

Ask HN: How did Treehouse get 5M in funding without wanting an "Exit"? - rpm4321

As mentioned by user marcamillion in the PG/Ryan Carson brouhaha - http://news.ycombinator.com/item?id=4800236, Treehouse has received 5M in VC funding, and yet Ryan Carson claims he has no interest in IPOing, and seems inclined to grow the company over the long term rather than having some other liquidity event.<p>As a practical matter, how would this work? My impression is that VCs are never in the dividends business.<p>Wouldn't there have to be a fair amount of upfront and unique legal legwork to put something like this in place, in order to not only compensate the VCs, but also to attract quality employees in lieu of stock options? Would the investors and employees be guaranteed a certain percentage of any money Carson takes out of Treehouse? Do VCs who would accept this kind of deal even exist?<p>I'm pretty much allergic to the idea of answering to a board, shareholders, and analysts myself. 37 Signals seems to have an interesting idea about how to compensate employees in the unlikely case of an unexpected liquidity event, but some sort of structure that would allow profit sharing, without requiring a path to IPO or acquisition, would be great:<p>http://37signals.com/svn/posts/2987-an-alternative-to-employee-optionsequity-grants
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hooande
Two ways to answer this question. The practical answer is: $5MM isn't a lot of
money to a VC firm. They have hundreds of millions or billions of dollars to
invest. Ryan Carson has a strong reputation in the tech community and he's an
accomplished guy. $5MM is nothing compared to the potential rewards from a
working relationship with him. Treehouse is a good product and it definitely
has value, but the potential that he could somehow lead them to the next
facebook is also very appealing. Part of being a VC is knowing how to use
money to open doors.

To answer your queston about the mechanics of fundraising: They aren't just
throwing their money away. They've bought themselves a share of the
intellectual property and technical team that Treehouse builds. Carson could
change his mind and decide to sell to an acquirer, or grow the business over
decades into a public company. Even though he's blogging about not wanting an
exit now, a lot can happen.

Unfortunately, VCs won't extend this kind of a deal to just anyone. The rules
are different for founders who are already well known. Everyone else had
better have a sharp business plan.

~~~
hkmurakami
Github is a prominent example of a company that changed course on the funding
/ no-funding and exit / no-exit strategy. I'm sure history is littered with
examples of such a change of course.

Further, there's the possibility of Treehouse raising more money in the future
(let's say we have another crash in the market, or because they start facing
really tough competition), and Ryan Carson is left with less than 50% of the
voting rights. In that case, the founding CEO can just be pushed out so that
the investors can pursue a strategy that maximizes their returns.

~~~
marcamillion
You guys are missing the point.

Github did not raise money BEFORE they figured out how investors would
generate a return. They are likely to have an IPO. That's a decision you make
before you decide to raise money.

It is also a decision you discuss with the investors.

If you take the money from them, without aiming to some sort of exit - or
rather, under the pretense that there will be some exit and then "change your
mind", that could easily be classified as fraud.

Now...please don't be mistaken. I am not saying that Ryan Carson has committed
fraud....but this is a big big deal - assuming that his investors were under
the impression that they would have some sort of exit.

------
marcamillion
Firstly, I must say I am completely flattered that you noticed my little
comment and blew it up into this Ask HN.

Secondly, you are absolutely right that it should be addressed.

Some people are saying here that these investors gave Carson the $5MM because
they have so much money that 'wasting' $5MM is no big deal. It doesn't quite
work like that.

For starters, being an investor with a ton of money, you don't need to buy
access to Carson. I can pretty much guarantee that people like Ron Conway,
Peter Thiel, PG, Marc Andreesen, even if they didn't invest in Treehouse if
they wanted something from Ryan Carson he would jump (as most rational people
in the tech space would rightly do) at the chance to help them out.

If Carson took their money, with them assuming that there will be an exit -
when he knew full well that he wasn't interested in one....well.....that's
dishonest.

If he was very straight forward with them, which from everything I have read
about him I assume this is the likely route he took, then he probably did
discuss with them exit routes he will take (i.e. an acquisition).

The issue is, as an executive (especially a chief executive) you have a
fiduciary responsibility to maximize shareholder value.

If you know, that your ONLY exit option is to be sold to a larger company,
then publicly getting rid of your other "legitimate, best alternatives"
essentially squanders this fiduciary responsibility.

In other words, if I want to buy your company. You want to sell it to me for
$50MM, so all of your investors can make a good return, why would I pay that
if I know that I can offer $30MM and you would be hard pressed to take it.

The only way for you to realistically bid up the price that they pay is if
someone else wants to buy (or you want to take it public). You can't assume
that someone will "always be there". That seems irresponsible to me.

The one option that every fast growing tech company has, is to go public. So
it seems like a mistake to piss away that option for no upside.

Edit: Cisco's acquisition of Meraki is proof positive of my theory of having a
legitimate alternative of going public - <http://www.meraki.com/company/cisco-
acquisition-faq>

From the CEO of Meraki:

 _So, when Cisco approached with an acquisition offer a few weeks ago, our
initial reaction was to politely say "thanks, but we're planning to do our own
thing and take Meraki public". It turned out that was exactly why they were
interested in talking to us..._

------
jonathanjaeger
Chris Sacca talks about his investment in Kickstarter and how the founders
don't want to sell the company:
<http://www.youtube.com/watch?v=6VOQnK7O2To#t=67m>

You have to get your investors on board even if it's not the "typical" setup.

------
ig1
Exit != IPO.

One of the most common forms of exit is to be acquired by another company.

~~~
TamDenholm
If i remember correctly, Ryan Carson has publicly said he doesnt want to sell
either, he's said he'd happily run the company for the rest of his life.

[Source] <http://vimeo.com/47271938>

~~~
rpm4321
Yep. That's really my question anyway - is there a path to victory as a non-
bootstrapped startup that doesn't include IPO or acquisition. How would you
structure things to where investors and employees are confident they would
share in the ongoing rewards of a non-public company.

If you look at the headaches Zuckerberg is running into now, even with,
ostensibly, "total control" over a public company, it just seems like an
extraordinary distraction from keeping your users and employees happy.

Speaking of Facebook, there is also the issue they ran into with having over
500 shareholders and staying private. I'm assuming that there is some way to
guarantee revenue sharing to employees without making them actual
shareholders, so that you wouldn't step over the 500 employee threshold and
trigger the SEC's required IPO - assuming you were lucky enough to get that
big.

~~~
Snail_Commando
At least as early as 2011 [1], the 500 shareholder rule [2], when applied in
the case of Facebook, meant that Facebook had to start reporting financials to
the SEC.

Although they were not necessarily obligated to go public, they were
effectively forced to anyway.

It's a small but significant distinction. Essentially, once forced to report
like a public company, you might as well become one; even if you had no prior
incentive to.

[1] At least as early as January 2011, when Goldman Sachs made $450 million
investment in Facebook on behalf of itself and other private investors. [2]
This rule has since been revised under one portion of the JOBS act which
raises the bar to 2000 shareholders (or 500 non-accredited investors.)

~~~
redthrowaway
I've never quite gotten this idea. Why does reporting force a company to go
public? Aside from the liquidity, what does a founder gain from going public,
and in return for ceding control of the company? How does forced reporting
change the equation?

------
petercooper
_but some sort of structure that would allow profit sharing, without requiring
a path to IPO or acquisition, would be great_

Wouldn't that structure be a _corporation_? Shareholders can take profits out
of corporations as dividends thus allowing profit sharing without requiring an
IPO or acquisition.

If Treehouse makes $10m profit per year then that can be issued as a dividend
and if a VC owns, say, 30% of the company, that's $3m for them. Do that each
year and you have a great, steady return (it could also be arranged that
equity can convert into a loan in case the business doesn't reach its targets,
thus protecting the investor.)

~~~
rpm4321
Hi Peter, thanks for your response. If you'll see below, my question is more
on the practicalities of this (copied at the bottom of this comment.)

Personally, I'm not aware of any VCs in the "dividend business", but I'm by no
means an expert so I could be wrong.

Also, if you are lucky enough to be successful and have over 500
employees/shareholders, my understanding is that the reporting requirements
required by the SEC are so onerous that you might as well go public.

============================================

Yep. That's really my question anyway - is there a path to victory as a non-
bootstrapped startup that doesn't include IPO or acquisition. How would you
structure things to where investors and employees are confident they would
share in the ongoing rewards of a non-public company.

If you look at the headaches Zuckerberg is running into now, even with,
ostensibly, "total control" over a public company, it just seems like an
extraordinary distraction from keeping your users and employees happy.

Speaking of Facebook, there is also the issue they ran into with having over
500 shareholders and staying private. I'm assuming that there is some way to
guarantee revenue sharing to employees without making them actual
shareholders, so that you wouldn't step over the 500 employee threshold and
trigger the SEC's required IPO - assuming you were lucky enough to get that
big.

~~~
petercooper
I'm being a little tongue in cheek because we _do_ have the _structures_ ,
it's just that the modern sort of VC we call 'investors' in these parts have a
limited range, as you imply.

 _is there a path to victory as a non-bootstrapped startup that doesn't
include IPO or acquisition. How would you structure things to where investors
and employees are confident they would share in the ongoing rewards of a non-
public company._

This question probably does make sense in the context of HN and the modern
tech VC scene but the reason I was being tongue in cheek, again, was because
across other industries and in most of the world for the past X hundred years,
taking shares in businesses and then taking a cut of the dividends has been a
main (though not only) way of making investments in smaller companies.

It seems like the modern tech scene is almost an aberration in this sense.

------
johnrgrace
If you can build a profitable company with good margins fast, the company
could do what I would call a reverse private equity deal. The company would
buy back the investment stake from investors and fund that via a loan or some
type of debit.

The option feels like a "domino rally" type of plan since multiple parts would
have to together perfectly in order to work. This type of plan is the only
option I can imagine besides being acquired if an IPO is out of the question.
I've seen this type of thing happen in the Oil and Gas world.

~~~
rpm4321
I've actually thought about this, but I think there would be conflict with the
investors in that there might be a sense that their shares are being taken
hostage, especially if this plan wasn't disclosed upfront. If the company has
no interest in an exit or IPO, then really the only interested buyer of the
shares is the company, which would depress the value of the shares compared to
what they would fetch on the open market.

Also, something similar would have to be worked out with the employee stock
options presumably, and then you would have to work out some other profit
sharing mechanism anyway in order to retain and attract new employees.

------
majani
Because investors know that no matter what people say, everyone has their
price. That's just a human reality.

------
kryptiskt
I don't see the problem really, if it's a major hit but still unlisted, can't
the fund simply shift the shares to its investors when it is wound up? There's
the small matter of valuing them. But a piece of a successful company will be
valuable even if it's private with no IPO on the horizon.

~~~
refurb
Most limited partners who give their money to VCs are university endowments
and pension funds. If you're the manager of a pension fund, you want cash back
once the fund shuts down, you certainly don't want a piece of paper saying you
own X number of shares in a company.

I don't know the details of this deal, but suffice to say, the VCs already
know what their exit plan is.

I know in the biotech space there is a trend towards exits other than
acquisitions or IPOs. You basically create LLCs and any returns are funnel
back through to shareholders (through dividends??).

~~~
rpm4321
I'd be fascinated to read any sources you might have regarding the Biotech
LLCs. Thanks in advance.

~~~
refurb
Here is a link:[http://lifescivc.com/2011/05/structuring-a-biotech-
liquidity...](http://lifescivc.com/2011/05/structuring-a-biotech-liquidity-
thesis/)

Go down the page to "Standalone LLC model". Basically the LLC is used to "pass
through" revenue from licensing deals and such to the LPs.

~~~
rpm4321
Thanks refurb, appreciate it.

