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People who destroy entrepreneurial value are the scum of the earth (ryanwaggoner.com)
152 points by ryanwaggoner on Oct 19, 2010 | hide | past | web | favorite | 40 comments

There will always be hustlers a-plenty ready to exploit entrepreneurs.

A few examples from my years working in Silicon Valley from the legal side (where, unfortunately, a lot of this crops up):

In the days when founders were generally less informed than they are today, I would often see them fall prey to "consultants" who would promise to open doors to funding and the like in exchange for a significant equity stake in their venture, only to show themselves to be nothing but B.S.ers.

I have seen lower-tier VCs who cared not a whit about their reputations take control, fire the founders and do a 100 to 1 reverse stock split in exchange for modest additional funding, reducing the entire equity holdings of the founders to less than 1% of the company in one fell swoop.

I have seen founders sell in acquisitions, take their full compensation in the form equity in the acquirer that had to vest over 4 years but without acceleration protection in the event of termination without cause, be told that "we wouldn't do this unless we wanted you to succeed," and then get fired within a few months as the acquiring company took years' worth of work from them for what amounted to a pittance.

I have seen a young founder build up incredible value in a new venture and, after a few years of devoting everything to it and building nice revenues, take in a "partner" who was a "player" in Silicon Valley, only to have that person maneuver him down from an initial 100% ownership stake to 50% to 5% and, finally, when a $30M buyout is about to happen, grant to himself massive amounts of additional stock (all for bogus reasons) to put the original founder under 1% right on the eve of the acquisition.

I could go on and on but the lesson in all of these is that entrepreneurs should always be vigilant to ensure that the deals they do are prudent and do not expose them to this sort of exploitation - it can come at you from all sides.

Very nice piece, by the way, Ryan - I find your posts consistently insightful.

I've always seen a strong analogue between systems hacking/infiltration and this kind of legal behavior. In both cases people who specialize in the arcane rules of each system (unix or specialized law) use this arcane knowledge to blatantly break the intent of the system rules without breaking the letter.

The only difference is that law hacking is totally legal. As Vito Corleone once said, "A lawyer with his briefcase can steal more than a hundred men with guns."

do a 100 to 1 reverse stock split in exchange for modest additional funding, reducing the entire equity holdings of the founders to less than 1% of the company in one fell swoop.

Isn't that how facebook re-jiggered things to make up for early equity granting "mistakes?"

Not exactly. Keep in mind that the movie "The Social Network" is not a 100% accurate telling of history. In the movie Eduardo (a co-founder of Facebook and initial source of funding) has his shares diluted from 30% down to a fraction of a percent. In reality Eduardo's shares were diluted (by issuance of new stock) from about 1/4 of the company to less than 10%. And it was probably a necessary move as well, seeing as Eduardo was no longer very connected with the company (it took him some time to even discover that his share of the company had been diluted, despite having been the CFO of the company on paper. In the end he ended up realizing something like a 6 million percent return on his initial investments (according to the value of his share of Facebook at the moment).

It's hard to imagine a nicer compliment. Thank you very much :)

I have seen lower-tier VCs who cared not a whit about their reputations take control, fire the founders and do a 100 to 1 reverse stock split in exchange for modest additional funding

So... why was additional funding needed? Why were the founders not able to get it on their own?

I have seen a young founder build up incredible value in a new venture

How incredible? Maybe the partner believed the founder's estimate to be literally that...

I don't want to defend the company described in the OP, but overconfidence is endemic to the startup culture. There's plenty of companies out there with nothing more than a clever gimmick, or worse yet, an imitation of someone else's clever gimmick, and that are destined to vaporize the carefully collected funds of their investors. Is it wrong to act decisively to turn such companies around? Or to collect whatever "value" remains when the end is nigh?

It's easy to criticize the VC guys, and they certainly can act badly at times, but every entrepreneur thinks their company is the best thing in the world - or acts like they do - and can be a little blind about these things.

I will readily acknowledge that investors can exercise their legal rights as they deem appropriate, There are times, though, when it makes you want to hold your nose as you experience it, and the 100:1 reverse split was clearly one of them (over the years, I have seen many, many down rounds and I would not make that statement about the overwhelming majority of them - so I understand and don't disagree with the general point you are making).

The second situation was not only ugly but blatantly illegal and led to a major lawsuit with some pretty serious repercussions for the wrongdoing "partner" (settlement by having to pay a 7-figure sum to the founder plus later getting sued by the acquiring company for various wrongs, including the one described here).

> every entrepreneur thinks their company is the best thing in the world

Nevertheless, it is their company.

After they have received an investment it is not their company, but a company that belongs to both them and their investors. Indeed, unless those investors are individuals, they have a fiduciary responsibility to act when the company is being mismanaged.

Just because you legally can, doesn't make it right.

There is no good excuse for maximizing your profits by suddenly changing the ownership structure of the company to your direct financial benefit. Doing so is wrong.

Is this Generational Equity (http://www.genequityco.com/Conferences.aspx)?

PS: Ryan, is putting a big HN submit button and begging for an upvote a little too much, or is it how "the games needs to be played"?

edit: more stuff from the disclaimer from Generational Equity seminar, that I really hate (of course it's in small print). See how well it matches the post:

Generational Equity does accept clients or customers that may later prove to be unviable or unmarketable

Please be advised that no particular buyer has expressed a specific interest in your business.

Generational Equity does not conduct a detailed or sophisticated screening process for its potential customers

Only after a customer relationship is established can Generational Equity assist in identifying the value of your business

If you read between the lines, it says, in plain English: you must pay us first, then we'll tell you that no one wants to acquire your company, but hey, we told you so, despite our sales pitch to the contrary.

Confirming it here would probably open him up to just as many potential legal pitfalls.

I'd expect a sly wink of a response that would serve as cover.

Something like, "I've seen that website before, but I can't comment on whether they're the ones who contacted me."

GW Equity is a master at SEO optimization, I'm really impressed. If you google "Generational Equity scam", then you find plenty of juicy stuff. But if you had just googled their name, Google shows you 3 pages of links that are all variations on their name, obviously designed to obfuscate good results. Really, it's worth a look. Where can I report SEO abuse to Google?

Read for instance: http://www.acquisitionadvisors.com/ma-blog/2009/03/another-b...

Google's suggestions sure seem to paint a clear picture though.. Shame the suggestions are at the bottom and not the top in this case:

  Searches related to Generational Equity
    generational equity scam
    generational equity named runner
    generational equity rip off
    generational equity blog
    generational equity complaints
    generational equity m&a

you got that right. And Generational Equity have good reason to do so as explained here: http://www.responseagency.com/2/post/2009/9/more-on-gw-equit...

Silence on this question is good enough.

I'd be curious who actually gets taken by scams like this.

I know 2 kinds of people who own businesses, those who worked their butts off for years building them themselves and those who inherited them from their parents. I've noticed a disproportionate number of the inheritors who have taken family money that took 40 years to amass and have lost it in a year or two. Founders and builders that I know seem to be much more wary of "get rich" scams. They know what it takes to be successful; they've already done it themselves.

Ryan, I'm guessing that you questioned this because you built your own. But would you have been more receptive if you had inherited Daddy's business and wanted out to "live the good life"? Just wondering.

Entrepreneurs of all stripes can get taken by scams like this. Often times they are not "scams" per se, just very overpriced services. Like agile programmering groups charging $200/hr and delivering worse code than the in-house teams. I've worked for four boot-strapped-then-venture-funded startups and ALL of the founders at these startups have fallen for something like this at one point. It's pretty easy to fall for this. Startups are very frustrating and stressful, so when your in-house guys are telling you it's going to take 4 months to do something and some external guys are telling you it's only going to take them 1, you WANT to believe the external guys. And hey, they have the balls to ask for $200/hr, so they must be able to pull it off, right?

There are also legitimate scams, like life coaching or various overpriced seminars or "consulting" from "strategists." I won't comment on these as there seems to be a strong internet entrepreneurial contingent who thinks this stuff is very valuable. I'm also pretty sure my founder friends who have paid out the nose for stuff like this would claim it was worth the money, so I don't really know what to say, here.

Are you really saying that all coaching/life coaching is a scam?

No, if you include actual sports coaches. But life coaches, yes.

What is your rationale for including life coaches, but excluding sport coaches?

Sport coaches are more operational managers, tacticians and physical trainers who have authority over a team than the pure teacher types that life coaches are. You also don't directly pay him money, or are getting paid.

How on earth do you figure? That's the exact equivalent of saying "All advice is bullshit, especially advice you pay for." And, "If you've ever read it, then having somebody tell it to you is a waste of time."

It's not like saying either one of those things.

This is a topic that is close to home. A good friend of mine turned evil one day and became a "Life Coach" simply because he wasn't making enough money in his career, and thought it would be an easy way to fleece the types of mid-range executive type people he was exposed to all the time as a "sales engineer." Why bother getting a paltry commission on some software you don't really care about, when you can charge the same person $500/hr for some bullshit unlicensed therapy? Or $5000 a head per seminar? Or $150 for some stupid mp3s? Or $75 for a PDF file? ETC, ETC.

Read the Mystic Masseuse by V.S. Naipaul, it's the same idea, only 50 years in the past. In fact the idea came to him FROM reading this book.

And you know what, he was RIGHT. He makes LOADS of money now. It's a bit disturbing.

There are wonderful therapists and rabbis and priests and friends and grandparents, but life coaching is a scam, pure and simple.

I actually don't know what to think about this, because I think the people who are buying his services believe they are getting something important out of it. So in that situation, it's good, right? But he went into it just to take their money.

This is the last thing I will post about this topic.

The singular of anecdote is not data.

I'm sorry your (ex?) friend is a douchebag, though.

I agree - that statement is far too general. One persons' scam is another persons good value. I think paying $20 to get into a nightclub is a scam, others see it as good value.

I've never even considered the use of a life coach but they are no more/less scammy than 100's of other personal services, from personal trainers to clairvoyants, hairstylists to Feung Shui consultants. If you gain personal value, to me it's not a scam.

A scam is where someone takes your money and provides nothing or something you weren't expecting in return. In fact I don't think you can really apply 'poor value' as a filter for scam - a Ferrari is poor value for money, but nobody sees it as a scam. Same goes for my nightclub example.

Ryan, I'm guessing that you questioned this because you built your own. But would you have been more receptive if you had inherited Daddy's business and wanted out to "live the good life"? Just wondering.

If only I had the chance to find out :)

Well, this is just like those casting call businesses that say they'll get you acting/extra/model work. Of course, you've got to pay them a big fee for representation and and overpriced head shot...

You tend to get less than you put in.

Sadly I have often seen the type of people mentioned in the article as the one considered "entrepreneurs" and are often the ones saying we need more entrepreneurs. When I was a teen, its all I saw and developed a strong aversion with all things related "entrepreneurs", it just seemed like a moral license to screw people and not care.

If it creates that perception for other people growing up, they really do a disservice to the world!

I think adwords & blogging and other actually effective forms of advertising are upping the amount of pressure on people who sell worthless things. I get called almost every day with someone who tries to sound like a customer to keep me on the phone long enough to sell me something. There's an air of desperation where we're finding out that some companies who were profitable before the recession are not actually adding value when you need to justify their services.

name of the business is? jason at calacanis dot com if you don't want it public.

OK, I'll be the contrarian here but although their pricing/compensation structure is off for a small entrepreneur, I don't see anything morally wrong with the concept of this type of business.

There are many business owners who want to sell for a variety of reasons -- divorce, need a large amount of cash, tired of running the business, etc...

Almost every entrepreneur has a "price" at which he'd be willing to sell. If this consulting business changed around their pricing scheme and took a percent cut of a successful sale, where everything was transparent, there are many people who would find value in this.

For a smalltime entrepreneur, of course it doesn't make sense to drop $30k on the HOPE that these guys find a buyer. However, if your company is making $1M in profit per year, it may well be worth MORE than $30k upfront to hire well-connected brokers to get multiple parties to bid up a purchase price for your company.

> I'd be curious who actually gets taken by scams like this.

Theory of multiple intelligences suggests, that, when working in the right context, the ability for building strong & profitable businesses does not necessitate the "intelligence" of strong BS-filter. This is why you have a lawyer friend, a strong peer group of entrepreneurs, and that guy full of cynicism, whom you still listen with half an ear. Or if you don't, you should.

There area lot of "incubators" that do pretty much exactly this... but the seminar never ends, and the list of services they can charge for doesn't either.


Would say, scum of the scum :-) Can you disclose the nationality of the guy who called you?

If you enter into a contract, knowing the details, that's your responsibility. They are not 'scum' for making the offer. And the people who take them up on it are not necessarily 'stupid'. Obviously, some of their clients are very happy.

At this point, you don't even have any proof that they have unhappy clients.

If you enter into a contract, knowing the details, that's your responsibility. They are not 'scum' for making the offer.

Your second statement doesn't follow logically from your first. They can be "scum" even if I'm responsible for my actions. Perhaps we just have different perspectives, but I believe that if you spend your time trying to rip off people who don't know any better, you're destroying value. The fact that they agree to it doesn't absolve you of any responsibility. If I sell a car with a critical defect that I fail to disclose to the buyer under the assumption that it's their responsibility to get the car checked before they buy, I've done something wrong. I wouldn't want someone to do that to me, and it's not right for me to do it to them.

Further, it's not at all obvious that some of their clients are very happy, but the collection of blog posts, magazine exposés, BBB complaints, and lawsuits is sufficient evidence for me that they definitely have unhappy clients.

EDIT: I don't have any proof of this, but from the conversation I had and the research I did, I highly doubt that the people forking over $32k have "all the details". This sounds to me exactly like any other high-pressure exploitative sales seminar.

If you're business depends on your customers not figuring out what you actually do then you shouldn't be in business.

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