
Why dividend cash-outs are evil - darklighter3
http://blogs.reuters.com/felix-salmon/2011/10/02/why-dividend-cash-outs-are-evil/
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cperciva
... and this is why stock options should be automatically repriced when a
dividend is paid. Any situation where option strike prices are not adjusted
results in dividends effecting a wealth transfer.

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rdl
Wow, this is a great example of either willful misunderstanding or outright
misleading "journalism". When did Reuters become Business Insider or Gawker?

Yes, a dividend cash-out is _unequal_ for different parties. It's not
necessarily _evil_. Lots of things in startups are unequal rewards for unequal
risks and contributions.

Treating founders (and maybe early pre-series-A employees, and early seed
investors who take common) differently from later investors and later
employees might be desirable. The founders are the ones making a choice
between selling the entire company now for $500mm or so to a place like Yahoo
where it will die, or raising VC money to try for an IPO, an outcome which
will expose them to much higher risk and yet might make 90% more returns for
everyone (investor and employee) alike.

This might be more complex if a company has a hired-gun CEO with 5-10% equity
stake in options, and some founders with common stock. One could argue that
the CEO should be incented to "swing for the fences" as much as the founders.
A founder probably has a greater percentage of net worth tied up in the
company, and may substantially lack other assets; a hired CEO probably
doesn't.

If capital gains, dividend, carry, bonus, and wage income were all taxed at
the same rate, it would be more straightforward to just declare a special cash
bonus to founders at financing events, vs. going through the somewhat indirect
route of dividends.

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jsavimbi
I guess the question that I still see unanswered in my readings is why are the
founders so keen to pay themselves upwards of $20M in investor cash when
they've really just begun. They're not investing that cash into the company,
their sweat equity is nowhere near that number and their talent is going to
prickle at the sight of soon to be purchased baubles parked in reserved spots
outside the office. What do they have to gain from what appears to be pocket
money in comparison to what they think the company is worth? Or do they not
think the company is worth the after-money price, somewhat a la Groupon?

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wccrawford
The word "evil" is now so over-used as to become meaningless.

This doesn't even cross into 'unethical', let alone 'evil'. The employee had
the option to buy shares and chose not to. Had they done so, they'd have
shared in the dividends, too.

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gojomo
Clear reductionist examples, but the 'evil' label isn't well-justified.

In the first 'evil' scenario (only Adam sells), it's only a bit unfair if Bill
is contractually prevented from arranging his own private sale. Otherwise, he
has the same freedom to arrange a person-to-person transaction as Adam does.

In the 'really evil' scenario (only Adam and Charles collect the dividend),
it's only unfair if a vested Bill is prevented (by policy or secrecy) from
participating in the dividend. That is, it's not the "dividend cash-out"
tactic itself, but the exact implementing details, that _might_ make it
unfair. The blanket headline condemnation isn't supported.

Also, what if unlike in Salmon's scenarios, Bill has only a relatively small
stake, and perhaps options that are only slightly in-the-money, or even still
out-of-the-money? Bill might then actually assign a positive value to Adam
retaining a controlling interest (versus later investors), or to the other
benefits of a big jump in funding and company ambition.

If the dividend-to-others helps finesse that control/ambition equation, it
could be more valuable to Bill's stake than a tiny amount of cash dividend
now, or sparing him a tiny amount of extra dilution. The magnitudes and future
hopes matter for an analysis of whether Bill would want to veto the deal or
cheer it on. And if Bill (along with Adam and Charles) likes the deal when all
factors are considered, can it be "evil"? No victim, no crime.

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ssp
Is this dividend scheme materially different from a VC simply paying 20
million directly to the founders in return for a lower valuation?

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moses1400
very clear example - well laid out

