
This Founder Made $99 from $82.5mn Exit; The Lesson? - ankitoberoi
http://www.nextbigwhat.com/founder-exit-negotiation-casestudy-297/
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kjackson2012
If I remember correctly from another article yesterday, the company went
through 7 more rounds of funding after the founders were kicked out. Most of
the heavy lifting was done after their ouster, so quite frankly they don't
deserve anything from the sale. The company could have easily folded and
everyone could have gotten zero.

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ig1
Basically blogspam version of the NYT article that was discussed yesterday:

[https://news.ycombinator.com/item?id=6764482](https://news.ycombinator.com/item?id=6764482)

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steeve
The story is originally from the DailyMail [1]. For those who don't know it,
the DailyMail is a tabloid.

EDIT: It seems the original source is actually the New York Times [2], so I
stand corrected.

[1] [http://www.dailymail.co.uk/news/article-2317924/Five-
founder...](http://www.dailymail.co.uk/news/article-2317924/Five-founders-
left-split-just-36-000-tech-startup-gets-sold-82-million.html)

[2] [http://dealbook.nytimes.com/2013/04/30/in-venture-capital-
de...](http://dealbook.nytimes.com/2013/04/30/in-venture-capital-deals-not-
every-founder-will-be-a-zuckerberg/)

~~~
ankitoberoi
Thanks for sharing! NBW clearly chose a much better title.

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gpcz
I took a class at the University of Michigan called "Entrepreneurial Business
Fundamentals for Scientists & Engineers" that goes into a lot of the mechanics
behind different investment avenues and the risks/rewards of venture capital.

If you ever intend to seek venture capital, it would do you well to play
around with the numbers in a capitalization table. You can find decent ones
online from a search. What you'll likely realize is that venture capital is
only good for the founders when things go perfect -- that is, when the
business does nothing but grow and never has a low-growth moment. If you ever
have a "down-round" (a round where the valuation of the company is lower than
the previous), that will sabotage basically everything. Therefore, if you
don't believe your product is going to be a complete revolutionary slam-dunk,
please save yourself and the VCs pain and misery and seek means of finance
elsewhere.

Another thing to remember is that VCs typically project out for a 7-10 year
exit. If you don't do that, they consider it a failure on their end.
Bloodhound got their Series A in 1999 and sold in 2011, so the VCs were likely
in failure-mitigation mode by that point.

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trevelyan
For the record, my unfunded startup makes me more cash every time a customer
pays.

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ajays
It doesn't matter if you're a founder or a janitor; what matters is how many
shares do you have? Just because you're a "founder" doesn't give you any
special fiduciary powers; you're just a person with lots of shares to start
with.

~~~
cscharenberg
Exactly. This wasn't "his company" the instant he took funding. Investors do
not give out loans, they buy ownership stakes. Multiple rounds of funding will
reduce the founder's ownership to a tiny share if they are not careful with
terms.

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fit2rule
Rule number one of business: do it because its fun. Rule number two of
business: rule number one is wrong.

Founders can get hung up in either of these two issues, I think, in the
negotiation of early capital seeding. If you're doing it because the customer
wants you to do it for them, then you've graduated. Hold on to everything
you're making, and don't give it up: keep the customer always in your sights.
So-called capital often costs soul. Good businesses, with soul, have it
because their customers give it to them - not 'capitalists'.

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pbreit
Not a great article. I'm assuming it refers mainly to liquidation preferences
but erroneously states "give away too much of their company too early".

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WoodenChair
The picture of Steve in that article is just classic. I couldn't help but
smile - what a funny look and turtleneck.

~~~
melling
I still have that turtle neck.

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jheriko
investment is always a bad idea if you don't need it imo.

i don't particularly think venture capital is a 'morally upstanding' industry.
its always painful to see rich people get richer because they are rich (even
if it is because they are making smart investments and are really earning that
money).

~~~
joshuaheard
In a capitalist system, there are two ways to make money: labor and capital.
Labor makes money from the production of some good or service resulting from
the labor. In the case of a startup it is the founders' time, effort, and
expertise in starting the company. Capital makes money off the use of the
capital. In venture capital, the use of the capital (money) comes with a high
risk, that the venture will not succeed. Therefore, there is a higher return.
Nothing immoral about it.

~~~
rayiner
Nothing immoral about it, but it's not quite as rosy as you portray it to be.
Most venture capitalists don't play with much of their own money, but rather
play with the capital of their limited partners. As an industry, they provide
pretty anemic returns to those limited partners. But almost all make a lot of
money personally, because their standard arrangement with their limited
partners is to charge a portion of the principal and a portion of the return
as a fee. Why do limited partners keep taking those deals? Who knows? A
combination of inertia, desperation, and bad judgment. Many big institutional
pension funds are under tremendous pressure to yield very high returns and at
the same time often aren't run by the best and brightest Wall Street has to
offer.

Also, as a startup founder, your investment of labor also comes with a high
risk in the form of opportunity cost.

~~~
joshuaheard
Limited partners keep putting money in because they understand that it is high
risk, high reward. They can put a small amount in and be in on the next
Twitter. Every investor should put a small portion of their investments into
such an investment. Search "investment pyramid".

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kayoone
Its easy to say "Many founders give away too much of their company too early"
but in how many of those cases do the founders really have a choice ? Most
often raising money takes too long so you are left with "go with this or die"
unless you are some rockstar startup.

~~~
mindcrime
_do the founders really have a choice ? Most often raising money takes too
long so you are left with "go with this or die" unless you are some rockstar
startup._

Sure, the choice is in your second sentence there. Do the math, and if a round
of funding is going to dilute you to the point that you aren't going to get
any return from continuing to work on the company, cut your losses, let it
die, and move on to the next thing. It might wound your pride, and nobody
wants to see "their baby" die, but if continuing on means getting screwed,
then _don 't do it_.

~~~
philsnow
Said a different way, consider the opportunity cost of continuing to work on
this idea that will probably not be a big payout for you.

If your idea will improve the world in some useful way (and if the rest of the
owners will let you continue on with the company), and if you think any
replacement CEO won't be able to execute your idea to your satisfaction, it
could be worth it for you to persist. Or it may be better to, as mindcrime
said, cut your losses and work on your next idea that will improve the world.

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bmurali
It doesn't surprise me, many founders get carried away with the tide of
funding money and associating with VC's that they loose track of their hold
and control over a company that they built. Doing that at times you get hit by
"Too much is too less" reality.

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xacaxulu
I'd rather make money from my company in smaller amounts while remaining
unfunded than to fork over huge chunks to investors. Even if the overall
amount was much less, the percentage of gains would be much higher.

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mildtrepidation
The point of investment is acquiring capital to build and/or grow your
business. If you don't need that capital, there is no reason to look for
investors.

There's a gray area when you can build the business on your own and it may or
may not take off without further development or marketing. But if you have
_nothing_ and you need money you don't have to build _something_ , then you
either don't do anything or you look for funds. It gets less simple at that
point.

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xacaxulu
Agreed. I think it's just become a bit easier to say "hey let's get investors"
than to look for slower, more sustainable options for growth. The appeal of
investor capital is strong and like you said, necessary in certain cases.

