
Snapchat Founders’ Grip Tightened After a Spat with an Early Investor - brianchu
https://www.nytimes.com/2017/02/23/technology/snap-founders-evan-spiegel-bobby-murphy.html
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vmarsy
The 2015 interview at a start-up awards show linked [1] in the article is
pretty interesting. Evan gives a few startup ideas who failed before he
succeeded with Snapchat, how he initially marketed Snapchat with flyers in a
local mall , and that the amount "his father was tired of paying" in
Snapchat’s bills was around $5K a month.

[1]
[https://www.youtube.com/watch?v=R-UAjGVPFIE](https://www.youtube.com/watch?v=R-UAjGVPFIE)

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molmalo
Just curious, Wouldn't that give his father the right to claim some kind of
compensation as an early investor?

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abalone
What _exactly_ would constitute founder-friendly seed / series A terms in the
area of future investor participation rights? Are we literally saying _any_
right of first refusal is onerous, or is it just the multiple that gave
Lightspeed up to 50% of the next round (which sounds like a 2-2.5X multiple)?

Sam Altman has a right of first refusal provision in his "founder-friendly
term sheet". At least I think he does.. he doesn't call it a ROFR, preferring
the plainer language of "investor participation rights". But it's there and
even the multiple is left as an open variable.[1]

So are @sama's terms actually spat-worthy?

[1] [http://blog.samaltman.com/a-founder-friendly-term-
sheet](http://blog.samaltman.com/a-founder-friendly-term-sheet)

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libertymcateer
@sama's terms are fairly equitable. I am a corporate lawyer with a substantial
practice in startups and software (I also code in node, and used to work in
LAMP and ANSI C way back in the day). I do a fair number of startup investment
rounds.

These are reasonable terms. They don't bend over backwards for the company,
they are not a land-grab by the investor. Are there 50 other ways from Sunday
to also have equitable terms? Yes - every deal is different, which is why you
need a lawyer, and depending on the context, different terms can be equitable.
In general, though, this is pretty "content-neutral."

Note: I am _not_ your lawyer. If you need a lawyer - get a lawyer. But yes, my
handle is my actual name (so you can look me up to see that I am not just an
armchair IANAL). As far as I know, I am the only lawyer named Liberty around.

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MegaButts
> As far as I know, I am the only lawyer named Liberty around.

I love this.

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libertymcateer
> MegaButts

I love this.

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lordvon
And about this you cannot lie, even though you're a lawyer.

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jzl
This incident fails to explain why common stockholders should have _zero_
voting power. That decision doesn't fall naturally from "an early VC had
onerous terms that we didn't vet".

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sjtgraham
Serious question. Why should common stock holders have voting rights? If
you're going to buy stock in any company the number one reason has to be that
you believe in its leadership. The ultimate vote of a shareholder is to sell
the stock. Mom & pop don't get to exercise any meaningful control over a
company with voting rights, leaving folks like Icahn to exert undue influence,
whose incentives are possibly not aligned with anyone else's.

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wch
Another serious question: if a stock has no voting rights and no dividends,
why would it be worth anything at all? That is, what makes it different from a
piece of paper with the company's name on it? If there are voting rights, then
there's value because someone potentially could buy enough shares to
meaningfully exert those rights, but if not, then what value do the shares
have to anyone?

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tyre
It's value is that you can sell it to someone else.

One of the big risks that Snap is taking in this IPO is that their common
stock has no practical value.

As you said, stock generally has two ways of being worth something: partial
control and/or profit sharing.

Snap common stock has neither. It's only value is its ability to be sold to
someone else. It's basically a currency? Is $Snap the new BTC? I have no idea.

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shalmanese
But that just pushes the question one layer of abstraction deeper. Why would
that person be willing to buy Snap shares from you at any price?

On a long enough timeline, you have to believe that Snap will either disburse
dividends, be acquired by another company or find some other way to convert
ownership into actual cash.

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tyre
They would buy because they believe they can sell it later at a higher price,
based on the belief that other people want to buy $SNAP and will drive the
price up.

I'm not avoiding your question—I agree that it _should_ be based on underlying
value—but that seems to be the only reason to buy $SNAP

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drfuchs
On the face of it, it seems that if existing investor VC1 has a ROFR, it only
means that VC2 can't under-bid on the next round, and that minimizes dilution
for founders on that round. That is, if VC2 says "We'll give you $2M at a $10M
valuation" and VC1 says "We choose to exercise our ROFR at that price",
clearly VC2 has set a valuation too low; if they want in, they'll have to make
an offer that VC1 won't match. That all sounds good for the founders (and
other early shareholders). What am I missing here?

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abalone
From VC2's perspective they are probably overpaying due to the ROFR. In your
example, $10M could just be what both VCs actually value company at, so VC1
exercising their right is not a bad sign. Therefore to win the deal (if it
can't be shared) VC2 has to offer >$10M.. perhaps a lot more if they want to
ensure they don't waste their time with the offer. So the concern is this may
discourage other VCs from bidding on the deal, knowing the only way to win is
to overpay. Or that startups need to sell a bigger stake to make room for both
VCs.

This is illustrated in detail here: [http://venturehacks.com/articles/options-
open](http://venturehacks.com/articles/options-open)

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drfuchs
By that logic, even if VC1 is dead and buried, VC2 still will never make an
offer, since VC3 might swoop in and steal the deal, so it's always a waste of
time to make an offer. Additionally, it's implausible that two VCs will
calculate the exact same "fair" valuation, since it's all so nebulous.

From the point of view of the original angel investors and early employees,
why shouldn't the founder push for the best, least dilutive, offer? Are you
suggesting that if VC2 comes in with a low-ball offer, the founder should just
say "gee, they made such an effort, I owe them the right to excessively dilute
us all, even though VC1 is putting his money where his mouth is, and is
willing to step up to avoid it."

Let's say I helped you by putting up a down payment for you to buy your house,
for which I get 10% ownership. Later, you want to sell the house (or a further
interest in it). If you get an offer, and I think it's too low, is it
unreasonable for me to want to "steal the deal" at that artificially low
price? Otherwise, it's simply a transfer of wealth from me (and you) to the
new buyer, which I'd certainly like to defend myself against. People buy
houses all the time in competition with other buyers; no serious buyer says
"I'm not going to make an offer on that house, because someone else might beat
my offer, or maybe exactly match it and the seller could choose that other
offer."

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argonaut
No, because once the contracts with VC2 are signed etc. they can't change the
terms, so VC3 can't swoop in anymore in the same round.

And even if VC3 swoops in during negotiations with VC2, it requires the
founders to be pursuing that (and VC1 would be aware). Whereas with the ROFR
the founders _have no choice_.

Finally, VCs suffer from herd behavior. So it is very plausible that many VCs
arrive at the same valuation - the valuation of the VC leading the round / the
valuation of the best-reputation VCs. If foo VC values a company at $10M, but
Sequoia comes in at $20M, 99% of the time foo VC will second-guess their
valuation and match Sequoia.

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drfuchs
The founders have a fiduciary duty to all existing shareholders (angels, early
employees, etc.) to exactly be pursuing VC3 at the same time as VC2, before
anything is signed, and to take the best deal. They already have no choice.

Your point about herd behavior is well taken, though. And the result is that
the VCs moan and groan, but ultimately the price goes up, and the entrepreneur
wins, because they get the best valuation possible. (I've been in the room as
an angel investor, and I was sure happy when the valuation went up 25% when a
second VC got interested in the B round.)

The only counter-argument I can see is, in your example, if Sequoia's money
really is greener than fooVC's (which there are long-standing arguments for
and against).

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argonaut
No they don't have a fiduciary duty to negotiate with everyone. Founders
routinely arbitrarily decide certain VCs are not the right fit (basically,
they don't like them).

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perfmode
How much has Spiegel's father earned for footing the initial bills?

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sulam
Man, it's true those terms were standard -- in the 90's. Seriously founder-
unfriendly.

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EGreg
What is the best way for a founder to secure the kind of control that Mark
Zuckerberg has in Facebook to this day? And still raise VC?

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rdl
Insane growth before raising = maximum leverage, and the corresponding
competitive pressure on the deal, plus asking for it. (and being in the right
place/time)

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EGreg
Ok but lets say they let you do anything, what terms and structure?

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rdl
Read [https://www.amazon.com/dp/B01M3UIVW3/ref=dp-kindle-
redirect?...](https://www.amazon.com/dp/B01M3UIVW3/ref=dp-kindle-
redirect?_encoding=UTF8&btkr=1) and ask for/demand the suggested "clean"
terms. That gets you pretty far -- going beyond that, you can probably either
optimize for valuation or optimize for control, but probably not both, even in
a very hot deal.

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e1g
+1 for "Venture Deals". It's a fantastic resource for founders raising money
on every level - from "I know nothing about finance" seed to "how long till
IPO" D-round. There are countless blog posts and articles on this, but none of
them provide the same guided walkthrough for all important considerations
along real-life examples.

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lu5t
How is one supposed to view the article? Even the web link doesn't work, as
all results present a paywall.

