
We Spent $3.3M Buying Out Investors: Why and How We Did It - Sujan
https://open.buffer.com/buying-out-investors/
======
eldavido
There's a lot of negativity here.

I give Buffer a lot of credit. They seem to deeply internalize the idea of
"realistic expectations" and it sounds like the buy-out was a win-win solution
where everyone got (mostly) what they wanted.

As he says, the investors might not have been happy about it, but at least he
has the backbone to resist trying to squeeze growth out of a market where
there's none to be had (in the short term). Most CEOs wouldn't be as
courageous, preferring to try to spend like crazy in the search for growth,
which just torches investor capital even as it adds little long-term value to
the business's equity.

In short, a bold move by a very honest guy who's in it for the long term.

~~~
dahdum
I don't think this sounds like a win-win, the founder moved the goalposts and
bought the Series A out for the minimum possible (9%) so he could start paying
himself.

I read the fluff around core values, but my first thought is that Joel would
rather not risk his personal fortune by growing the company further. Better to
ride the 25% margin as long as possible, giving himself enough liquidity to
retire wealthy, than take a chance on growth.

Maybe I'm too cynical, but I admit I'd be tempted to do the same thing.

~~~
tptacek
As an operator or employee of a company that doesn't plan to raise further
money from a VC, you _want_ them to pay the minimum possible. Every dollar
that goes to the VC is a dollar that can't go to the team.

Meanwhile, if the investor didn't want to sell at the number they came up
with, they could presumably just say "no".

You are, yes, probably being too cynical here.

~~~
delinka
"...they could presumably just say "no"."

I wouldn't imagine that's the case. Especially if the investor came up with
the number and agreed to it in a legally binding contract. It'd be an uphill
battle in court to get around that. (yeah, you still need the funds to defend
your company...)

Also, my anecdata says that most corporations have in their corporate bylaws
(or whatever the right document is) the provision that they can forcibly
recall shares at any time (presumably for current fair market value/409A
valuation.)

~~~
tptacek
Huh? No, the investor agreed to an annual 9% interest rate, _not_ a lump sump
their equity could be purchased for.

It would be pretty funny if the legal norm among startups was that they can
acquire their own equity back from investors based on their 409A valuation.

~~~
delinka
"...at the number they came up with..."

Maybe I've misread you here. Is this not a number the investors came up with?

As for the 9% interest rate, that starts sounding more like debt than
ownership.

~~~
tptacek
Yes. That is the idea. As downside protection, Collaborative Fund's investment
was to begin behaving as if it were debt (issuing interest, that is) after 5
years. I assume the expectation was that if Buffer maintained hypergrowth and
reached the inevitable Series B, part of the series B negotiation would
eliminate that downside protection clause. But they didn't; they charted a
course that didn't involve an imminent second round, and so that protection
clause was problematic.

Again: it would be really weird if companies could simply demand their equity
back. The whole point of investing in a startup is that their equity will end
up wildly more valuable --- not 40% more, but 10x more --- than the money put
in.

~~~
gamblor956
Once the interest (aka "downside protection") kicks in, the shares effectively
converted to debt, meaning the company was simply repaying a liability.

~~~
tptacek
Did I miss the part where they said that? The post suggests their counsel said
it was a unique clause.

At any rate: they bought out their investors years before interest became due.
It was a negotiated sale.

------
dyeje
So the same company that gave paycuts to their entire staff (except the CEO
and Director of People) 8 months ago, has enough money to buy out their
investors? Interesting.

Paycut Discussion

[https://news.ycombinator.com/item?id=15861043](https://news.ycombinator.com/item?id=15861043)

~~~
jVinc
Sounds a lot like the CEO gauging the company growth and employee pay in order
to build up enough cash to push out investors, get a majority so he could
"provide liquidity" for himself.

I can't say if this is close to the mark, but if so it makes perfect sense why
the other founders left. Being at the head of a ship with a captain trying to
slow down so he can line his own pocket is a special kind of hell.

~~~
rloomba
I actually had the same thoughts. I'm surprised he's being so transparent
about this. I feel for the employees at this company -- just because a company
is profitable, doesn't mean that employees are being paid fairly/market rate.

I wouldn't be surprised if the founder tries to sell the company in the new
few years a discount of the current valuation. With 45% ownership, that's a
very large chunk of change.

~~~
swyx
buffer's salaries are posted here fyi
[https://docs.google.com/spreadsheets/d/1l3bXAv8JE5RB9siMq36-...](https://docs.google.com/spreadsheets/d/1l3bXAv8JE5RB9siMq36-Ogngks2MT6yQ5gt8YXhUyAg/edit)

make of it what you will but doesnt seem low

~~~
sahillavingia
This is out of date, as Joel now lives in Boulder, CO.

~~~
puranjay
Here's the updated link:

[https://docs.google.com/spreadsheets/d/1l3bXAv8JE5RB9siMq36-...](https://docs.google.com/spreadsheets/d/1l3bXAv8JE5RB9siMq36-Ogngks2MT6yQ5gt8YXhUyAg/edit#gid=2089488141)

------
kayoone
Seems like Joel is quite stubborn regarding his values and vision for Buffer,
which i believe is a good thing but i can see how it can lead to differences
with co-founders and investors once the vision does not align anymore. Felt
like it was all over for him when they asked him to eventually step down and
from that point he planned to remove them.

In the end it also means that their investors most likely lost their
confidence in buffer, otherwise no investor would get out in a deal like that.

~~~
dsl
Came to the comments to say the exact same thing: this is basically just a
vote of no confidence in management.

I can't imagine any employee joining this company from this point forward
without demanding all-cash compensation. Management and the investors have
effectively set the value of restricted shares at zero.

~~~
tptacek
How did you get there from here? This appears to be an A-round startup that
just paid $3MM to gain the flexibility to award liquid equity to (among other
people) it's employees. Doesn't that make it _better_ than the average equity-
issuing startup?

~~~
dsl
When VCs (companies that make their money by betting on long shots) and two
cofounders walk away, that is a really bad sign for a company. As I mentioned
in another comment, if he hadn't had 45% of voting shares, the CEO would be
gone.

It sounds like he just wants to turn it into a lifestyle business. Which is
cool, they just need to be upfront about bonuses or profit sharing, and ditch
equity.

Quick edit: I just re-read my previous comment and realized "cash only" wasn't
the correct phrase to use. I meant it to include the other stuff I mentioned
here (give employee some amount of cash) not just base salary.

~~~
tptacek
No. All things being equal, the VC and cofounders leaving is a bad sign. But
all things aren't equal: Buffer is so profitable that it can buy out its
investors without impacting operations. That's an extraordinarily _good_ sign,
one few startups ever find themselves in a position to do.

The Buffer post is extraordinarily clear (almost numbingly so) about the
mechanics of their Series A and why they needed to buy their way out of it.
They had two structural problems:

(1) the terms of their A round included a strong incentive to liquidate the
whole company early, in the form of a perpetual 9% annual interest payment due
to the A round investors after 5 years.

(2) the terms of their A round forbade them from extending liquidity to other
shareholders, including employee equity holders, without the approval of the
A-round lead investor.

Unsurprisingly, Buffer's A-round investors needed to be talked into accepting
the buyout, which they took at a substantial premium to their investment in
the company.

I do not think the logic you're employing to value these shares is sound.
Early exits are usually bad for employees (the lower the exit valuation, the
less money is likely to trickle down to employees). Profitability gives Buffer
lots of options to maximize returns to long-term shareholders, which is what
employees are. To my eyes, Buffer's employee equity is _more_ valuable given
this information, not less.

~~~
charlesdm
It's also tax efficient. Taking out $2.5m would first incur corporate tax,
then dividend tax.

They initially sold equity of the business, only incurring capital gains tax
in their personal name. Now they buy back shares and destroy those shares, so
their stake increases again. They bought back shares with taxed capital within
the company, but without incurring dividend taxes.

------
sebleon
> $2.5m of $3.5m was for founders and early team [of Series A money]

Terms:

> Series A class of shares included a protective provision which meant that
> Buffer was unable to offer liquidity for other shareholders

> a return of 9 percent annual interest on their investment at any point

So... the founders raised a series A mostly to give themselves liquidity, at
the expense of a high interest loan that also threw their early investors
under the bus? Well, they definitely achieved their vision of putting together
an atypical round.

Given their lack of interest in going down the VC-startup path (high growth at
all costs, keep raising, aim for IPO, etc), it's unclear what their
motivations were to raise a VC round in the first place.

~~~
tptacek
How exactly does offering an immediate return to those early investors throw
them under the bus? Buffer put together a deal and their investors took it.
For them to "buy" their equity, it had to be "for sale", and it turns out it
was.

The normal story of what happens when a company takes an investment planning
for hypergrowth and that doesn't pan out is that the company "pivots" to some
usually-less-promising hypergrowth opportunity and repeats until it dies. The
outcome here seems far better for investors, which is presumably why they took
advantage of it.

~~~
sebleon
Ah, to clarify: Buffer threw the seed investors under the bus when they inked
a deal with the Series A investors.

However, kudos to the founders for fixing this mistake later on. While their
intentions at Series A were questionable (raising to pay themselves), they
made things right later on, though they did pay the price of a co-founder and
CTO departure. Everyone makes mistakes, but true character can be seen when
you deal with them.

> Our seed investors had been supporting the company for almost six years, and
> several were starting to ask when they may get a return

> The Series A class of shares included a protective provision which meant
> that Buffer was unable to offer liquidity for other shareholders (seed or
> common) without approval from a majority of the Series A.

~~~
gowld
Seed investors offered a deal. They weren't spring chickens.

------
sytelus
This is an excellent piece and kudos for being transparent. This is possibly a
story of virtually every startup that doesn't quite make it to 10X: You get
funding and expand team rapidly but then revenues are not keeping up so you
cut down and then wonder where you go from here. For many startups there is a
path of being sustainable profitable business that perhaps will never become
unicorn but then investors aren't happy with that. I think buying out
investors is an excellent idea in this situation and every founder should
always think about this possibility when signing the term sheets.

------
ig1
One of the under-appreciated facets of SaaS economics is that you have to grow
your growth constantly, regardless of whether you're bootstrapped or VC
funded.

If you're steadily adding 100 customers/month you might think thats great
because of the accumulating nature of subscription revenue - but actually
that's a death sentence.

Your churn will grow as your customer base grows.

If you've got a 5% monthly churn rate then at 1000 customers you'll lose 50
customers/month. At 2000 customers you'll be losing 100 customers/month - and
all of a sudden your 100 new customers a month will net out to zero. After
that point you'll start losing customers.

From a quick look at Buffer's baremetrics board that's what happened here.

You either have to have net negative dollar churn (which is very very hard if
you're selling to SMEs) or you have to have an exponential growth rate that
means you can escape the churn effect and that almost always require external
capital to fuel the growth.

~~~
svantana
> If you've got a 5% monthly churn rate then at 1000 customers you'll lose 50
> customers/month. At 2000 customers you'll be losing 100 customers/month -
> and all of a sudden your 100 new customers a month will net out to zero.
> After that point you'll start losing customers.

Actually, in this scenario the number of users will asymptotically grow
towards growth/churn = 100/0.05 = 2000 in perpetuity. So it's not a "death
sentence" but will lead to growth stagnation.

~~~
ig1
Yes.

Plenty of SaaS businesses (both bootstrapped and VC financed) end up
flatlining. How sustainable this is depends on what space you're in, generally
if you're revenue flat you become much more vulnerable to external factors
(competitors coming into market, CAC increasing, recession, etc).

~~~
T2_t2
This is just a weird concept. Sure, not growing is risky in the existential,
everything is risky sense. Profitability makes that far less scary.

The biggest cost for most SAAS business is salaries. If times get tough,
letting people go is always an option, and if a company makes a 30% margin -
which $1.5M and 500K profit is almost exactly - that means the non-salary
costs likely need to grow by a few thousand percent before there is a profit
pinch.

I'd take $500K profit and control over loss making and hope. But that's just
my personal risk profile.

~~~
ig1
Revenue can collapse _fast_ in SaaS if you don't have churn under control.
Let's say there's a downturn (for economic or competition) reasons and new
user acquisition falls to 80/month and churn goes upto 7%.

You're now losing 60 customers/month. In _three months_ you'll be down 10% on
revenue and your costs will likely be the same.

This isn't a VC funded vs bootstrapped issue, it's a fundamental dynamic of
the subscription mode - I've seen plenty of VC funded startups struggle with
the same challenges.

Living on the edge where your best efforts only net out churn is _hard_.
Everything becomes harder from recruiting to sales. It's super demotivational
to a sales and marketing team when their best effort essentially nets out to
zero.

------
syntaxing
So investors put $2.3M into the company and got back $3.3M. They essentially
have a ROI of 1M over a span of four years. Am I crazy to think that this is a
pretty good deal for the investors?! If someone gives me a ~40% return on a
crapshoot investments (like how most start ups are), I would be pretty happy!

~~~
zminjie
You are thinking from the perspective of an individual investor. For VCs, this
kind of return is abysmal since it won't cover the 7/10 companies that went
completely bust. In order to VCs to take high risks on early stage companies,
they need the winners to return 100x so the fund even makes financial sense.
It's one of the main reasons why VCs constantly push startups for hyper
growth.

This is certainly better than losing the investment completely but I can't
imagine the investors being too thrilled about this outcome.

~~~
paragpatelone
Who cares if it's bad for VCs. They already get paid over 200k+ in carry every
year for over 10 years. They are also not investing their own personal money.

~~~
hobofan
The point is that if all startups behave like that, thr VC business model
doesn't work out, will vanish, we will all have to stop playing the startup
game since there is no one providing that kind of funding anymore.

~~~
T2_t2
No it won't. One case in either direction means anything.

The game is that VCs will adjust, then founders. Then VCs. Then founders ad
nauseam forever. This is just one small piece of a giant play being performed
by many in different ways every day.

------
AYBABTME
The way this company operates is inspiring, but as a recent churned customer,
the resulting product is lacking. The web UI mixes up order of operations when
dragging posts around and when I looked at implementing an API client for
their service, I quickly realized why the UI had out-of-order problems. The
API doesn't respects any sort of contract, changes types of responses in
inconsistent ways and is basically impossible to implement in a typesafe way.
The API used by the UI seems to rely on ordering of events received on their
backend, but these events don't seem to be commutative, and each UI update
seems to be its own API call...

All this to say, I appreciate the goals of Joel in building a strong culture
and strongly support this, but the product itself isn't that great to use as a
customer, which is probably why growth isn't what VCs want. And I'm just
hypothesizing that a hard look at the tech stack could maybe help.

------
goseeastarwar
This is the oft-cited dream of founders that think they’ll just pay back the
VC’s if the relationship isn’t working out. The reality is that no investor in
their right mind would take that deal if they had any confidence in a more
successful outcome down the line.

~~~
Ceredron
Any reasonable investor would gladly take that money from Buffer if they
believed the money would give them better chances of more return elsewhere.
That does not mean Buffer is worthless. It's not black and white.

------
sytse
"Whereas in the past we’d “had it all” and achieved growth alongside creating
a unique culture with a fully remote team and high levels of transparency, it
now started to feel like we had to choose between those things. It was
suggested that some of the fundamentals that I had come to value could be
removed to create a productivity environment that would increase the growth
rate. I refused to compromise on the transparency and remote work aspects of
our culture, so we started to explore slower growth goals, and what that would
mean for the future of Buffer."

I respect the commitment of Joel to all remote and transparency, he's an
inspiration. Personally I think that high growth can be compatible with all
remote and transparency. For example both us at GitLab and InVision are all
remote with high growth rates.

------
lxe
> creating a unique culture with a fully remote team and high levels of
> transparency, it now started to feel like we had to choose between those
> things. It was suggested that some of the fundamentals that I had come to
> value could be removed to create a productivity environment that would
> increase the growth rate. I refused to compromise on the transparency and
> remote work aspects of our culture, so we started to explore slower growth
> goals

In what way did "remote culture" specifically negatively affect productivity?
How was this measured against the more traditional way of working? Or was this
just a perception/bias issue, like "oh hmm the team is remote, so I guess that
can be blamed on slow growth"

------
richardlblair
When you give someone a pile of money you will always wonder if you get that
money back, let alone see a return.

Returning anything to investors should be seen as a positive. If you disagree,
go give someone 6+ figures and have them lose it. You're opinion will change
rather quick.

~~~
jgh
otoh me giving someone 6 figures and having them lose it is much more
meaningful to me because:

1\. It's my money, not money someone has given to me to invest

2\. It's a pretty significant part of my net worth. If I was worth $100
million and gave someone $100k and they spent it all without any return, I
doubt I'd lose much sleep over it. If I do that now it would be very hard to
get over.

I'm not really disagreeing with you here, but the emotions at play are
different I think.

------
wgyn
> Collaborative Fund suggested that we account for these various paths within
> the structure of the Series A funding. We added downside protection for the
> Series A investors, in the form of a right to claim a return of 9 percent
> annual interest on their investment at any point starting five years after
> the initial investment. At the time, I didn’t appreciate how important this
> clause would become. Even our legal counsel commented that this was not
> something he saw too often.

The wording suggests that this was a decision he regrets / a feature of the
agreement he didn't think was important at the time. Is that the case? Would
it have been less onerous with a lower rate? In general, I'm curious if / how
they would have redone this decision.

------
jessep
I'm not confused as to why he wants to buy back control of the company, but
I'm confused why he wants to be so profitable. Does he say somewhere why he
isn't reinvesting more of the profits in the company? Why not be a little
closer to the line?

------
rajacombinator
Article explains somewhat about the hows but not really the why, other than
alluding to “differences in vision.” Maintaining transparency about these
things is a bit tricky!

~~~
dsl
In any other situation it would be the CEO leaving. The investors clearly
didn't have enough votes to boot him, and took a cashout to avoid it being a
total loss.

~~~
devcpp
Yep, the key figure in this piece is the CEO owning 45% of stock. Hard to beat
in any vote.

~~~
robocat
Surely he now owns relatively more than 45% after "undiluting" his stock. He
alludes to that being the case by saying the other minority stockholders have
increased their percentage ownership for that reason.

------
samspenc
I applaud Buffer for sharing these challenges and financial details, as they
have done openly in the past (such as with salaries etc).

------
aj7
I’d love to have been a fly on the wall where it was accomplished that the
VC’s were pushed out. ‘Cause that’s what happened.

------
tomasien
This is great news - it sounds like Buffer is a great company to work for and
own as an operator. I do think they're a cautionary tale for trying to build a
VC backed (in mission and capitalization) company the way they did, but VC
backed is not and should not be the norm so that's not a big deal.

------
nvrmor
He's trying to pass this off as a startup growth post, but it's pretty much a
direct response to calm the VCs who made Buffer happen in the first place.

------
Kiro
I don't understand. Who owns the shares now if they were bought with the
company's own money?

~~~
owens99
No one. There are now fewer shares outstanding.

ie. before there were 10M shares outstanding which represents all the shares
owned by employees founders investors etc, now (as an example, these are not
real numbers) there are 8M shares outstanding because the Series A investors
no longer have shares those shares are taken off the market by the cash.

------
Danieru
Woah, this has got to be the most positive recruiting message ever. It is
clear buffer prioritizes the right things and executes then achieves those
goals. Impressive.

------
mrhappyunhappy
Does anyone even use buffer? I remember it gaining traction several years back
but that's about it.

~~~
icelancer
The data is open here:

[https://buffer.baremetrics.com/](https://buffer.baremetrics.com/)

As an anecdote, we are happy paying customers and have been for some time.

~~~
1123581321
Interesting to see number of accounts decline, but revenue per account and
total revenue increasing. Assuming social networks got better over time at
providing account management features at the same time Buffer got better to
selling to agencies and large companies.

------
jaequery
This looks to me like a no brainer move! Way to go and congrats on the buyout!

------
rdlecler1
If I remember correctly, these guys were proud and very public about building
Buffer as a lifestyle business as were the VCs that backed them. At the end
the VCs would came out with a negative IRR which was not unexpected—a lesson
into why VCs don’t invest in lifestyle businesses.

~~~
wslack
I find it strange that being this profitable is labeled a "lifestyle
business." The hypergrowth/unicorn exit isn't a healthy outcome for many
businesses.

~~~
olllll
Because you aren't building a business. You are creating an asset you can
sell.

Businesses are great and I don't think most people are trying to talk down
about them. But VCs are trying to build an asset they can sell. Because when
you sell an company that has a high rate of projected growth you get all that
money now as opposed to waiting 20 years. There are plenty of investments that
pay out solid returns for 20+ years. VC type funds are attractive in no small
part because they pay out in a shorter period of time.

It really has little to do with building a business outside of the fact that
the asset happens to be a company.

~~~
rdlecler1
That’s not the VC game. These are high risk companies that may never generate
a profit. Because the failure rate is so high you need a few outsized winners.
Value investing where 95% of your portfolio is generating a 10% IRR doesn’t
work. Investor invest in VCs to make money. Investing in companies with VC
risk profiles and lifestyle business return profiles doesn’t work.

------
flanban
Good, for them. Quality of life is overhead VCs will not pay for.

------
alberth
I’m confused.

The article says Buffer is doing $4.6M in annual revenue.

But Buffers own dashboard says they are doing ~$15m

[https://buffer.baremetrics.com](https://buffer.baremetrics.com)

~~~
dsl
Look at the "Live Stream" on the lower right. It is all placeholder data. I
think its just a demo page for whatever baremetrics is.

~~~
tommoor
It’s real data, anonymized

~~~
person_of_color
Any other companies on this site ?

~~~
sah2ed
Baremetrics itself has its numbers publicly viewable at:
[https://demo.baremetrics.com/](https://demo.baremetrics.com/)

