

Wizards of the Coast, Equity Distributions: Part 1 - rb2e
http://www.peteradkison.com/blog-entry-2-wizards-of-the-coast-equity-distributions-part-1/

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patio11
This is one of the reasons why I like HN, because nothing in my lower-to-
middle-class upbringing prepared me for the notion of stock as anything other
than shares of IBM which you held at the brokerage until you needed to retire.
Pretty much everything I learned about the mechanics of tech investing I
learned as a direct consequence of this site, in many cases to material
effect.

One would hope that investors, on dealing with unsophisticated entrepreneurs,
would tell them "Hey, it seems like you don't know the ropes of this yet, let
me explain it to you" but the overwhelming number of anecdotes where I hear
that have that sentence followed by advice so bad it shocks the conscience.

~~~
wooster
FWIW, TechStars was great about this. David Cohen and Andy Sack gave fantastic
advice to our round (Seattle '12). I've been doing this for awhile, have read
the relevant books and heard a lot second-hand from people who've raised a lot
of money, but having mentors give great guidance around this from personal and
networked experience was leaps and bounds better.

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cperciva
Can someone explain to me how this is even possible? I mean, when a
corporation is created, before it takes any investment, _someone_ has to own
it, right? How is it possible for the founders to not start out owning 100%?

~~~
patio11
It's more clear if you read his follow-up to the post.
([http://www.peteradkison.com/blog-entry-3-wizards-of-the-
coas...](http://www.peteradkison.com/blog-entry-3-wizards-of-the-coast-equity-
distributions-part-2/) <\-- highly recommended)

What probably happened is that they (on the basis of really, really, REALLY
bad advice) started with something like 1,000 shares of the company, valued at
$0.50 apiece. They did genuinely own 100% at that time. Then as they raised
the 300k they _issued additional shares_ , at valuations between $0.50 and $4,
diluting the founders _horribly_ , because the founders did not award
themselves new shares.

The fundamental problem here is grossly misvaluing the company (i.e. the total
value of 100% of the shares) at the time new shares were issued. For example,
if you had hypothetically bought them a drafting table for $100 (an example
used later), you ended up with a 0.5% stake in the company (implicitly valuing
the company at $2k at that point). A tech company which only exists as a
napkin held between two hungry young men with no asset other than a gleam in
their eye gets a notional value of $250k+ on day one. If you attempt to invest
in them later, after they have e.g. a product with customers for it, the value
gets re-pegged SHARPLY north of that, perhaps in the single digit millions or
higher if they're doing really well.

He mentions that a lot of the money men involved were annoyed by hordes of
small investors making seemingly outsized returns on their initial
investments. I don't think he quiiiiite understands that they're not wrong:
their outsized returns were essentially large gifts of surplus value from the
founders to them. (The money men, of course, seem a little put out that the
founders didn't instead make a large gift of surplus value to them.)

~~~
cperciva
_The fundamental problem here is grossly misvaluing the company (i.e. the
total value of 100% of the shares) at the time new shares were issued._

Aha, that makes much more sense. So the problem wasn't that they didn't have
founders' shares, or that they didn't have enough shares; but rather that they
were selling off shares at ridiculously low prices.

Tarsnap Backup Inc. officially has 100 Common shares outstanding, but there's
no way I'll issue new shares for $0.50 each. ;-)

~~~
patio11
I would certainly not suggest giving away those 100 common shares for
picodollars because that would compromise your business results and make it
affirmatively more difficult for sophisticated investors to join you, leaving
your company to only receive investment from worse investors.

By the way, I signed up for Tarsnap and am using it "in anger" for Appointment
Reminder. My predicted bill for this month is something on the order of 60
cents. It is, literally, the smallest business oriented bill I have ever
forced my accountant to look at, and would fall below the noise floor but for
the fact that I want paper records of me having paid for a professional backup
service in case I ever have to prove this for my insurance agency. (I have
professional liability insurance and data loss/data breach insurance for
Appointment Reminder, chiefly because I have hospitals as clients and they
want to know that if I screw up there will be deep pockets in the neighborhood
to sue to settle up with. The insurance company is basically renting their
deep pockets out on a "We are willing to bet that you won't screw up" basis,
but to protect their interests, they have a 15 point checklist for various
things Serious Businesses do regarding data security and if it turns out that
I'm not a Serious Business than my Serious Business Insurance Policy will not
actually cover me.)

I would, and this is my honest and true opinion as a customer rather than as
someone who has nagged you for years to raise your prices, prefer to pay $100
per month for no reason other than to avoid having my insurance company think
that _I_ am a stupid kid playing at being a real business by entrusting core
parts of my infrastructure to a service which costs me sub-coffee money. In
the event of me having an insured loss (which, n.b., I hope to never have and
to just set fire to the $10 _a day_ I pay for insurance), I really don't want
to have that conversation. Please make me not have to have that conversation.
I can pay.

~~~
bigiain
Let me introduce you to "Bigiain's Managed Tarsnap Backup Service" \- for the
low low monthly fee of $99.40 (on top of Tarsnap backup charges), we'll
provide you with a professionally monitored, secured, authenticated, managed,
and 100% guaranteed digital _and_ paper invoicing service - complete with
99.999% SLAs on the invoicing and _punishingly_ punitive guarantees of
eventual consistency in your long term invoice and payment ledger.

(Call now, our operators are standing by…)

~~~
bigiain
Perhaps a little less cynically, I wonder if there's a market for "Enterprise
sales as a service"?

How many Tarsnap-like services are there, which with the right salespeople and
a 5,000+% markup could be sold into "The Enterprise" \- which would be a
completely non-competitive demographic to the developer/startup trying to sell
at <$30/month (or even <$1/month)?

Patrick, iterested in going 50:50 partners in BEMTBS? (Bigiain's Enterprise
Managed Tarsnap Backup Service) You do sales, I'd handle "fullfillment" (read:
invoicing), out of goodwill we can cut Colin in for 15% of all sales (and not
even charge him commission on the Tarsnap bills incurred by our customers).

(Oh, and Patrick, BTW - my offer above of our $99.40/month plan is the
"Personal Plan". Our "Business Plan", which includes all the features of the
Personal Plan plus the words "Business Plan" on each invoice and statement is
$248.40/month, and our "Enterprise Plan", which includes everything with the
Business Plan plus the words "Enterprise Plan" on the invoices and statements
_plus_ up to 3 faxed copies of each invoice as well as the PDF and USPS
physical/paper mailed copies, is only $499/month.)

~~~
cperciva
Patrick: Please say yes.

Seriously, I'd love to see people reselling Tarsnap. This is the main reason I
provide accounting details in CSV format. As long as you pay me for your /
your customers' usage, I don't care how much you charge your customers.

~~~
napoleond
I've often considered the ways I could pack up Tarsnap for Windows users,
and/or make a pretty GUI for Linux/OS X. It's encouraging to hear that you'd
be supportive of that!

~~~
cperciva
Very much so. Windows support is something I may be able to do myself, but a
GUI is definitely something I don't have the expertise for; at some point I
may end up hiring someone to write one, but if someone writes one on their
own, all the better.

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jacalata
The story of all the small investors surprised me, because i thought there
were more rules about who could invest in a company. Are these rules new, or
do i misunderstand something?

~~~
bretpiatt
I'm a "suit", without a "Esq.", so if you want real detail here perhaps an
attorney with a focus on equity issuance can reply.

Rules do exist about non-accredited investors buying shares of private
companies or shares in public company private placement. Those rules give the
"little guy" extra rights. This is why you won't see them investing capital in
venture led financing rounds or able to trade on places such as Second Market.

Non-accredited investors end up with equity in private companies all the time
through "Founder's stock" or grants from the option pool. They may even put in
"seed money" to get it started so often in a venture backed company you'll
have some early capital from what gets called "friend and family money".

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michaelochurch
This is painful to read, especially the part about rich establishment late-
comers whining about early, small investors getting "too much" payoff.
Apparently people from middle-class backgrounds who "got lucky" don't deserve
it. This reminds me of when Mark PinkAss whined in public about the Google
chef making $20 million.

The people at the top of society really don't want anyone else to win because,
as they see the world (and the OP clearly does not subscribe to this) it's
completely zero-sum. These people do not believe in fairness _at all_. They're
constantly looking for ways to take advantage of people, which I suppose is
how they ended up at the top, but it makes the world ugly and I wish it would
stop.

~~~
simonh
It wasn't a case of establishment late-comers whining. It was a case of
establishment late comers not actually coming at all, late or not, because the
system was rigged so they couldn't make any money. Since WoTC needed the
investment, it was WoTC's problem and so they amended their terms.

If you're in a situation where you need to borrow people's money, it's up to
you to offer terms that are acceptable to them. If you don't, then there's no
law that says they have to lend to you.

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contingencies
I've started one business and had options in two. In the end, one of those
businesses (not the one I started) wound up paying me some lump sum. Presently
I distrust futures of any kind; to put it simply, I am more interested in
present-day pragmatism than greed.

I think the author comes from a similar line of thinking, as his tone seems to
suggest. I'm not rich but I do fine. I'd recommend: do what you love; money
comes and goes, someone with more flexible morals or risk affinity will
certainly make more of it, but in the end you won't regret it.

