1. It is bad form for this sort of thing to be aired publicly. It may give us a voyeuristic fascination on something that is depicted as an internal intrigue within a prominent up-and-coming startup but this is fundamentally company confidential information that is not capable of being aired publicly without significant distortion. Who can answer the implied charges of impropriety? Those most directly affected by whatever is happening can’t do so without violating duties of confidentiality. Yet what are they supposed to do? Sit by while people now start making invidious comparisons of their activities with, say, the increasingly notorious Groupon venture? Come out and declare "I am not a crook"? Start attacking the author of the email, who may have intended it as a confidential communication and not even have had a role in its being leaked? Or start to spread over the public record all sorts of confidential discussions in hopes of trying to defend their reputations? I don’t know how this got leaked. But it amounts to an inherently unfair attack that is almost impossible to defend just by the nature of the case. In law, we learn early on that a one-sided story can almost always be made to sound compelling, while on a full airing it can just as easily be shown as just the opposite.
2. There is a long-time tension in the startup world between founders and VCs and, as someone who has worked closely with founders for nearly three decades, I can say unequivocally that it has not been the VCs who have tended to get the short end of the stick when the inequities arise. Now that fact does not justify founder abuse, if that is what happens in a given case (I say nothing about this case - we really don’t know the facts). For decades, investors categorically refused to let founders take even a penny out of the company as they were urged to "swing for the fences" to ensure that the investors got their projected minimum 10-to-1 one return on investment. And when they missed, it was the investors who would force a merger or sale of the company, take out their liquidation preference to get a return on their money, and leave founders with a zero-equity return after perhaps years of working for little or no salary and putting in 20-hour workdays in the process. This value proposition may have paid in a big way for founders in select companies but it has also left large numbers of seriously harmed founders in its wake over the years. Today, this is changed somewhat and founders at times have opportunities to balance their risks along the way as they strike their bargains with the VCs. How, when, and to what extent they take any money out along the way is a completely legitimate issue to be fought for by founders and resisted by investors as circumstances dictate. But the overriding goal of letting founders spread some of their risk is completely bona fide. The details get resolved by the founders, the company, and the investors through private negotiation, not through a public airing. If investors choose to accept something that sounds aggressive to the rest of us, that is their calculated risk. Last I checked, they qualified as "sophisticated investors."
3. Is it good policy to have a dividend declared for the benefit of insiders and for founders to take significant cash out of a company in the early stages even while other employees may not have that opportunity? Maybe, maybe not. That is a legitimate question for debate and it should be cast as a policy debate, not as a perverse prying into the details of a particular company whose circumstances we do not really know. The traditional justification for requiring founders to ride it out to the bitter end with no prospect of any real return unless the company hit it big is that it is important that founders have "skin in the game," i.e., show a real commitment to the venture as opposed to making opportunistic short-term moves that further their immediate gain at the expense of the venture. That is a legitimate concern at all times in a startup but so too is the idea of fairness to founders. Why, when founders have the power to assert more control, should they voluntarily accede to a historic policy the keeps them in handcuffs and leaves them with basically an all-or-nothing proposition in whether they ever get anything significant out of the venture? This makes no sense and it is natural that founders would want to change this older pattern and practice. We can debate to our heart's content whether this is good for startups or not - that should be a policy debate (including over where exact lines ought to be drawn on cash take-outs), not an excuse to take what might amount to cheap shots at a founding team that certainly deserves better treatment than to have a one-sided debate carried on at its expense.
There's no SEC for privately-held companies, there is basically no oversight and the confidentiality clauses make it almost impossible for this little guy to find out how he's getting screwed and by whom. Learning and talking about it is the only way to fix it, and I'm a bit concerned that you completely overlooked this aspect in your comment.
Meanwhile, investors are diversified and have great counsel, so they can look out for themselves.
The only question for me in a situation like this is if there are people who were vested but unexercised, who would have exercised had they known the unique dividend was coming. It'd certainly be nice for a company to give them the info they'd need to participate knowledgeably.
But other approaches to limiting founder dilution and rewarding early shareholders could have included new offsetting stock awards to key staff, or selling even more shares to pay bonuses taxed at ordinary income rates. Those could have been more dilutive to smaller shareholders than this dividend approach.
Dividends are legal, tax-favored, and exist to reward actual shareholders-of-record (even though they're rarely used at this growth-needing-capital stage). Closing that alternative wouldn't necessarily benefit the employee-optionholder 'little guy'... but it might benefit the new-money sophisticated investors who would then have more control.
there is a special well known definition for a schema when "dividends" are paid using new incoming capital. The dividends you're talking about are supposed to be paid using earnings from the actual business.
If you just mean traditionally, well, if this is a more efficient way to meet the various goals of all parties to the transaction, I'm with founders/investors/innovation, moreso than tradition.
Also, money is fungible. What if AirBnb has earnings from elsewhere that could pay the dividend, meeting the early shareholders' desire for a interim diversifying return? But, that would then leave less capital for expansion. However, new investors are happy investing money that replaces (and then some) the cost of the dividend to support expansion costs.
There'd then be no essential violation of the way you think things are 'supposed to be': just think of earnings paying dividends, and then new investment adding all required expansion capital. Everybody who's a party to the transaction is happy, in a tax/legally-efficient manner, and no one's rights are trampled.
(As I've mentioned elsewhere, I think the main fairness issue would be if anyone who had the legal right to become dividend-eligible, for example by vested option-exercise, wasn't given that chance. But that's an internal fine detail we don't know about this still-in-progress private company financing.)
>There'd then be no essential violation of the way you think things are 'supposed to be': just think of earnings paying dividends, and then new investment adding all required expansion capital.
Even if they had other sources able to completely cover the "dividends", there seems to be the causality link between the investment and the "dividends". In Tom DeLay's case the causality between "donors to RNC" and "RNC to candidates" allowed the jury to recognize shortcut-ed "donors to candidates". It seems to me that it was an obvious bonus (i.e. ordinary income) to founders which for the purposes of lower tax rates (i.e. basically for the reason of greed) was shaped as dividend, and as result they seems to step into the Madoff territory.
>Everybody who's a party to the transaction is happy, in a tax/legally-efficient manner, and no one's rights are trampled.
people were fighting to get a piece of Madoff action.
Google's founders famously helped an early employee (Scott Hassan) who had done a lot of work and didn't have much on-paper equity. He's now running an awesome robotics startup, Willow Garage.
I still think its okay to compensate the founder for getting the app to this point.
And I agree that shafting employees is reprehensible and downright despicable.
It's the same principle which means if Steve Jobs came to me and said he wanted to be involved in my startup, I'd happily hand over 60% of my equity to him. The 40% I'd be left with, whilst proportionally lower than what I had previously, would be worth far more than what it was before.
At the moment I earn my rent + expenses from my business. As and when we close our next round of funding, I'll likely formalise this arrangement (at the moment we're boxing clever with the tax man by paying me in various ways), but I'll definitely pay market + equity for early hires.
So now I make $3k/mo. It's interesting trying to live within that amount (I have savings, but consciously would like to not dip into them more than I have to) in the Bay Area.
It is a great opportunity to do IRA to Roth conversions and such this year. The crazy thing is I would technically qualify for rent controlled apartments in SF, although my income might be too low to rent them.
I think $50-60k is a much more reasonable founder salary, once we finish Series A. I suspect most Bay Area startups get to that point, or even up to $70-100k, for founders, once they raise >$3mm or so.
If it doesn't hold value (as it seems you're positing), then early employees are getting played in the worst way. They're the ones who are getting screwed.
The context of what most people are saying is that founders are now getting their pound of flesh from VCs/investors (summary of other comments, not this thread.) The tone of those comments is that founders are simply putting steps in place to ensure they don't get screwed.
If this is the case (I don't know how true it is) then the marker for who gets hosed lands squarely on those early employees, and THAT will be a gigantic problem for startups. If early employees begin to distrust founders and investors, it's not just a headwind -- it's pretty much game over. Early employees are quite often the difference between success & failure. Those top-flight team members you need to execute on that idea will use the only leverage they have in that relationship -- they simply won't join the startup.
I hope AirBnB is an anomaly, but I expect this type of scenario to happen more and more. As for founders wanting to put themselves in position to do this -- who could blame them? But, it's not without consequence and their reputation as startup founders will be summarily tested with any future ventures.
The smartest startups will very quickly learn that success will only come when all parts are working together, doing their jobs -- founders, investors, early employees.
Stock options are a less significant part of the equation--they aren't worth anything unless there's an exit, and if there's an exit they still probably aren't worth especially much unless it's an extremely outsized exit, the once-in-a-decade type like Google, Amazon, or Microsoft. They're probably still worthwhile, but it's not prudent for an early employee to expect too much from them.
Imagine a founder talking to an engineer about their fantastic idea, explaining how huge the opportunity is, etc. etc. and that the engineer will earn experience and a close-to-market salary. And you'll have options, but they likely won't be worth much unless we become Google, Amazon or Microsoft.
Yeah, I can't imagine that conversation either.
The demand for talent makes this situation appealing only to those who really need the experience. The highest quality talent -- the ones you need for your early-stage startup to succeed -- can do better than this nowadays.
Post-funding, if you offer a market salary, standard benefits, and a startup working environment (which seems to be the norm for YC startups), why wouldn't top talent choose that over, say, working for Google?
If someone was making this statement to me, as a prospective employee at Startup X, a giant red flag would go up. This is a signal that (a) this company isn't aware of what's being offered elsewhere, and (b) this company is projecting what's valuable to me as an employee (no financial gain, but "better working conditions".)
I wish it was that trivial, but this is a quaint notion that simply doesn't work if your goal is to pull in premium talent. It may work once in a while, but long-term -- no way. Maybe that simplicity has worked for you in hiring situations, but in my geography -- you'll end up with mediocre talent.
The bigco environment you mention -- the Amazons, the Googles, the Microsofts -- top flight candidates are using the pool of bigco and startups against each other to gain greater financial rewards. It's leverage, and the top candidates have it and are using it to their advantage.
Play the reindeer games or not, the market is what it is.
If a company sells for $150mm, and you have 1%, and there has been $20-40mm in financing (i.e. certainly not a great outcome for later investors, but ok for early), it's possible your equity will be worth $0 (due to preference), or maybe $200-300k. The odds of the company going from early to this are maybe 20%. Getting 1% isn't all that common either; 0.1% is a lot more likely unless you're pre-A.
$200-300k is nice, but if you figure there's a 20% or less chance of it happening, and you have to wait 4 plus maybe 1-4 more years for it. So, the net present value is about $10k/yr in extra salary.
Now, if you're Google, Facebook, or Microsoft, it's totally different; or if you are early at a company which takes very little financing and has a good ($50-150mm+) early exit.
As an employee, what I'd want from a prospective employer is full visibility into the financials/cap table, and help running through various assumptions about the future. Misleading people about the value of compensation, up or down, isn't reasonable.
As an employer I wouldn't want to be hiring someone who was too stupid to understand the accounting when given the numbers, or too meek to ask for the numbers, either. But an employee would be a lot better if he were motivated by wanting to solve this problem, use this tech, expand skills, be in this industry, or learn to do his own startup, vs. banking on the options lottery.
> As an employee, what I'd want from a prospective employer is full visibility into the financials/cap table, and help running through various assumptions about the future. Misleading people about the value of compensation, up or down, isn't reasonable.
I think that's the crux of it. Most startups are not this transparent and upfront with potential candidates.
> As an employer I wouldn't want to be hiring someone who was too stupid to understand the accounting when given the numbers, or too meek to ask for the numbers, either.
> But an employee would be a lot better if he were motivated by wanting to solve this problem, use this tech, expand skills, be in this industry, or learn to do his own startup, vs. banking on the options lottery.
For the company, absolutely. For the employee? Yes, if certain circumstances hold true. But expecting this to be of equivalent benefit to everyone is uninformed.
> As an employer I wouldn't want to be hiring someone who was too stupid to understand the accounting when given the numbers, or too meek to ask for the numbers, either. But an employee would be a lot better if he were motivated by wanting to solve this problem, use this tech, expand skills, be in this industry, or learn to do his own startup, vs. banking on the options lottery.
Again, great sentiment, but when you fold in everything that's been discussed and you target premium talent, more often than not I'm finding that talent is often going elsewhere.
As a summary, I think the tension around financials between founders and VCs is slowly being pushed off to early-stage employees, and premium talent recognizes it and is expecting more than invaluable startup experience as compensation for making someone else wealthy.
If your startup is a rocket with no problems, either approach works, but if it gets bumpy, having cash extends your runway, and helps you retain key people better than increasing amounts of declining stock.
Plus, having investors put more cash in keeps them motivated to help you longer, sort of like an author's book advance.
There is definitely under appreciated value to being "rich" in your 20s; driving a nice car, living in a nice place that you like, being able to go out to eat... and it really only takes making a marginal extra 10-20k to make a big difference.
Options aren't it. They're somewhere between a bonus and a lottery ticket, and if you're smart enough to be "top talent" you're smart enough to figure that out anyway.
Below-market rates? Not sure if that was implied, but that's certainly not the case I'm talking about.
I'm not suggesting that's the case, but you need to ask the candidates who we've identified that are doing so. We've been losing people to AMZN/GOOG (MS less so) who will often have salary offers matched + bonus structures that exceed ours, plus benefits that jump way over anything we can provide. What's so much better about that? You'd have to ask the candidates.
Not sure where the discussion went off, but I'm not suggesting that options are the end-all-be-all for early stage employees. I agree that the chances of them holding any value are low. But this I would say: if they really are this gigantic crap-shoot, why on earth do startups continue to offer them to candidates?
The founder in all ways owes his company to the employees and everyone who has helped him and any big upside MUST be shared.
It probably sucks to be the founders of AirBNB to have this info exposed, but they have the opportunity to respond to Chamath's opinion. It certainly seems as though they are in an indefensible position, but maybe there's a good reason why they are withdrawing millions from an as-of-yet unprofitable company. As I mentioned in another comment, I don't recall Bezos ever doing this.
You seem to have forgotten about the lessons of the dotcom boom. It's not about the founders or the VCs, it's about the investors. During the dotcom boom, founders and VCs both screwed the investors out of billions upon billions. A great deal of money was lost during the bust, and a lot of peoples' lives were affected. If you were around Silicon Valley at the time, you would know that the amount of jobs lost during the bust was worse per-capita than Detroit in the 80s. As a morbid datapoint, commuting on the 101 got much better at the nadir of the bust, because so many peoples' jobs were lost. The company I was at had half a dozen layoffs in 1 year, and lost 50% of the employees. The last thing I want to see is another round of smash-and-grab VCs and founders bilking more money from investors, and killing investment again, possibly putting me out of job because the SV economy contracts again.
The point that Chamath made is that the money is ONLY going to the founders and maybe some initial investors. Employees are being locked out of this. Say what you want about companies like Google and Facebook, but Brin, Page and Zuckerberg never turned their companies into cash-grabs where only they benefited.
We need MORE transparency, not less, so when seemingly shady things like founders withdrawing millions from the company coffers occurs, I would like more information about this.
I want to know if this is another second-coming of the dot-com bust, where I could lose my job and be unemployed for months/years because VCs, founders, and Wall Street were all complicit in sucking and spending money from investors, and then causing a complete seizing of investment in the Valley.
I have to admit that SARBOX actually did end up exposing companies like Groupon. At least there is a modicum of transparency in the S-1 filings so that people could see the accounting techniques being used by Groupon.
Public investors committed the largest valuation run-ups at the time. Remember how hot day trading was? In the end, they got left with the short end of the stick.
Your general sentiment is right. The people who are rich now are the ones who cashed out when times got frothy. Hard working employees should be given the same opportunity as the people who architect the deal.
You seem to have missed an important detail: the dividend was to 'common stock', without a full list of stockholders you can not make the claim that employees are being locked out of this.
the financial dealings start to stink in Silicon Valley and in hi-tech in general and some people seem to care enough and are in position to at least voice their concerns.
A $120 million investment round means that about $2.4 million in cash money just moved from the limited partners (universities, pension funds, wealthy families) into the pockets of the VC firm's partners. Not stock, not options: cash money. This is the way the system has always worked, since time immemorial. VCs get paid a management fee (about 2%) win or lose, and a percentage of the profits when they win.
Just something to keep in mind when someone mentions their strong principles in the course of a discussion over how dang expensive butter is these days.
[Edit to add: My description of management fees is slightly simplified and ignores salient things like the fact that they recur annually.]
But this article is about something new - a dividend that mainly goes only to the founders. It's about entrepreneurs screwing early-employees, entities that until now I've always considered as been in the same bucket. You can rightfully claim that the messenger sucks (which might be well-known) but that doesn't imply anything on the message itself (or its novelty).
There is something "new" here: the fact that founders have so much leverage in this market that they can claw that value back from investors.
The welfare of the "employees" is a total red herring. Venture capital investors have been fucking over employees directly for almost 20 years.
Yes, that surprised me a lot! Especially from founders that are somewhat "famous" and are connected to YC. I expected they don't play these tricks. Greed?
Anyone knows how their employees reacted to this news? If I would have worked 50+ hours for year(s) and then read this... :(
Incidentally, this is one of the best reasons to found a company -- equity is distributed in such a way that those who take the biggest risk will be properly rewarded.
Secondly, founders taking money off the table has become common. As mentioned in this very comment thread: "Zuckerberg, Moskovitz, and Parker each got $1m from Accel when they raised their $12.7m Series A according to David Kirkpatrick's The Facebook Effect."
This is both at a far earlier stage, and far more money on percentage basis compared to the overall valuation of the company. I wasn't party to the deal, but I highly doubt any other early Facebookers got liquidity then. But those same people are definitely not complaining today.
I personally don't think anyone got screwed here.
Using multiple credit cards to fund a risky investment is irresponsible.
And if on joining, you were told about 2 classes of stocks - one for the founders and one for the employees then you should have understood that this was a distinct possibility.
This VC is just using this small soapbox to warn Airbnb not to eff with him. And to try to stem the tide in Silicon Valley where successful founders are compensated for getting a company upto a $1 billion valution WITH revenue.
If an employee had written this, I would have been a little (tiny) bit sympathetic but for a VC to act like he cares for the employees -- you HAVE TO BE KIDDING ME!!!
They've only had employees for about 2 years. /pedantic
If there is ever a second class of stock, and it is yours, it is worthless.
$2.4 Million a year sounds like a lot initially, but when you consider local salaries and costs associated with this. You might think that VC's make tons of money, but when you consider that the $2.4 Million has to fund their entire business, and when you look at how the costs break down, it starts to look a bit more reasonable.
Here's how those costs break down:
Office space on Sand Hill Road:
5000 sq ft @ $60sq ft / year = $300,000
3 exec admins @ $ $80k / year = $240,000
2 Associates @ $150k / year = $300,000
2 Analysts @ $100k / year = $200k
4 partners @ $300k / year = $1.2M
Marketing / sponsoring events @ $100k / year
Legal fees @ $300k / year
Now, when you exclaim that a $300k salary is exorbitant, consider that most engineering managers in Silicon Valley make about that much. $300k will allow you to purchase a house in San Jose ($500k for an average house in the burbs), but it won't let you purchase anything in Palo Alto (over $1M, easy. Monthly payments are around $7k).
Nurses working the night shift in Silicon Valley make around $150k a year without working tons of overtime. Firemen and policemen make about the same. An ER tech at a hospital makes about $70k.
Add to that, that most partners and associates at VC firms will end up working 80 to 100 hours a week. So, partners will end up having an hourly wage of about $75 an hour, which is what PHP contractor will make in the area. A decent Rails contractor will bill about $150.
So, when you break it down, the greedy blood sucking vampire VC's... really don't make as much as it's made out to be. A number of them are actually pretty nice, and great people to have a beer with. And, it's actually a pretty hard job.
Full Disclosure: I haven't made a penny from VC's. I've had a couple sponsor events for Hackers & Founders, and a number of them have been really helpful in teaching me the ropes of Silicon Valley.
Also, a $1M house is affordable if you earn 300k a year. Why would you think it's not? You could probably pay that off in 10 years, far short of the 30 year time span on most mortgages.
Are you suggesting that this VC pattern justifies the actions of founders who take $21M as dividends ? (to be more precise - founders of a young private company that is dependent on external investment for financing itself)
I don't think that particularly requires moral justification, any more than an engineer saying "That offer is interesting but I would prefer $5,000 more and an extra week of vacation" requires moral justification. Capitalism happens. Sometimes, it even happens to rich people.
Edit for context: "Capitalism happens" is shorthand I frequently use for "Sometimes one party in honest negotiation with another has leverage, perhaps because of how supply and demand for the product being sold shake out, and this is natural and not particularly noteworthy." I usually say it when rich people complain how much money they are paying for things like e.g. engineers or shares in a hot startup.
My reading is that the VCs for this round are not getting screwed in any way, they know exactly what they're getting (X% of the company for $Y, with $Z ending up in the company's accounts). For them it doesn't really matter whether all the shares they buy are newly issued or whether some are sold by existing shareholders, as long as X/Y/Z are the same.
Any possible investors in earlier rounds are not particularly getting screwed, since they have shares that will now receive a dividend.
But the employees with options are getting shafted, as they have been dilutied more than if the founders' cash-out had happened by them selling shares.
The delta between this deal and every other deal is that the founders are getting treated in a way typical for VCs, not in the way typical for employees.
Here's some numbers about a hypothetical company FooCorp to make a point: assume that the employee option pool is 20% of the pre-market valuation of FooCorp when FooCorp raises $1 million on a $5 million valuation. (That pre-market bit is significant because putting it pre-market rather than post-market is a easy way for VCs to change the price of the deal without changing the price of the deal, which is a theme we will be returning to shortly.) Prior to the first round, employees (present and future) own or will eventually own 20% of the company, and the founders own or will eventually own 80% of the company. (We'll pretend there are no angels to keep the math easy.)
After the first round, employees own 16% of the company. Wait, didn't we say 20% literally on the piece of paper we signed the deal on? Yes, but some 20%s are better than others, for example 20%s which are written by people who do this for a living. This is garden-variety VC screwage and only tangentially related to the point.
Anyhow, say we raise $3 million on a $15 post for Series B. Employees get diluted again, with the founders, and they now own 12.8%.
We'll stipulate that the company goes red hot and the numbers around Series C are getting thrown about in the neighborhood of a billion dollars. They want to raise $80 million for business use. If the founders negotiate a post-money valuation of a billion, the employees get diluted to about 11.8%. If the founders instead raise $100 million and return $20 million of it to themselves, the employees are instead diluted to about 11.5%.
But wait. That is exactly equivalent to the founders raising $80 million (i.e. taking no money) but just not negotiating quite as well: if the VCs wheedle them down to $800 post, then employees end up with 11.5% anyhow. (That's a perfectly reasonable outcome for the negotiation because valuations for non-public companies are set by slicing opening a goat's entrails and successfully arguing that they look more or less auspicious than the other guy thinks while insinuating that if he doesn't like it he can go cut a different goat with other people.)
This (the OP) is a discussion about the price of the deal (and, secondarily, about the diminished leverage a hypothetical VC would have for subsequent deals if he had to deal with a counterparty who was already rich). It just doesn't sound like one, because we have invented a rich vocabulary under which people who understand money can manipulate the price paid to people who understand computers without ever saying the word "price."
Returning back to tangible reality of possible interest to HN readers, an early engineer promised .5% of the company when he joined waaaay back before they were famous is looking at this discussion and going "Honestly, guys, why do you care?", because the differential is between him ending up with 0.295% of the company (that's 2.95 million per billion if they should take no money and then exit) and 0.2875% of the company (that's 2.875 million per billion if they should take no money and exit). i.e. In the still-quite-unlikely event that he receives a pot of gold at the end of his rainbow, it is not a meaningfully different pot of gold than he would have otherwise gotten.
In most cases, that is the most unethical action a company can take against its employees.
I will agree that dividends should generally be used when the investors are able to invest the money better than the company can.
eg. If an putting the cash into ops will generate a 6% return and investors are able to earn 8% then a dividend should be issued.
If you can fill out your round, get cash and not have to dilute as a CEO why wouldn't you? That would be like a VC turning down free equity.
It is generally accepted that a vast majority of a VC partner's income comes from their share of the fund's return, not from the management fee. It is not unheard of for a VC firm's costs exceed the management fee, such that the partners loose money unless the fund has a positive return.
Industry standard practice is that startups pay for costs associated with deals, not capitalists. That one is virtually universal. The grapevine tells me that it is not uncommon to see VCs travelling as board members. Some of them don't exactly fly coach.
And fees are not necessarily split equally across partners. One senior partner might take 20-50% in some cases.
As a founder, I'm delighted the AirBNB guys are charging for admission to their equity sale. Call the payout back wages paid at market rates and call it a day. And if investors are reacting in shock to the sticker price they can get out of the showroom. Sorry you won't be joining us - perhaps there is a cheaper model you can lease somewhere else?
This guy is getting skittish that 1/100th of the valuation of the company is going in a payout to the founders? That's only 100k over a 10 million round. Seems pretty conservative to me.
If the deal doesn't make sense, it doesn't make sense because the company is overvalued. But for a VC to agree that a company is worth X and then complain when 2% of that is used to de-risk founders is hypocrisy: the payout constitutes a smaller percentage of deal value than the VCs charge for allocating capital.
Any VC that finds these compensation figures absurd should have balked at the proposed valuation LONG before this point. This is in principle no different than de-risking founders 100k each out of a round valuing their company at over 10 million.
The point of investment is that the money is supposed to allow the company to grow. When 1/6 of that investment isn't even invested in the company, but rather given as a no-strings gift, it's not an investment anymore.
Doesn't that seem reasonable? With the huge potential upside, shouldn't there be an associated risk?
A VC arguing the ethics of this deal with respect to early employees is more than a bit disingenuous, at first glance it looks as if they are doing this to protect the little guy but that is only because for once they are treated the same as the little guy.
Founders cashing out is a big red flag. I said it about Groupon. I've said it before. This really is taking it to the next level: cashing out with a dividend to retain control and ownership.
I absolutely agree that for any cash out it should be open way beyond the founders. In fact, this is a good way for larger startups to kick the 500-shareholder limit can just a bit further down the street.
I see Airbnb as a fundamentally risky business. At some point Airbnb will be large enough to warrant the attention of local and state authorities because many people offering places to stay are doing so illegally or in violation of their own lease agreements.
This woman who had her apartment wrecked is just the tip of the iceberg. It is only a matter of time before a headline about a serious physical assault or worse. Airbnb can count their lucky stars it was "only" a ransacking and vandalism.
No, it's not. Palihapitiya agreed that there should be a secondary component to the financing.
When a company is "shooting for the moon" and has a chance at a >$1B exit, investors want the entrepreneurs to cash out a portion of their stock, because it gives them the financially flexibility to swing for the fences. It aligns the founders and management team with the late-stage investors.
Fred Wilson does a great job explaining why founders and early investors cashing out in late-stage financings is a Good Thing for everyone.
Agreed. I think what OP meant was "founders cashing out [using this method rather than a secondary sale]" is a big red flag.
Think of it as hedging your bets, on the one hand you keep a large chunk of stock because the company may weather all the storms ahead successfully, on the other hand it may not. The insecurity can be translated in to a strategy where you remove some money now in case the 'worst case scenario' becomes a fact.
Nobody is forcing any of these guys to do business under these terms. If the VC doesn't want to be part of the round then they should just pass on it, it's not like there is a guy with a gun behind them making them ink the contract. If they don't like the terms, don't do the deal.
Reminds me of Freud's story about the peasant who says to the other peasant "Hey, you broke my pot" and the other says "First, I didn't borrow your pot, second, it was broken when you lent it to me, third, it's my pot."
A VC complaining about the terms under the pretense that 'the little guy is treated unfairly' is a bit like royalty complaining about the price of cake.
Nobody forces him to do this deal on these terms. He's just scared to miss out on a big hit, he'd like the ring side seats to be cheaper by keeping all the money in the company or by buying out some of the founder stock.
Too bad, you can't have it both ways.
He may have a point about early employees (a 'special dividend' that excludes certain shareholders is not very elegant) but it is not his to make, and the dividend in this case was to 'common stock' which seems to imply that anybody with vested shares participates in that dividend.
His 'concern' is about the unvested employees, but that's a nonsense argument, as long as your stock is unvested, you don't have any stock.
Options do not participate in dividends until you exercise them, they never do because they are not stock and that's a pretty clear-cut thing.
Pretty low-class to dump this email in the public domain, I think that people will remember this when dealing with this particular investor in the future.
The big difference is that since the founders aren't selling stock, they aren't being diluted, so the employees with unvested stock don't get more of the company.
Basically, vested common gets paid, common doesn't get diluted at all, unvested common gets relatively screwed (they'd own more of the company if it were a secondary sale).
Of course, dividend vs secondary also affects the investors' price, but I can't see Chamath making such a stink about a simple matter of price.
" If you see in a province the oppression of the poor and the violation of justice and righteousness, do not be amazed at the matter, for the high official is watched by a higher, and there are yet higher ones over them. But this is gain for a land in every way: a king committed to cultivated fields.
He who loves money will not be satisfied with money, nor he who loves wealth with his income; this also is vanity. When goods increase, they increase who eat them, and what advantage has their owner but to see them with his eyes? Sweet is the sleep of a laborer, whether he eats little or much, but the full stomach of the rich will not let him sleep. " - Ecclesiastes 5:8-12
1) Founders de-risking a successful but still growing company at a series b or later financing (or even a late series a). I really don't see a problem with founders diversifying their personal portfolios (otherwise, many have 100% in company stock AND debt from school, etc.). You don't want them to get distracted, but being short on cash doesn't help you make a successful product.
2) De-risking via a special dividend, vs. secondary sale of stock. Yes, it lets founders avoid selling some shares. If you're doing it at a $1b valuation, it doesn't seem like a major factor either way, but if there could be a precedent for people raising $20-50mm rounds, dividend vs. sale might be a better way to put $1-2mm in the pocket of each founder after a few years, so they can shoot for a >$1b exit.
I'm curious if this form was suggested by the AirBnB side (or their law firm) or the VCs.
If employees with unexercised but vested options were given a heads-up that such an unusual early dividend was coming – so that they too could choose to qualify – that might address much of Palihapitiya's concern about fairness.
Employee stock options are meant not to be exercised until they are saleable. When you can them early in a private company your capital is locked up in a dead asset yet you have to pay capital gains taxes. The dividend would have to be huge.
Further watch out for insider trading. The value of the stock when the option was struck has to price in the promised dividend.
'Qualified dividend' treatment only requires a 60 day holding period.
Also, those with founders shares have almost certainly held (via an 83b election) the shares long enough for long-term capital-gains treatment, as well. If you're saying that yes, the dividend treatment may save them on taxes (or at least be no worse) than other approaches, we agree.
For employees who might have to exercise vested nonqualified options to collect the dividend, other ordinary income taxes may apply... but shares that were early enough could still be in a dividend-is-more-than-all-exercise-and-tax-costs situation, again making the participation a riskless no-brainer... in fact helping them set an earlier start date for future capital-gains calculations.
If they're not in the no-brainer situation, they'd have to decide whether the dividend and early-holding-period-start was worth the cost/risk of converting to actual equity. That's a matter of tax law and risk-affinity... any dilemmas created by having a new range of possible choices aren't a knock against the offer of a dividend.
But I do agree with the article, dividend's like this are not the spirit of building a good company. Just founders who want a huge pay-day. I would have understood 1m-4m, but not 21m, thats a huge percentage of their investment.
They're just diversifying a little. You wouldn't ask an investor to prove their commitment by putting 100% of their net worth in a single venture. Investors are diversified. Smart founders should be, too, as soon as they are able.
If the founder's want to sell some of their equity, I'm fine with that, but that is NOT what happened here. This is purely a pay-day.
If I knew my company was going to be the next eBay for realestate, why would you hamper your company by taking 21m off the table. This signals greed and/or being unsure of your future success.
And yes the figure is still "large" because it is 1/6th of their funding that goes to their pockets, rather than the company.
Alternatively they could offer a retention bonus to everyone based on current salary.
And then... the Groupon comparison kind of sticks in your mind, doesn't it? I don't know, I get the feeling there is more behind this ...
1) Chamath talked with airbnb, and he felt that he was scoffed or otherwise disregarded
2) Chamath talked with Reid Hoffman, and both concur on the matter
3) Reid and others talk with AirBNB but the airbnb people stuck to their guns
4) Chamath believes that he is right in his view, and hopes that by going to the public, others (i.e. PG) will pressure airbnb to reconsider (especially with the groupon comparison)
Now, I don't know the airbnb founders directly, but I'm certain that if they felt that other investors were concerned about the arrangement, they would either change the terms or decline to take the opportunity. If Chamath doesnt want to participate, its his prerogative, and expressing his concern to the public really doesn't help his prospects of investing with airbnb or any other yc company.
The fact that companies can get away with something like this is absolutely ludicrous. It illustrates just how far the stock market has gone from its original purpose.
Back before companies had the ability to sweet-talk investors with bulging pockets, companies wanting capital had to raise it the good-old-fashioned-way: IPO. IPO used to have the ability to allow a company to access as much capital as it would reasonably need to grow. But with the preponderance of heavily privatized companies milking both the private AND the public side of the investment machine, the value-creating just cannot be accounted for properly. Something in the gears here needs to be tweaked.
A company like Apple with $75B cash (if that's true) should have a legal and an ethical obligation to pay out dividends to its shareholders. Tight-fisting cash doesn't do anything to the wealth-creating mechanism in our capitalistic society.
Apple's cash hoard is functioning as a giant insurance policy against Apple's stock price, which if you buy and hold, never gets taxed.
After all, we aren't the only people that make a company succeed.
I have no knowledge of specifics outside of the ATD article mentioned, but my read says that the dividend will go to all common shareholders. So employees who have both vested and exercised shares will receive their pro-rated portion of the proceeds as well. It just seems that the founders must hold 93% of the vested shares (21/22.5), which is reasonable given that they started vesting years ago, when they were still in their cereal-selling phase.
Addressing the founders' decision to dividend-to-common instead of secondary selling some of their common shares:
In a typical venture financing, only preferred shares are sold, and there is a price per share that is set by the round's valuation. After closing, the price per share of the common shares/options is determined by external auditors in what is called a 409A valuation process. This process is a little bit of a game, whereby the company tries to come up with reasons (financial models, market comps, etc.) to depress the price of the common shares relative to preferred. This has the benefit of giving subsequent hires a lower exercise price on their options (and eventual higher profit upon exit.)
The price delta between the classes can be as high as 10:1, though it's usually closer to 3:1 and narrows as a company approaches IPO. However, were anyone (founders or employees) to sell common stock in the round, the common price per share would jump to exactly this new clearing price. Since Airbnb is a hot company, it's reasonable to think that buyers would be willing to pay a market price for common that's not far below preferred. And that would mean less upside for all future employees. A dividend-to-common avoids this.
Because Airbnb is so young and fast growing, they still need the allure of the upside of stock options to recruit and retain talent. Any sophisticated investor should understand this dynamic. And yet this dividend annoys them because it means there's a wealth transfer occurring that doesn't increase their ownership.
Let's assume for a second that I'm right and that all vested/exercised common shareholders will see some of the dividend. As food for thought, what if Airbnb had instead said they were going to spend $21M of their newly raised capital for cash bonuses for anyone who had worked for them more than a year -- distributed per employee via this equation: total hours worked * total value created... would the Valley's response have been less uproarious?
Oh how Michael loves to insert himself into every piece of drama he can get his hands on.
Did any founders of great companies ever do something like this? From my recollection, I don't believe Bezos, Jobs, Gates, etc ever did anything like this.
No? That's ridiculous? I agree.
Seems to be a lot of this going around these days.
To me, being greedy is hardly the worst trait to have as entrepreneur.
Off the top of my head, I'd say stupidity, laziness, cowardice, and soft-headedness are probably worse traits.
It looks to me you can increase your salary to live a good life, while waiting for the big exit. I understood Groupon did this because they thought Groupon was at its peak. Is that the same thing for AirBnB? Am I missing something here?
If HN can't outgrow the fascination with morality plays, then what hope is there for the rest of society and society as a whole?
We need a new Web site: VC_secret_confessions.com!
He would always get more after an IPO or exit. So why would he?
I assume the founders are not stupid, they know their valuation is not justified.
That is just not true.
You have zero clue of any one founders back story. How many years have they been building their business and not taking a pay check? Not taking health insurance? Struggling... Taking a payout, in some cases, can motivate someone who has been putting in 24/7 for year(s) to keep going. It can also allow the people in your life (family) to support you in pushing forward with your passions.
If they didn't believe in the company they could just sell it today for $500 million (or whatever) and put $50 million in their pockets instead of $5 million.
They are not selling their stock for that $20M lump.
The only 'foul' thing here, is that their employees (option holders) will probably get nothing.
Granted, most of that money would probably have gone towards AMT, but let's not vilify AirBnB before we hear their end of the story.
Selling 5% of your total shares for $3,000,000 sets you up well for life. Not great, but well. At 4% interest that's $120k/year. After that, it's gravy.
I'm not saying twitter is a failure by any means, but none of the people that built the company are still there ( Jack Dorsey started square so maybe he is that small percentage of people that can juggle two amazing startups ). When all the founders cash out early, it just makes it questionable.
On Wallstreet they call this "fuck you money".
I am utterly fascinated with the capital markets and many aspects of finance. The returns reflect a true understanding of the markets. And yes, for the record, tech startups are in many ways less stressful than finance startups :)
As far as "altruism" is concerned, the value-add to society is wholly artificial: if our financial systems weren't structured to force retirement and pension funds to invest in the capital markets, I highly doubt anyone would say they were doing something good for the world.
Total off topic.
Instead of selling though, they're raising more money, taking some out themselves, and setting their sights on an even higher level of success.
Makes sense to me.
Their product is an inferior version of hotel rooms.
There is a high possibility that they are bankrupt some day.
What the founders are doing makes perfect sense to me, maybe there will never be an IPO or Exit.
Maybe studying economics diseased my brain, but i can't see why competitiveness doesn't matter any more.