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Boards are dangerous to founder/CEOs (reactionwheel.net)
716 points by tosh 8 days ago | hide | past | favorite | 324 comments

I always thought stuff like this happened to OTHER founders, but would never happen to me. But my board fired me six months after closing our series A.

The advice in this article is 100% spot on. I didn't know any of this. I was totally focused on building my company. But if you raise money you can't do that anymore. 50% of your time will always be occupied with working on your next round of funding or managing your board of directors.

I noticed super early that VCs were not "helpful" at all like they had claimed during the fundraising process.

So I got fired, and I thought, "well, at least I still have my founders stock!"

Then a year after I got fired the series A investor led the next round of funding and decided to value the company at $0, so I got diluted by 99.99%. Sounds illegal, right? Well, it probably was, but what am I going to do about it? They have billions of dollars and I had no money.

I just let it go and started something new - bootstrapping of course. On the bright side, the new CEO ran the company into the ground. Meanwhile my new company is doing well and I love my job.

Anyway, do what this guy says to manage your board and just plan on being fired at some point if you raise VC money.

That was a disappointing and strange day - I was in the last group of devs hired before all that went down, but I understand if we are just vague memories at this point.

I choose to focus a bit differently on how that all went. There is enough negativity from it all to go around, but I find it better for my own well-being to focus on the positive. (To be fair, you had more skin in the game, so I understand our difference in approach.)

Specifically, you and the other folks who hired me gave me a great opportunity to come join a modern team, learn a more modern stack than I had been on before that time, and it was a good growth experience for me, so you deserve thanks for giving us that chance. Thanks!

I consider that experience to be pivotal to converting me from being just another old legacy coder, and instead empowering me to modernize my skill set. I look back on that experience not as a failed startup, but as a valuable learning curve that has helped me succeed in the work I've done since that time.

Even events with poor endings can bring positive results to who we are, and where we go next.

They don't have to value the company at $0 to fuck you over once you're gone. The current board can depreciate all of the shares by 50% and then issue themselves twice their original shares so they break even. Then do the same thing a couple of rounds later.

I haven't seen $0 but I knew a few people who got diluted to a joke. It doesn't take but a factor of 2-4 dilution of your outlook to drastically change your opinion of how you spent that time.

>They don't have to value the company at $0 to fuck you over once you're gone. The current board can depreciate all of the shares by 50% and then issue themselves twice their original shares so they break even.

Mark Zuckerberg tried a variation of that game to cut out Eduardo Saverin's shares when they changed the company from a Florida LLC to a Delaware Inc. Well, Saverin sued and Facebook lost that lawsuit; they settled. Saverin got ~4% ownership worth $5+ billion at the time.


Facebook did not lose any lawsuit. A settlement is a far cry from a loss and judging from the outcome, it looks like Saverin got screwed over.

So basically, the board will try to screw you over; if you're not in a strong enough position to do something about it then you're out of luck, if you are strong enough to do something about it, then you might be able to recoup some of what you're entitled to.

Anyone know how Zuckerberg avoided the same thing happening to him?

Bezos was a 30 year old with a decade of experience in finance, I assume he was quite savvy. But Zuckerberg was a teen.

As far as I can tell, Zuckerberg's true talent is being thrown into situations he has no life experience to handle and appropriately picking the right people to surround himself with and listen to.

>Zuckerberg's true talent is being thrown into situations he has no life experience to handle and appropriately picking the right people to surround himself with and listen to.

This seems to be falling apart for him right now, as a bunch of those people have recently left FB. But yeah, I generally agree with your main point, he does seem to be very good at this.

To steal their ideas and screw them over.

that part is normally just silently implied...

Situations like work.

He had more power, because Facebook was an obvious rocket ship. So he could make better deals for himself when it came time to finance, and retain a controlling share in the company. If the board tried to fire him, he could just fire the board.

He has the controlling stake in the company.

They did it to others? They knew ownership and control was paramount and acted accordingly.

Shawn Fanning

Pretty sure it was Sean Parker but I could be wrong

One of the Sean's :)

Or Shauns.

(Oh holy fucking mother of Baa[l], only now it struck me that the name of the animatronic series by the Wallace-and-Gromit guys is of course a play on Shorn the sheep!)

I experienced dilution as a former employee of a startup. Teespring did a 13:1 down round a year or so after I left (2015?). If you weren't an accredited investor that could afford to invest in the round, you had 1/13 of your original shares after the round finished. I experienced both being pushed into AMT when exercising the options (they didn't offer early exercise) along with having 1/13 of my shares later on. No idea if I'll ever see any money out of the deal so I've chalked it up being a lesson learned -- many say to value stock options as $0 but they can have negative value.

well to be fair, you should never exercise if it isn't early exercise. the odds are very much against you. I mean, by the odds you shouldn't early exercise either but at least you don't get hit by the AMT bullet.

That's certainly not true. You should evaluate the investment just like any other investment and decide if you can afford to lose the money and stomach the risk.

Part of your evaluation should be consulting a tax professional to determine if there are any immediate, negative tax consequences. You're not guaranteed to get hit by AMT just because you exercise some stock options.

There are very few times where the finances work out for options. Most employees lack access to the necessary company financials to make an informed financial decision, there is a 100% downside risk and barring early stage founder equity stakes - it's unlikely that the equity will do better than getting lucky on a top stock pick.

I have yet to hear a single case of an employee purchasing their options when they left and thinking it was the right decision later on.

> I have yet to hear a single case of an employee purchasing their options when they left and thinking it was the right decision later on.

I know at least a dozen ex-colleagues of mine who fit this criteria. When the company in question exited, it created 400 millionaire employees.

that's the problem with anecdotal evidence - you can't really tell for sure a company is going to become a massive unicorn often until very close to the point it does. I've worked at companies that raised many millions of $s and seemed very promising and a few years later went out of business. Who becomes a winner is also not always completely "fair" (as in it depends somewhat on circumstances/fortunate happenstance).

> you can't really tell for sure a company is going to become a massive unicorn often until very close to the point it does.

I don't contest this point.

> I've worked at companies that raised many millions of $s and seemed very promising and a few years later went out of business.

The only narrative I contest with my anecdata is drawing a universal truth from this experience of yours.

As a sibling comment said:

> Salt of the Earth folk love to share their stories of financial misery, but generally keep quiet about their embarrassment of riches.

I think it's the other way around - we comparatively hear a lot more about the successes than the failures. For every unicorn that made 400 people millionaires there are probably >1000 startups that either went out of business, never had a liquidation event, or never at the scale that rank and file employers got anything significant.

Obviously not literally "nobody", someone at some point joins google/microsoft/facebook/amazon/etc at an early stage and exists a millionaire many times over. Just like every week somebody wins the lottery. It's just not as likely to happen to you personally as the people selling you on joining their early startup would like you to believe.

> I think it's the other way around - we comparatively hear a lot more about the successes than the failures

Not here on HN.

I was prompted to post on this thread after reading comment after comment about failures.

aye - latecomers to a company may have massive financial/product impact but have less equity when the IPO happens vs. those who were there initially and left after 12 months. On the other side the board and others can dilute early equity holders at their leisure.

At the end of the day you're really throwing money into a black box which may turn out to contain a trash can. There is more financial transparency in penny stocks.

I've personally had great success with RSUs, but those are ultimately part of your comp even if you discount them to zero - there is no requirement to put in additional money.

I won't claim that it's the expected outcome for most, but I've exercised options well into AMT territory on multiple occasions, and it seems to have worked out favorably to the point that I could probably skip the ping pong and shrimping boat phases and jump straight to mowing lawns for fun like Forrest Gump.

Also, I have heard stories of former employees that didn't exercise their options or cashed out early, and I wouldn't say regretted it, but reflected on the fact that the stock did a lot better than they predicted it would.

Salt of the Earth folk love to share their stories of financial misery, but generally keep quiet about their embarrassment of riches.

I purchased options. Some didn't pan out. Some did. Was an early employee on all of them, purchase price was relatively low, and I don't regret any of them.

If you aren't getting hit by AMT, the company is not growing fast enough and you should not exercise. If you are getting hit by AMT, the chances are you are out the exercise cost plus the AMT.

I've done exactly what you're saying I should not do and it worked out very well.

My point is that these hard and fast rules don't leave any room for nuance. Consider, as I mentioned in another comment, you don't have to exercise 100% of your options. Exercise whatever makes you comfortable. Maybe that's one under the number that would push you into AMT.

If zero is your comfort level, then so be it. But get to that conclusion by doing a little thought and evaluation, not applying an arbitrary rule.

Preface: humans are really bad at assessing risk. Also, you can't help but be biased in the decision process. Most people want a chance at the golden ticket. Especially after all that hard work we put in! We deserve a payout! What was I going to do with the $10,000 anyway, really? It won't break me.

The people that can make a reasoned and well considered, as impartial as possible judgement about it don't need to be told to do so. In fact, a statement that one should never buy the options can and mostly will (rightly so) just be ignored by such people.

But, judging by the number of people that have NO CLUE about how it works, need only the tiniest thing to grab onto to make the wrong decision. There is zero need to recommend "well consider your risk". If you have to ask, then my advice is always as I gave it: not to skip it as a rule, but if you re-read you'll notice all I said was, the odds are not in your favor and you "should" just leave the options behind. I think there is a subtle but important difference. Maybe I'm splitting hairs, if so, sorry.

You're actually arguing survivor bias as being some kind of counter argument! You are in the pretty small minority, I do hope you understand that.

Tell me, how do you feel about COVID vaccine? Shouldn't we just be allowed to make up our own mind about it? If masks and vaccines work, well the scientific set can wear masks and vaccine up. The anti-vax crowd can do as they please and die. We don't need the government to TELL US what to do, do we? No one gets out alive anyway, amirite?

What is your recommendation on COVID? Evaluate the risk and decide for yourself? Surely you prefer Florida's or Texas' take on COVID to California's then?

I now come full circle: humans are really bad at assessing risk.

> You should evaluate the investment just like any other investment

Except it's not like any other investment. It's an investment that you are too close to. You can't think 100% objectively about an investment that you're too close to. For many people the solution is unambiguous: If I can't be objective about a decision then the answer is automatically 'no'.

There are lots of things I'm close to that I need to think objectively about. Maybe I don't hit your ideal of 100%, but I do my best. Investments is one area. The health and well being of my children is another. You can never have perfect objectivity. You do the best you can. GP's advice is too rigid and therefor not very good.

FWIW, I'm speaking from experience. Had I taken GP's advice and "never exercise unless it's early exercise" then I would have missed out on a lot of money.

The other thing to keep in mind is you don't have to exercise 100% of your vested options. If you're too nervous or don't trust your own judgement, maybe go for 10%, or whatever makes you comfortable. There's a lot of room between 0 and 100 here. Go ahead and explore it.

How does share dilution work? Does that mean issuing more shares? How does depreciating shares happen?

It's not a publicly traded company so the paper is worth exactly as much as the people who hold most of the paper decide it's worth. They need some sort of majority to vote to change the rules, and since the employees with unexercised shares control exactly 0.0 repeating percent of the company, you're going to lose that vote.

It's a democracy where the wolves vote that the sheep will be dinner.

Employees with full (exercised and vested) shares at my company don't have any voting power until after an exit event. The paperwork these days is truly ridiculous.

The board and officers still have a fiduciary duty to minority share holders. Even if they can vote the company is worth zero and issue 100x as many shares, a court can say the company wasn't worth zero and they need to compensate the former owner.

While this is theoretically true, I think you would be hard-pressed to find an example of someone suing and winning.

I know of several such cases, but it's costly, and usually a good idea to decide whether or not you want to pursue something like this involves the cost (and stress) of a lawsuit over an extended period of time, and to ensure that that is outweighed by the upside of winning the case.

Hard pressed? Ed Saverin is a very well known case. He sued Facebook after his co-founder Zuckerberg diluted him out and settled for multiple billions. But then, it was a unusually straightforward case because Zucks put his malicious intentions in writing.

Could an employee union balance out the power of the board? They could attend board meetings and veto deals that harm the employees via strike or mass resignation.

Unions don't necessarily get board observer status, let alone board seats, AKA a board vote. Having a board vote isn't the same has having a veto over every possible decision.

You seem to be replying to a different comment.

> Having a board vote isn't the same has having a veto over every possible decision.

My comment did not imply that a board vote grants veto power. I suggested that the union could "veto deals ... via strike or mass resignation". This means that the union decides on a maximum dilution and agrees to strike or resign if the board makes a deal that dilutes employee positions more than the maximum.

> Unions don't necessarily get board observer status, let alone board seats, AKA a board vote.

My comment did not mention anything about board seats. The board would grant the union permission to attend board meetings, lest the board inadvertently trigger a strike or mass resignation.

Next time, please read the comment carefully before replying.

Take that up with the person who wrote "[The union] could attend board meetings and veto deals that harm the employees via strike or mass resignation."

Board meetings are for board members, so I gave that person the benefit of the doubt.

My mistake.

You seem to be attacking the weakest part of my idea and ignoring the strongest parts. Apparently, there is a new word for this: dunking [0]. Please stop.

Your replies go against the guidelines [1]:

> Be kind. Don't be snarky. Have curious conversation; don't cross-examine.

> Please respond to the strongest plausible interpretation of what someone says, not a weaker one that's easier to criticize. Assume good faith.

> Please don't post shallow dismissals, especially of other people's work. A good critical comment teaches us something.

[0] https://news.ycombinator.com/item?id=29352131

[1] https://news.ycombinator.com/newsguidelines.html

How does one go about learning about these things. HN crowd definitely leans towards the technical side myself including.

Btw. The blog is very informative and have subscribed.

> How does one go about learning about these things.

A very good question that I don't have a good answer to. Management likes that there's a steady stream of new people who don't know that there's a bunch of tricks that get used and so everyone learns them the hard way.

Could you explain more? Because this sounds like it should be very illegal. My understand is that shares represent partial ownership of the company. So what gives one set of shareholders the right to reduce others' ownership share?

In fact, why don't the boards of all companies do this? Devalue everyone else's shares so they become the sole owners?

> On the bright side, the new CEO ran the company into the ground.

I've seen this up close several times, and countless times afar. Successful company gets bought by bigger company, new owners replace the successful management, new management runs company into ground in short order. Remains possibly sold for scraps to former competitors.

Like... is there something they're getting out of this I don't fathom? Or are they just repeating the mistakes of others again and again and again?

It's often hubris, but I have personally seen it done to dispose of competition. They could have decided to be better at running their own company, but, of course, big corporations don't work that way. Nope, buy that troublesome startup, run it out of gas, problem solved.

If there're any texts to read about this that you like, it'd be interesting to hear

I’ve been doing a lot of research on debt as an alternative to VC. A ton of options out there. Keeping notes here for anyone interested https://www.trypaper.io/

Be sure to read the fine print with debt and to realize that even if the interest rates are good it's not necessarily going to stay that way unless you negotiate it to be.

No financing option is without risk.

Just be aware with debt there are other forcing functions at play

Absolutely. Just another option that's not talked about as much, so I've been trying to shed some light on it. If want capital without the "help" from VCs, there are options there, but as you said, with different downsides (mainly being on the hook for repayment).

It isn't unheard of for banks to get someone on your board as part of the debt agreement. Though probably only in deals far larger than anything in the VC range.

Many of the debt players are realizing their advantage over VC is lack of control over your company. For example, check out https://timiacapital.com/. A lot of their marketing is around "Retaining control" and "No warrants and no harsh covenants".

It seems quite crazy that this hasn't happened earlier. It seems to me most VC rounds are usually used to mostly finance sales and marketing growth, which if they have a positive RoI should really be debt, as that's the whole point of it!

Equity funding to me should be used less for that and more for R&D and product development where the RoI is harder to calculate, or may not exist at all.

I think the reverse repo situation sheds some light on why this wasn't happening as much earlier: https://fred.stlouisfed.org/series/RRPONTSYD/

Put simply there's now a glut of money that is waiting to be invested via loans in anything that has a good ROI with low enough risks. In the past due to higher interest rates and various other factors (including regulatory) this glut of money just didn't exist before.

Well, go back a few decades and all businesses were pretty much debt financed. VC wasn't around - maybe a few friends and family rounds, but bank debt was the only option for growing a business (at least until you got to the public markets).

This seems to have been lost over the past 20+ years. I wouldn't even think about going to a bank with a smallish business for financing, you'd instantly think of equity funding instead. Hopefully this changes because debt really is more sensible for many startups.

The last time I went to a bank I remember thinking the loan terms were pretty bad for the business I was involved in relative to equity approaches. Why do you think there's been a shift towards equity financing? I wasn't looking at anything in this space a few decades ago, is it because debt financing options are worse or equity better?

What kind of competent investor does a debt deal that doesn't place them higher in the cap structure?

The best part about debt deals is that if the company collapses, you can take over all IP as it's the only asset worth anything.

Does anyone have a good idea about the laws for valuation tricks and the ways companies skirt them? A company for which I had stock options recently was sold to a larger company, but the deal seems to have been coordinated such that the investors with privileged shares (or whatever they're called) got their money, but the peasant shares (again, I forget the terms) were worthless--all of the "key employees" got generous bonuses and the employees still with the company were to be rewarded by the buyer with (presumably) valuable stock.

I wasn't really banking on these options as part of my financial plan, but surely this sort of thing is illegal, right? What are good search criteria for someone who just wants to learn more about these laws and loopholes for the future (I know I can talk to a lawyer if I want to pursue action in my specific case)? What are the ways a company can legally fuck me over?

Very typical in acquihire situations and probably isn't anything to spend energy feeling bitter about--the company simply wasn't worth enough to trickle value down to common shareholders, and didn't yield the result the founders and early investors imagined.

The structure you describe is 1) legal and 2) typical.

Preferred shares cost more, but for that extra money they come with preference. What is preference? It can vary, but the term that matters most is that they get to earn their money first. A 1X Preferred share (very generous) will be paid their investment back before anyone else sees a dime. Often shares are not 1X, they can be 2X or 3X, which means they will get more than they put in before anyone else sees a dime. There are more variations, but this is what matters in the story you’re telling.

Common shares, which is what employees receive, are much, much cheaper (the strike price will often be pennies on the dollar compare to preferred shares that investors receive). However they simply convert to common stock when they’re exercised, with no special treatment.

How does anyone make money then? The answer has to do with liquidity events that are large enough that everyone is getting their money. If money is limited, the investors get it first.

Everybody doing startups should pick up and read Venture Deals. It explains the various tiers of stock well.

PS the last VCs who funded us have a 2x preference (we were out of options and it was the only money on the table.) In retrospect we should have just shut down and gotten a few years of our lives back.

Who was your investor? So other startups know who to avoid.

2017-10-04 Series A - Numetric $13M

Insight Partners — lead investor

Hack VC

EPIC Ventures

Draper Associates

Aaron Skonnard


If firing the CEO is a (the?) major degree of freedom for investors/boards, why are these events not recorded on crunchbase? That would seem to be a natural addition. I'd also like to see events related to dilution using valuation and any other major DoF that a board might have.

But firing the CEO, even a founder, is the right of investors who paid for it... I mean what else do you sell them?

If they like the business but not the guy, why should they forever be forced to have him as a parasite in their mind ?

Dilution seems wrong though, because they were supposed to buy something, not steal it.

You sell them.. returns on their money. That's the whole point, right?

Then don't sell voting stock?

Unless your company is a rocket ship already off the launch pad and accelerating to orbit, it's hard to make a deal that doesn't involve voting stock.

Then you won't be raising any money. It isn't unusual to see VCs insist they get more rather than fewer rights and preferential treatment options because they are later to the party and get to dictate their terms or they walk. That's why you in theory should always negotiate from strength, the weaker your position the bigger the chance that you will have to accept unfavorable terms.

You sell them the opportunity to gamble a large amount of their money with better odds and/or a more appealing returns distribution than any casino will give them, and for barely any more effort on their part. If anything, it's really very presumptuous of them to ask for any measure of say over the outcome beyond a good faith promise from the founder to try their best

There should be a reverse ledger where you can look up the misdeeds of VCs, their partners and various other people active in the investment scene so you as a founder have a way to evaluate who you are getting into bed with.

Yeah this checks out, these people have a reputation for this behavior.

Thanks, I was going to reply myself asking for the poster to call them out - these are shitty investors that should be avoided.

Don't want to dox, but you should be able to find it on crunchbase. I'm not surprised about the story given who's in that round.

> I'm not surprised about the story given who's in that round.

Care to elaborate?

I am also very interested

email the fun details XD

Question from someone uneducated on this topic: is it impossible to get VC levels of investment without giving away board seats?

Is a board even required for private companies?

> is it impossible to get VC levels of investment without giving away board seats?

Not impossible, but extremely difficult. You need to already be successful to a degree that investors are fighting each other to give you money, to the point where they will still give you that money without asking for any amount of control of or oversight over the company. Google[0] and Facebook founders managed to do this (though not through board composition, but through stock classification and voting rights), but 99.9% of other founders will not have that kind of clout.

> Is a board even required for private companies?

I believe some state laws around incorporation require them, but otherwise it's just a standard way of doing things that a company will lay out in its charter/by-laws. You're going to have a really hard time convincing a VC to give you money if you tell them that you're not going to have a board of directors. Even if you present an alternative structure that gives the VC some form of oversight, they will be (rightly) skeptical, since this is unproven ground and they will be (rightly) afraid that their lack of understanding of your unique structure will come back to bite them later.

[9] I do think Page and Brin retaining control of Google was especially impressive, considering that their early funding rounds happened during, and in the aftermath of, the original dot-com bust, when investors were probably pretty leery of funding tech companies.

> is it impossible to get VC levels of investment without giving away board seats?

Microsoft, interestingly, was after the opposite. They took a rather nominal $1M VC funding to get someone knowledgeable on their board. Probably helped when it came time to IPO. They definitely didn't need the funding. VCs would love for the world to believe that their funding is necessary. But often that sort of rocket fuel is detrimental to the growth of a company. It puts immense sudden pressure on a company, relationships are strained, and really weird things start to happen as your headcount shoots past 20-30 people.

> Microsoft, interestingly, was after the opposite

Microsoft is like Marylin Monroe, or Michael Jackson or that person who lived to 123 years old.

You'll never see a company like that ever again in your lifetime.

They did what Standard Oil did, in perhaps an even cleaner and uncontroversial manner.

Tons of talent and luck aligned in the exact right way for it to be the phenomenon it became.

You mean luck of copying wordperfect and visicalc? Or maybe the purchased OS and the IBM deal?

In the same way standard oil was just another oil company. Execution and business strategy set Microsoft apart, not unique software.

Microsoft bet on GUI when nobody thought it was gonna be the future

I'm not the most informed person on HN who can respond to this but as a general rule it's within the bounds of normality to raise single-digit millions in unpriced rounds ("seeds") that don't generally have board seats attached, but your first significant priced round (your "A" round) will essentially always give up board seats.

Formal boards are not required for private companies.

Delaware (and all or at least most other states) requires at least one member on the board of directors for any corporation, whether it's private or public.

For bootstrapped (for lack of a better term) companies these "boards" are pure formalities; it's a running joke among bootstrappers that they flip a coin to figure out who the listed corporate officers are going to be.

The incorporator, board member, investor, CEO (President), Treasurer, Secretary, and sole employee can all be the same person.

There's nothing legally requiring me to give any seats for investment though right?

Reading through this and my gutt feeling is that if I had a company doing really well I would do my absolute best to not give up any control over it - but idk how many investors would be willing to invest in that case (if we were doing really well though, I assume at least some would?)

In practical, ordinary terms, there's nothing legally requiring you to give board seats to any investor.

Yeah somewhere around Series A and esp Series B chances are, unless the founders really lucked out (eg, equity funding that could have been a debt round due to insane profits), they'll have lost control

I don't think losing control after an A round is totally normal.

shares: preseed / seed / A / option pool + multiple cofounders means CEO is a minority holder, and common may be as well. for firms raising big seeds, I expect even more likely at the A.

board: many co's give 1 board seat at Seed and another at A, so lose the board around B. but more negotiable, eg, seed investor gives seat to later investor .

So it seems normal: for most, somewhere between A + B, and except for outliers, by C.

Edit: VCs generally have an ownership target, say 15% as a lead, and less as a follower. So that adds up quickly.

The board seat is a part of the negotiation in larger rounds. Depending on how much leverage the company has in the negotiation, they can argue for a mutually agreeable 3rd party board seat. In many cases this ends up being someone favorable to the CEO, or at least less directly aligned with the investors.

Some companies have grown quite large with small boards. The company will need a certain number of people to make up the board, though, so it helps to start identifying such people early.

Had this happen on a much smaller scale as an employee. I (foolishly) bought out some of my options when I left the company. Years later they sold it, but structured the deal such that the major investors got paid out all the proceeds, leaving zero for the common shares. Yes, I realize preferred shares and payout preferences and so forth. The really galling part is that the exec team (who had themselves acquired, not built, the company) paid themselves massive bonuses. The employees mostly got a token amount and a kick out the door. Common shares got zero. Thanks guys.

tl;dr, shares in a non-public company are a lottery ticket at best. Just like options, but more expensive.

All the horror stories around VC money and shennanigans like this make bootstrapping look not just appealing, but required. It's an iterated game that they play a lot, and you play once, and they have no incentive to play fair. I'm glad some of them were named and shamed in this thread, though. Like, why would anyone take money from someone who has acted in bad faith many times in the past?

It reeks of unaccountable power and information asymmetry, two of my least favorite things.

This is what my father informed me of after seeing the reality of a founder CEO being diluted to nothing in the 90's. All that risk-taking and life which can't be recovered just to pay for someone else's Tahoe ski-trips :(

You probably could make a good point but this makes no sense:

> It's an iterated game that they play a lot, and you play once, and they have no incentive to play fair.

The player who plays multiple times ("iterated game") has more of an incentive to play fair. That's basic game theory. If you only play once, noone can "punish" you in the next game if you cheat.

I didn't mean iterated game in the game theory sense, because that implies both counter-parties play against each other repeatedly.

It's like when you get a mortgage - it's a once-in-a-lifetime for you, and a Tuesday for them. They know exactly how to (and have mechanisms in place) enforce every part of a contract they've been using and improving for decades; you barely understand the contract because its the first time you've ever seen anything like it, and you have no machinery in place to understand or enforce your side of it. They have one contract they enforce against 1M counter-parties; meanwhile you have 100 different contracts you're supposed to enforce ...at the same level of care and capability? That's never going to happen, and so all you're left with is heuristics like "surely they'll treat me fairly!"

It honestly seems extremely foolish to take VC money under these circumstances.

Yeah, the correct terms for these would probably be "diversification" and "information asymmetry".

I think the main reason for these onerous terms is the fact that without them, the founders would cheat (not people like you or me, but rather, they would attract cheaters if they didn't work so hard to prevent them for succeeding)

The thing about iterated games is better known as the "repeat player advantage". They do indeed play the same game over and over, not one game that goes on and on. The information isn't specific to each case either, typically both parties are equally aware of the facts at hand, it usually means the repeat player simply has more experience and a better grasp of the same information and its implications. This doesn't necessarily involve the usual meaning of information asymmetry, which is more about being different from chess, where both players have a full view of the board.

If someone gives you a contract with an option to purchase shares, you have as much ability to analyse its risks as they do, and frankly if it is a contract to purchase X shares of a class that is so insufficiently specified that it can later refer to a diluted version of the same, then I don't know why on earth people accept them as good consideration. I don't know what laws apply to disclosures around share dilutions in the US, but it is one of the areas in which commercial law often tries to even out a noticeable information gap, just like takeover offers. But they can't save you from accepting it without knowing what it means and looking into how you can protect yourself from its risks.

Mostly I believe it happens because 95% of tech founders have no business being anywhere near the c Suite. So they fall prey to venture bandits who will let them call themselves ceo or entrepreneur. If you're actually ceo material, use debt, private or commercial. Figure out the Toronto stock exchange.

I like 'venture bandits' as a term. Another I've seen is Vulture Capital.

It's all about who you do business with. Some VCs are ethical, some aren't. Some are horrible and turn around to become a pest the day after they invest, some go out of their way to help the companies they invest in succeed.

Yes, but it seems that the terms give the VC the power to do whatever they want, and so you are really just hoping they won't hurt you, and you have no way to protect yourself if they choose to. Why would a VC not strike a deal with a founder, fund 2 years of your blood/sweat/tears and then when they feel like they've got enough value from you, simply take away your equity and fire you? Isn't that just good business? They get to have their cake and eat it too. If the only thing preventing this from happening is the good will of your counterparty, when would it ever be a deal worth making? Even if you like your investor, or they like you, they could always sell their interest to someone who doesn't.

Track record is everything. Every VC that is worth their LPs is going to do due diligence (tech, commerce, finance, legal) on the company they are about to invest in. As a company executive, you could do much worse than to return the favor and research them for a bit. Talk to other founders that they have invested in, see how that went, look at past exits, see how the original founders were treated.

Though in the business world it is always like that, whatever you do. Whatever kind of deal you are doing you have to be careful and attentive.

Bootstrapping is great, but it also has challenged to overcome. Many fail to do it.

This happened with Premise Data in their last round. Prospective employees beware.

What you're describing, though, is normal. The vast majority of deals happen this way. (We only hear about the tiny fraction where rank and file do make a dime or two, like we hear about the 10 heart conditions / COVID complication and suddenly the sky is falling.)

Whereas, while the situation described by the GP is not unheard of, it's uncommon.

Anyway, your situation is why the common mantra, value your stock options at $0.

I think that's a wrong statement though. Stock options should have a binary value. $0 or IPO/exit value. If the company doesn't go all the way to IPO, you won't get a partial payout. So then guesstimate the IPO valuation of your options and factor the risk.

It is normal, but a lot of the rank & file don't understand that ahead of time.

I also think that fact that management went out of their way to leave the common shares with nothing is scummy, bordering on unethical. Which is not the same as saying it's uncommon.

(FWIW, I was not one of the downvotes)

That's so sad but also super impressive. I'm not sure if you are ready to but may we know your current and previous startups.

Current start up is in their profile.

Can’t you structure things like Zuckerberg or Palantir and just have the founder retain unilateral company control?

>Can’t you structure things like Zuckerberg or Palantir and just have the founder retain unilateral company control?

Fyi... Zuckerberg didn't "retain" unilateral control. He lost his 65% majority ownership control because it was reduced (diluted) to 40% when Peter Thiel invested in 2004.[1]

What eventually happened was that Zuckerberg later consolidated voting power from other shareholders like Sean Parker and Accel Partners.[2] Why would they give voting power to Zuckerberg?!? Because Zuckerberg was doing a good job running the company.

Yes, Facebook also later set up class B shares with 10x voting power for Zuckerberg. But investors won't accommodate founders with that structure unless the company is a big success.

So in short, MZ lost 65% control, and then eventually got majority voting power back after some business events. Even though he now only owns ~14% of Facebook, an article said his voting share was still at majority of ~58%.[3]

[1] Facebook ownership was divided between Zuckerberg, with 65%, Saverin, with 30%, and Moskovitz, with 5%. After the transaction, the new company was divided between Zuckerberg, with 40%, Saverin, with 24%, Moskovitz, with 16%, and Thiel with 9%. The rest, about 20%, went to an options pool for future employees. -- from : https://www.businessinsider.com/how-mark-zuckerberg-booted-h...

[2] https://venturebeat.com/2012/02/01/zuck-power-play/

[3] https://www.bloomberg.com/news/articles/2021-05-26/facebook-...

If the company makes bucketlots of money, the board isn't going to change the CEO, even if he would be a total arse in board meetings. I think it has to be repeated that investors want returns for their investments. Also, if the company happens to make money despite of lousy CEO, the board will highly probably keep the lousy CEO.

All these founder-centric stories makes it looks like board will fire the CEO just for fun, or just because they happen to get the idea out of the blue. Actually it is a lot of pain and work for the board to try to find a new (better) CEO and they probably realize that they will fail (statistically speaking). So, the board will fire the CEO only in a situation where they genuinely believe that average replacement from the market will do a better job running the company. They don't fire on a whim.

Sure... If your company is so attractive that the investors will go along with it. IMHO, Facebook's history is an outlier. Most startups aren't positioned with the leverage they had when raising money. I don't know enough about Palantir's history to comment.

This kind of depends on the interest rates and the Nasdaq (50%). The number of VC in the market(30%) and the allocation of LP to VC (10%).

I see the VC asset class as an arbitrage on private company valuation. As the number of VC increase the arbitrage opportunity disappear and switch sides, from the buyer to the seller. I.e. founders are getting to arbitrage the VCs.

Personally I think that there is a market failure here, where the government protect mom and pop investors from making risky bets on early stage startups, and yet allow them to invest on some crypto scams with no questions.

I envision that, like cannabis, this will be solved soon in the form of some sort of public stock exchange for startups.

I think Founder’s Fund and Thiel are desirable because of how they treat founders.

I wrote that first comment before finishing the article (which is a good article people should read it).

His first advice is basically to try to do what I asked if you can.

When the orders of magnitude change, so does the correct solution. In other words:

Stop comparing your startup to FAANG.

You are not FAANG. If you were, everyone else would know it. Since you aren't, their strategies don't work for you.

Well, the FAANG did not know that they will be a FAANG in the first years.

Actually they often knew they're exceptional.

This is a bit later than the first few years, but all of Microsoft, Facebook, Google, Apple were very highly profitable (on gaap, not some xxx-adjusted ebidta bullshit) at their IPO, and for a while before, with hockey stick revenue growth. And the IPOs happened much earlier in the company lifecycle back then. Look up old S-1s.

In theory, yes. But even that is no guarantee. Travis Kalanick had control through supervoting shares at Uber, but the investors forced him to resign and passed governance changes that made all shares equal in voting power. Even with founders having voting power, it's possible for the board or investors to exert other leverage.

How did they force him if he had control?

Here is the story

> Indeed, Kalanick had some tepid support inside the company. But his vote counting rankled even his defenders. He was also calling executives daily, asking for detailed information about the business. Even worse, he ordered the security team to dig through an employee’s email to see if that person was leaking a potentially damaging story. It all proved too much for the 16-person executive team, which signed a letter to Uber’s board—but clearly directed at Kalanick—asking them to refrain from reaching out to employees or meddling in the company’s daily affairs. Kalanick’s own handpicked executives turned against him.

> Somehow, amid the dysfunction, Uber hired Khosrowshahi, who impressed the board with a thoughtful PowerPoint presentation that included a slide that read, “There can be only one CEO at a time.” Khosrowshahi was all that Kalanick wasn’t or couldn’t be: humble, a good listener, and a diplomat. In a pointed reversal of Kalanick’s mantra, he would say: “We don’t have a PR problem; we have an ‘us’ problem—we have behaved poorly.” And when the city of London revoked Uber’s operating license in September, Khosrowshahi visited, met with taxi regulators, and published an open letter. “On behalf of everyone at Uber globally, I apologize,” he wrote. “We will appeal this decision on behalf of millions of Londoners, but we do so with the knowledge that we must also change.”


He was forced out days after his mother died and his father was in the hospital. There are some life events where you just don't have a whole lot of fight left in you to deal with a hostile board of directors.

If you still need investors to put in more money, you're never really in control.

You can - but then your startup needs to be that much more attractive to get investors in the first place.

> but what am I going to do about it? They have billions of dollars and I had no money.

There are still many options. You just have to search harder...

> On the bright side, the new CEO ran the company into the ground.

And this is the real risk. There are plenty of legal ways to make stock worthless.

Something I don't understand from here in the UK: if they did a new round wouldn't you have pre-emption rights? So, if they set the valuation to $0 you'd be able to afford to take them up and avoid dilution? What am I missing?

Unless you have reasons not to naming and shaming investors and boardmembers that did this would be A-ok with me.

Super curious about this - aren't there laws about fiduciary duty in most countries?

Can someone please elaborate how that is possible?

Why didn't it happen to Bezos or Musk?

Tesla is an MBA case study of CEO-aligned board (which is bad for public companies, Im sure you can see why now), probably because Musk had most of the seed capital. As to how he kept enough out of his previous ventures, I dont know.

> which is bad for public companies, Im sure you can see why now

Tesla is the world's most valuable car company. What is bad about that now?

Lol. How do you think Musk became CEO?

He IS the investor who pushed out the founder CEO.

How about Bezos then?

what about your cofounder?

>Then a year after I got fired the series A investor led the next round of funding and decided to value the company at $0, so I got diluted by 99.99%

Was it made impossible for you to be an investor in that round? Could you have prevented 99.99% dilution that way?

So the existing stock the CEO had, made through his blood sweat and tears, was worth nothing, but you'd expect him to want to pay for the ability to buy more stock in the company he was just kicked out of?

At a $0 valuation (assuming that's accurate) you'd be paying almost nothing to participate in the round (assuming you had a contractual right or were given the opportunity to participate).

No, I'm just curious if it was possible technically. Obviously it's super unethical to do this to your CEO.

It's hard to participate in a funding round when you don't have much money, as the parent says.

This is something you should really understand if you're starting a company. The board isn't your "friend" while individual board members may be, as an entity it probably isn't. The understanding that individuals can be "good" and the composite can be "bad" is usually encountered by most people when some government is doing something "bad" but the people who live where that government is in power are known to be "good." We see a lot of companies that have "good" employees but act in a "bad" way as a company.

So with that in mind, you have to understand that none of your "friends" would fire you, but the "board of directors" (even if composed of people you consider friends) could easily decide to do that.

Tom Lyon used to joke that it was only on your third startup that you funded yourself that you are really in control. The wisdom of that took a while to sink in for me.

“A group experience takes place on a lower level of consciousness than the experience of an individual. This is due to the fact that, when many people gather together to share one common emotion, the total psyche emerging from the group is below the level of the individual psyche. If it is a very large group, the collective psyche will be more like the psyche of an animal, which is the reason why the ethical attitude of large organizations is always doubtful. The psychology of a large crowd inevitably sinks to the level of mob psychology. If, therefore, I have a so-called collective experience as a member of a group, it takes place on a lower level of consciousness than if I had the experience by myself alone.” - Carl Jung

I intensely dislike the cynicism of this and other similar statements.

It's a truism of American culture that any group of people is somehow stupider, meaner, and more hurtful than any of its individual members. Yet our lived daily experience is that often our most rewarding, beneficial, and joyful experiences come when being a member of a group.

I mean, we are a group right here and right now in this thread and I assume everyone participating still feels it is a net positive for them to do so. The idea that all groups become bureaucracies, mobs, or totalitarian regimes is this weird extreme perversion of American values. Call it toxic individuality.

I think a value-free and more accurate observation is that emergent properties exist: a group can have observed properties that are counter to the intentions of any of its individual members. The aggregation process itself can be dynamic, iterative, and complex in ways that break a simple coupling between invidual intent and total outcome.

This can be bad, when otherwise sane reasonable people get riled up in a mob. Or it can be good, when a choir's tone sounds more in key than any of its individual singers. It's highly dependent on both the individual members and the communication structure of the group.

The quote is likely referencing large in-person groups. I would argue HN is absolutely _not_ a group in any meaningful sense. We are a bunch of individuals sharing individual thoughts asynchronously. We don't act in unison. 4chan, on the other hand...

Using the combined tone of a group of singers as a counterexample seems like quite a stretch. Again -- the original quote: "... the total psyche emerging from the group is below the level of the individual psyche." He talks specifically about the emerging psyche, not some arbitrary emergent property of a group.

Can you name one organization that became MORE ethical / smarter / nicer the larger it got?

I believe it's a group: Hacker News is a community. That we don't act as a hivemind is a result of our contrarian community culture.

> I assume everyone participating still feels it is a net positive for them to do so.

No, I don't, and I think some of the other people who think that are probably wrong.

Unless you are and out and out masochist, your presence here indicates the contrary.

“The intelligence of the creature known as a crowd, is the square root of the number of people in it.”

- Terry Pratchett

Also Pratchett, and mathematically probably more accurate (decreasing rather than increasing with the more people added) - "the IQ of a mob is the IQ of its most stupid member divided by the number of mobsters"

Jung's statement is much stronger, more akin to 1/sqrt(N).

Of course, I invite readers to treat Carl Jung quotations as having a credibility proportional to the amount of efforts he made during his life to properly prove and establish the facts he was enunciating: not much.

Just because it isn’t science doesn’t mean it isn’t true or interesting.

Hey man, thanks for the invitation, really, but you're literally just some random account on the internet and Carl Jung is a founding psychoanalyst/symbolic thinker. I would invite anyone to regard your suggestion in proportion to the comparative significance of your intellectual contributions.

Not all insights come as ready-for-consumption statistics and prepared-for-you facts wrapped in a nice red bow, nor they always come with numbers and figures attached.

Often, the most interesting insights come from experience and reflecting upon it. You know, old fashioned thinking.

> Often, the most interesting insights come from experience and reflecting upon it. You know, old fashioned thinking.

That _sounds_ nice, but the Ancient Greeks (and others, but I've got to pick on someone) tried it and didn't succeed in much more than setting back the scientific method and thinking up all sorts of plausible things like "everything is made of air" and "the first humans were born inside a fish." The problem is that something can sound completely plausible, be internally logical, and also be completely wrong.

Ironically, you don't need to look farther than psychology's reproducibility crisis to see this in action. Tons of great and interesting insights that came from experience and reflection, that led to some bad studies and are completely unreproducible. In fact, they were so interesting and insightful that most people still think they're true. See: Stanford Prison Experiment, most of the stuff in Kahnemann's book, anything Freud said, Myers-Briggs, etc.

You know, making up some shit that sounds good.

>That _sounds_ nice, but the Ancient Greeks (and others, but I've got to pick on someone) tried it and didn't succeed

... except at moving humanity forward regarding morality, understanding of society, politics, history, organization of civic life, philosophy, theater, poetry, arts, a few millenia forward, while spearheading democrachy, historiography and several other things besides, and establishing the whole basis for this "western civilization" thing...

>That _sounds_ nice, but the Ancient Greeks (and others, but I've got to pick on someone) tried it and didn't succeed in much more than setting back the scientific method and thinking up all sorts of plausible things like "everything is made of air" and "the first humans were born inside a fish." The problem is that something can sound completely plausible, be internally logical, and also be completely wrong.

I think an even more real problem is a lack of knowledge of history, and what exactly those pesky Greeks (and others before and after them) did, combined with a fanboy attitude towards the "scientific process" (as if it emerged wholesale somewhere around the 16th century or so).

So I think there’s a lot to this composite phenomenon and I wish it were studied explicitly. (Although I wouldn’t necessarily know), I’m not aware of social science / organizational behavior research that dissects the difference between an individual’s behavior and a group’s behavior that they are a member of. Yes we know about peer pressure and power dynamics (the Milgram experiment), but what are situations when an org will do something that all its constituent individuals would not but for fulfilling their respective unique responsibilities in the organization?

I wonder if this is a consequence of the shared qualities a large group has. In a large group, there are lots of people with different ideas. The only thing that is the most similar between all of the people are their base animal instincts because we are human. Thus, the base instincts are accentuated in the group.

While I do think there's something of value in the idea here, boy do I find that quote unconvincing (:

The second sentence essentially says "This is due to the fact that that's how it is." I'm sure Jung has a larger context and basis for these claims, but this quote just struck me as super hand-wavy.

> I'm sure Jung has a larger context and basis for these claims, but this quote just struck me as super hand-wavy.

No, no, don’t worry. Jung was already dismissed as completely unscientific and not to be taken seriously while alive. Sadly, psychology as a field mostly remains in a dire state and still has to shed part of its let’s generously say less than rigorous past.

Now, think about the wisdom of a democracy :-)

we don't ask the mob as the mob. we get the mob to go into a room one at a time and then ask

This is also why it's very very important for early employees to have their own lawyer review employment agreements. The CEO may be your best buddy and may promise to never fuck your over, but at a certain point they will report to the board and no longer be in full control. You should be weary of promises that simply cannot be kept. Your only option is to make the employment agreement 100% explicit even if it costs the company an extra round trip with legal. (Similar if a company offers to have their lawyers go over the employment agreement with you to save you some $$... there's an intense conflict of interest here that I'm surprised is even allowed.)

As a CEO of a company, I think this is one of the most important thoughts here. I was the owner too, hired a lady as CEO, later I fired her. It was very tiresome for me to keep wtf kind of promises she made just to maintain the credibility of the company and not to alienate people. Of course it payed out and I loved all the people, but boy... it would have been much easier to just tell the people that these are new times and those promises were against the company or whatever - pretty sure lots of people would choose the easier and cheaper way in "hard times".

I told to directors in multinationals several times that we have to sign this because it is not evident for their eventual successors that it is in their best interest etc.

Trust, but always be careful and assertive.

Good board needs to be able to act independently from the CEO. One reason for bad corporate governance in America is boards made from the friends of the CEO.

That's a high minded goal not really connected to the minutiae of the situation. Also relates to larger companies as opposed to early stage VC companies.

Think about it from a founder perspective with a bit of reality: who in their right minds would you hire an antagonistic board for the high-minded goal of making corporate governance in America better when you don't even know if your company is going to make another year?

People work for companies for three reasons: mission, people or money. If you enjoy working with the people at your company at least you have that covered. Most corporate companies don't have a real mission people can get behind and money is in the long run for founders.

I'm mixed: Hard to have it both ways

Tech grows big & fast, and a lot of today's problems can be traced to VC-backed boards noping out of ethical responsibilities.

Startup board members are generally (rightfully) worried about growth or survival, until that's on rails and by then it's too late to fix the monster they've grown.

Today's trends of founder friendliness, wide participation, and big checks makes these trade-offs even more extreme. Startups are so messy that the industry hasn't figured out how to juggle it all yet, or even if the relevant stakeholders even want it to.

I would agree that I am mixed about it. It's not binary but it does seem to be difficult to build a board around a hypothetical fantastic growth trajectory.

That said I don't think it's the boards sole responsibility on ethical choices - that's the management team and rolling up to the board.

It feels a bit how HR is complicit in the company outcome and is a fraught position. The board of directors is the same. Maybe the rest of the world has thought about the board of directors in the wrong way in that they have assumed that they represent an ethical, independent thinking group of people with different incentives then how boards are actually set up.

Not using this as a scape goat of responsibilities but more observing how things seem to be in the real world.

Firstly, founder does not hire the board.

Secondly, independent is not the same as antagonistic.

> Firstly, founder does not hire the board.

Where the founder also controls the voting majority of stock, yes, the founder hires the board.

That case is outside the context of the discussion.

If founder has majority of stocks, he can't be fired.

You didn't even read the article and don't understand fundraising dynamics for a start up. Go directly to jail, do not collect $200 and don't come out until you've done your homework.

It may be gauche to express this opinion on HN of all places and I hope it doesn't come off as tonedeaf disrespect, but does anybody notice VC is falling out of favor unless absolutely necessary?

I am noticing a lot of bootstrappers that are emerging with the ethos that VC isn't what it used to be for some markets, and often a poor choice of the right VC can be a detriment to a project's longevity, with some teams choosing to avoid it at all costs.

I don't think that's a new sentiment around here. Anything published by 37Signals and its founders used to be mandatory reading on HN, and they were all about small teams eschewing outside investors. Their Getting Real book was published in 2006.

Also the founder of HN wrote an essay on VC suckage http://www.paulgraham.com/venturecapital.html

I was firmly in the Basecamp camp until I found out they were basically given a large "grant" from Jeff Bezos that allowed them to continue bootstrapping

Interesting you avoided calling them basecamp given the recent media fallout. Not saying you did it intentionally, but just rare anyone refers to them as 37Signals much anymore.

I forgot they had changed their name. They were 37Signals when they were HN's darling. This is the company everyone was in love with: https://37signals.com/manifesto

Eh it’s still how I think of them, fwiw. I haven’t seen as much from them since their name change.

It was my impression Basecamp is more associated with the product of the same name, rather than the group (37signals) associated with it. Correct me if I'm wrong, others may have a different opinion and I'm not the foremost expert on that.

They formerly renamed the company to Basecamp a few years ago and shut down / spun off other products (campfire and highrise).

As with much other knowledge and fashion (clothing, software, management, ...), it's cyclical.

Old-timers will remember Jerry Kaplan's Start Up, about the failure/betrayal of Go Corporation. https://www.worldcat.org/title/startup-a-silicon-valley-adve...

Or Sandy Lerner and Len Bosack's betrayal having founded Cisco Systems.


I gave up on VCs because I hate the entire experience of raising money and being beholden to someone. It's exhausting, for a start, and takes away so much time from building a product.

I just took my idea list and erased everything that needed VC money.

All ideas need some money to launch, and sadly some of the best ideas need a ton of money to launch.

Ask yourself - do I have a simpler idea I can build first to make enough money to launch the thing I really want to do?

If you look at the most valuable tech companies today, most made it a significant way along the path without outside investment due to the financial position the founders were born into. While there are a few notable exceptions, nearly every one of them relied on early loans from parents to build their fortunes rather than early stage VC.

Privileged access to powerful people probably matters more than the $. I recall Bill Gates got trusted access to IBM decision makers. A recent example is Elizabeth Holmes, where the $ amounts were probably low hundreds of thousands:


“The family’s wealth, power and political connections date to the 1890s, when Christian Rasmus Holmes, a Danish immigrant and physician, married Bettie Fleischmann, heiress to the namesake yeast fortune and a Cincinnati socialite with a fondness for Chinese bronzes.” - from NYT article: https://archive.vn/aMCpe

The interesting thing is that the future fortune depended on a “yeast fortune”, i.e. while you might not be born into wealth and power, perhaps your grandchildren or descendants can be.

I think people underestimate the cascading effect that avoiding a seed / angel round can have on cap tables in later rounds. It allows the founders to retain control for much longer, which in my opinion is a critical factor for success of a rapid-growth product company. A founder has a clarity of vision that, when it aligns with the market, delivers outsized results and delights customers. You can avoid decision-making by committee for a lot longer, which gives you a much better shot at success.

Their companies are more successful as a result (when the vision aligns with the market — things can go to shit just as quickly if the vision is off). And we see this story of parental financial resources reflected in nearly every case. The fact that these were technically “loans” is largely an artifact of tax law.

The signal-to-noise ratio is getting lower and the risk is getting higher of choosing the wrong investors, and having the wrong investors pushing your company in undesirable directions to meet LP expectations can be really frustrating, at the least.

I agree that is happening more often in the initial stages. And with a bit of experience/reputation you can command very favorable terms in the early stages of a start-up, at least in the present climate where seed type funding is relatively very easy to come by.

Or let's say you don't have much money and you want to avoid early VC due to loss of control and hefty dilution. In the US market, move to a college town (often quite safe), take a part-time $15 / hr retail job (CVS and Walgreens are both moving to that minimum in 2022; both are better than fast food and easier than Walmart type jobs), get a modest cost apartment ($650-$750), walk/bus/bike to work (no car expenses), keep your bills under $1k-$1.2k per month, build your start-up on Hetzner (new Virginia datacenter). Self-fund, build your thing, don't take early venture capital, maximize your leverage later on. Maybe occasionally do some side contracting work if necessary to fill up the personal treasury (10 hr per month or less).

The counter argument to that is primarily the speed angle, get bigger faster or get crushed by the VC funded crowd, and similar arguments. It likely varies by the case as to whether a given approach makes more sense or less (eg depending on what you're building, time to market may not be so much of the essence, or it may be critical).

Man, I hear a lot of horror stories about working at Walgreens and the like on Reddit, even among pharmacists

I guess that just going there part time as part of a bigger plan will be a lot lower-stress than trying to make a living off it, but that still sounds like a bad idea

You might be better off working as an engineer for a year and then saving 3-4 years' worth of minimum wage money instead

I had a friend who really regretted using his savings to try and bootstrap businesses though, since he was still working at Amazon in his 60s

If a person has enough experience at contracting to lean on that reliably, or enough skill to earn ~$80k-$100k per year (to build enough savings quickly for a good runway), then it's definitely not the ideal route to pull a part-time $15/hr type job (it'd be a waste of time).

And it only works well for younger people without a family, as it'll involve 70-80 hours of work per week (at least in the beginning).

It's a poor(er) person's scenario. It's what I might do if I were 19-21 years old again. Back then, circa 1999-2001, I did a lot of web development contracting to fund building things I wanted to build with the rest of my time. It was a quite unreliable path though, as some months were flush and others were bleak. Poor people in that scenario usually don't have degrees from nice universities, they often can't easily get good engineering jobs early on. And if they have an aversion to working for other people/companies, as I always have, then that complicates the context further (CVS & Co are mostly drone jobs; POS, scan bar codes, greet customers, bag items, stock shelves, repeat; and it might help reduce development burnout, as it gets you away from code and out of the house). If you're young'ish, poor'ish and without a ton of experience, it provides a highly workable avenue to go after building a thing you want to build, self-funded, while cutting out the need for early outside capital (the need to give up a piece of your soul to the sharks).

It worked out well for the guy who made Stardew Valley, I have to admit!

A lot of small business owners hand out paychecks on Friday Afternoon and then go to the all night gas station to earn the only paycheck they will get. Once the company is successful they can make earn a lot of money, but in the early years a company will often have more bills than income and the founder loses.

Note that all night is important in the above, not gas station. Anyplace that will let you work not normal business hours so you can work your business during business hours is what you need.

I've noticed the same though I don't know what the split is; still lots of VC companies, and more companies of all flavors being started right now.

I've also seen some late stage cos raise a mix of equity and debt at favorable terms; is that becoming more common as part of the same phenomenon?

Rates are low, its preferable to raise debt than a dilutive round for existing investors. Companies that are locked into a prisoners dilemma for spending/market share need to get creative with how they finance their spending.

Never stand between people and a pile of money.

Your Board doesn't fire you when you're the best guide to a pile of money. Your Board will fire you if they think you're slowing their progress toward a pile of money.

If you think your skills as a guide to piles of money are imperfect, don't put your life in the hands of people who need you to rapidly increase their pile of money.

Actually, the board has to believe that the replacement CEO they find from the market, will generate better returns than the current CEO. So, it is not that the CEO has to be "the best", it has to be good enough so that if he is fired, the likelihood of the new one succeeding should be lower than with him.

Note that there should be quite many advantages for the current CEO to do the job well compared to some external guy. Typically it might take 2 years from a new CEO to learn the business, etc.

Boards don't fire on a whim, they genuinely have to believe that a replacement will do clearly better job - they don't want to go through all the hassle of finding a replacement just for fun.

The VC cares about their portfolio, so if removing the CEO gives gains elsewhere in their portfolio, then their financial incentive can be against the startup. Edit: also the financial incentives of the most influential board member might not be aligned with the company valuation.

Or the “nobody gets fired for buying IBM” theory where it is better to put in a known respected CEO (John Sculley), because fault can be blamed on the founder and LPs will believe the future VC spin.

Usually the startup is one of the failing investments to consider changing CEOs, and I suspect that there are a lot of other human motivations that come into it.

That is true, but I don't see how firing the CEO typically would give gains somewhere else in the portfolio. For example VC's very rarely invest in competing companies.

However what affects the situation is that VC's want a lot of risk, and the risk preferences of the CEO could be considerably lower - eg. the CEO would be fine with moderately profitable company, while the VC wants all or nothing.

I don't think it is common to change CEO's for truly successful companies which actually show good numbers. No one wants to change the CEO, they do it because they think that it clearly increases their possible returns so they basically have to do it because otherwise they would look incompetent as board members.

VCs invest in competing companies all the time. There’s even a saying about it “no conflict, no interest” (as a counter-play to “conflict of interest”). They might not invest in a direct competitor, but startups rarely have direct competitors that are each both looking for VC funding and are fundable. Conflicts happen all the time, though, and VCs don’t worry about them as such. They may worry about a fund company that is doing well, because no intelligent VC is going to potentially hurt a successful investment to fund something that has a 90% chance of failure. But when all else is equal (and especially if it isn’t and they can help their successful investments) they will never worry about conflicts of interest.

The more interesting point here is: word gets around. You can see it in another part of this conversation (top comment right now). VCs are worried about their portfolio, it’s true, but they’re MORE worried about their next fund. The success of this portfolio is simply a good way to advertise to LPs that they should participate in the next fund. They are also worried about deal flow — they can’t get into the hot deals if they have a reputation for turning on founders. If the situation is noisily public (Uber was a good example of this) VCs will think very carefully about what to do. If you’re a small company that is struggling to stay afloat, they will ask themselves one question: is the founder the reason the company isn’t successful? If their answer is yes, then good luck. If not, they will simply chalk it up to it being one of the many investments they make that didn’t work out like they hoped.

I didn't say boards are capricious. They just have a clear motive: more money, now. This should not be a surprise to funded CEOs. Don't let your happiness depend on making a board happy, if that's not what you bring to the table.

If you're the best person to achieve more money, now you stay. But if you cease to be the best person to achieve more money, now, you are susceptible to replacement.

Of course, there are transaction costs that might make a particular pivot too expensive. McDonalds isn't going to pivot to Elon Musk, even if Elon Musk is objectively the world's best CEO. In that case, the current CEO may still the "best" guide to more money, now, all things considered.

But no CEO can adopt a long term position inconsistent with their Board's two goals (more, now) without risking replacement.

Never stand between people and a pile of money.

Once upon a time, I helped a group of friends start a company, and as we were going over the parts of the LLC agreement that outlined what would happen if the company dissolved as part of a fight, the entire group treated me like I was ridiculous for suggesting that they would get in a fight. I told them that if they were planning on staying friends forever, they didn't even need the LLC agreement, they could just promise to treat each other fairly.

The company imploded amidst a massive falling out something like a year later...

Plan for the divorce during the honeymoon.

Then put the agreement in the safe. Two outcomes:

  * everything goes swimmingly: you've wasted a bit of time and paper
  * everything does not go well: hard decisions are already made
Before I co-founded a startup, I read the Nolo books on partnerships, especially the parts about dissolving them fairly. The details differ slightly if you have an LLC, C corp etc (as long as it is private) but the overarching themes are the same and so so important to consider.

Shouldn't you do it before marriage? That also gives you a third possible outcome

* you find out beforehand your ideas about what's fair don't overlap enough to even start.

Good point. I should have said "plan for the divorce during the courtship".

I'm happy and appreciative that this advice exists, but as a tech person who just wants to build new things, it makes running a company sound like a massive drain on the psyche.

There is a reason I "work for the man" instead of run my own company. I could make money, but I wouldn't be a programmer. It took me almost 20 years of a CS degree before I was earning more money programming than I could have earned if I had dropped out of school and stayed at McDonald's (they offered me a management job and the career path in the direction was obvious - and also why most people even on that track decide to self limit before they reach the highest I could see from there.)

To make it clear, if you found a company you MUST be a management type person. You can maybe program 25% of the time, but the rest of your time is sales and management duties. You can hire out the sales but that means more management. Soon you are best off hiring out the programming as well and being all management.

There's tons of different companies, VC-funded high-growth startups are just a small subset of all companies. If you want to do programming in your own company you can set up some boutique working on some niche. Absolutely no need to be "a management type person" in my opinion. It certainly is possible to run company where you do up to 80% programming IMO.

But, if you want the big bucks it typicalle makes sense to hire and grow. If you want to stay small and do stuff yourself, it means less money.

Running a company is a massive drain, and is not the best way to 'build new things'. Starting and running a company is one of the best ways to 'build a new organization'.

Sure, it is - running a company is a whole full different and very intense profession that has little in common with a tech person building new things, you would have to focus on one over the other.

You can always choose not to take on investments that relinquish your control.

This brings memories. I also got „asked to leave“ after raising our first round.

I was young (25) and naive, with no experience in business within the family. But what was really crucial back then was that I lacked a mentor who’d make me aware of the risks before letting the sharks in.

It took me three years to bounce back and start something new. On the positive side, I learned a lot.

> It took me three years to bounce back

What happened with the first company? I wonder if you made any money from it in the end, if maybe they sold it and you hadn't been diluted to much

> I also got „asked to leave“

Could they force you, by having more votes? Or were they just very persuasive and convincing

> The advice here is pretty basic: nothing happens in your board meeting. Your board meeting is scripted. The board members should have seen the information presented before the meeting (and not just because you sent the deck—half of them won’t read it beforehand—you must talk to them.) And you should know beforehand how each board member will react to the information presented. If there are decisions to be made, you already know how each board member will decide, because you told them about the decision to be made and they told you what they will decide. No surprises

This is, honestly, how one should aim for pretty much any -formal- meeting to run - as a high trust means to make a pre-existing consensus common knowledge to all the participants.

(things like design brainstorms are a completely different category, hence the 'formal' qualifier to try and make that clear)

Hmm it'd be interesting with a list of all meeting types, and their intended outcomes, and if scripted or not

The article itself is titled "Your Board of Directors is Probably Going to Fire You", why has the title of the post just now changed?

What an article. It's rare you find something that has such practical and straightforward advice for managing people (even if those people are your board members).

Ooh, this is spot on.

> The fact that early-stage founders continue to take their money has to be some sort of delusional grandiosity, in my humble opinion. “Well yes, they fire half the CEOs they back, but surely not me.”

Having started companies, delusional grandiosity is almost a requirement, especially if you're going to take venture capital. I mean, just look at the odds. So it makes perfect sense to me that the VCs happily take advantage of it.

I think you have to weigh the options though.

On one hand, you have a 50% chance of being fired.

On the other hand, you’re raising from Sequoia.

Is raising from Sequoia going to change the direction of your company so much (in a positive) direction that it’s worth taking on the 50% chance you’ll be fired?

1. Avoid going public if at all possible. 2. Avoid outside investors if at all possible. 3. Avoid having a board if at all possible. 4. Control the shares or the shares will control you.

> 1. Avoid going public if at all possible.

This is basically what Bloomberg has done. Despite selling financial terminals to bank traders, the company still hasn't gone public after all these years.

Just get born rich so you don't have to do anything.

I think it is no-brainer that founders would prefer to have full control and ownership. If you manage to bootstrap a profitable company with zero outside funding, great for you, but that's not the typical case. Most of us need some money to make money.

That isn't always good advice. Often the money from going public is required to make it. You either go public, or someone else will take your idea, go public and use the money from it to eat your lunch and then you get nothing.

Good ideas are easy. Unique good ideas are so rare as to be non-existent. Nearly all good ideas are obvious to anyone who knows the field and what can be done.

The market today is so big that many competitors can live side by side . At least in B2B. I mean there are hundreds of CRM companies.

You can have other companies eat your lunch. All you need is to get into a default alive state. I.e. have 5-10K MRR. The rest is nice to have. It should be possible in any billion dollar market.

Also don't sleep on email marketing! :P

Step one on this road: and you suddenly found a pendrive with 100kpcs of BTC.

5. Manipulate your employee's equity awards so that %99 of them return them to you, eventually, because you're never going public and thus your company equity is functionally worth $0.

Reading things like this and how common it is for investors to take over, I just wonder how it is possible that a young - and presumably naive - Mark Zuckerberg avoided the typical VC pitfalls and board guillotine / "CEO replaces themselves to help transition company to the next level" path?

Was it just because Facebook's growth was so unprecedented they had no need to replace him? Or did he have a very good mentor or early investors that believed in him or helped guide him without taking advantage of the situation? Or was he actually just extremely shrewd at navigating board politics?

If the company makes money, there is very little reason to fire the CEO. In fact pretty much the opposite, there are probably CEOs that would deserve to be fired for multiple reasons, but because the company makes good money, the board won't care. The board is responsible towards the owners, if they actually fire a CEO of a performant company, they really have to show why it was in the best interest of the owner.

All these stories where the CEOs were fired are from companies that weren't profitable, needed constant funding rounds etc. In the situation where the company is just sucking money from investors the CEO gets changed easily.

The idea that "if the company makes money" is taken as a universal here is false. In the real world it is entirely contentious, and the source these sorts of conflicts. The fact is no one knows for sure the future prospects of a company, but people with power can surely ram through their ideas even in the face of economic pain.

Wrangling that sort of power maneuver is the responsibility of the founder; that is if they wish to retain their control.

He had leverage. Facebook's massive growth meant that he could command the terms of the investment, and he ensured that he would always continue to control the board even as he was being diluted with later rounds.

See the “dual class” structure he managed to set up early on to preserve control.


This was made popular by Larry and Sergey in 2012: https://www.sec.gov/Archives/edgar/data/1288776/000119312512...

It’s really only possible if the company/investment is so compelling that investors will invest with virtually no control.

I think people don't credit Zuck with intelligence. Sure he created something simple, but he saw the value he could create, grew it, avoided giving away large chunks of it. He did go to an Ivy school, presumably knew how to learn on his own. And also there are people that you could probably trust to give you good advice: 1. business owners not invested in making money off you. 2. your lawyer is effectively a extremely expensive professional advisor, and generally required to be a fiduciary to you.

> and how common it is for investors to take over

How common is it? Like, NN%?

Selling equity is one thing. Selling control is another.

When the founders have control, they're the leaders and directors have to follow. When the directors have control, they lead and the founders have to follow.

Generally, founders are more successful leaders of their own companies.

> Generally, founders are more successful leaders of their own companies.

Is that just because bad companies remove their founders in a last ditch effort to survive? Is that because bad founders can screw the company before they are removed?

Founders are the ones with the experience, skills, and knowledge to lead the companies they create.

Generally, VCs are equity portfolio managers and not qualified to lead a company. Even when they are successful founders themselves, they're almost never the right people to lead another founder's startup.

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