meaning of
the existing word.

