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How Derek Sivers sold CD Baby for $22M without taking VC (venturevoice.com)
45 points by vv on Oct 23, 2008 | hide | past | favorite | 25 comments



Obviously a great story and he does sound like quite a class act.

However, I strongly disagree with building a company that lacks proper equity distribution for employees. A lot of the culture problems he alluded to could have been prevented by keeping the team smaller and increasing team ownership.

It's great to be a founder and own 100%. But I'm not sure it's smart to build companies where people aren't on the same page when it comes to owning the creation they build together.


Actually the problems started when equity distribution started. That's what changed some focus of the company away from the clients and on to profit-sharing, benefits, etc.

I let the CFO choose the profit-sharing plan and blindly trusted her choice, until 6 months later my accountant showed me it was giving almost all net profits back to the employees, and had doubled most people's salaries.

So I tried to scale it back, which of course led to huge upset, and endless company-wide meetings and votings and such, which at that point the whole mess had changed the day-to-day focus of the company so much I just felt like shutting it all down and starting something new. But I sold it instead.

Lots of great lessons in what not to do. :-)


Yet another reason I love HN. Some company founder gets mentioned in a news story, then they show up HERE to discuss it. Congrats and thanks for stopping by, Derek!


I'm a long-time HN fan (PG fan, YC fan, etc) - so HN is actually my main source of news! It was weird to see my name on the list of news yesterday.


Derek, thanks for chiming in and clarifying. This is super helpful.

It'd be interesting to hear what the reaction was. Honestly I've often wondered what would happen if you had a "gilded-company" style compensation -- everyone gets paid twice as well as anyone else in the industry, but at the same time, it's far more difficult to get hired / easier to get fired for nonperformance.

There's a lot of research that suggests employee compensation is inversely correlated with satisfaction with one's job -- no matter what the job is. How strange is that? If you get paid more, you actually feel like your job is less important or interesting, and vice versa.

What sort of macro effects did you see?


Unfortunately, profit-sharing didn't improve anything except people were happier (sure! their salaries doubled!). But performance didn't improve. Neither did responsibility, initiative, etc.

In hindsight if I had to do it all over again, I would have tied profit-sharing to improvement in performance above the current baseline, and also had healthy bonuses instead of everyone sharing equally, whether they were coasting or thriving.

Keep in mind this was a company of 85 people, 50 of which were in the warehouse $8/hr pick-pack-ship, 28 were customer service answering emails, and only 6 jobs were "other", such as bizdev, tech, or management.


Makes a lot of sense. This is a very important lesson to share -- and learn from.


Maybe he can finally learn rails now :P


A company with 100M in revenue for 22M?


In the audio, he says expenses of 80M, with revenues between 90M to 100M. He also was not holding out for the best price, but a combination of price, terms, and ability to deliver good service to existing customers.


That was the first thing that crossed my mind. I can't get the deal math to work in my head without staggering licensing fees, legal exposure, or debt obligations.


100M in revenue, how much in profit?


Wow, what a champ! Put that capital into a fund that will be redistributed to music education when he dies. No interest in material wealth... keeps his life simple, focused, and open.


No interest in material wealth? Charitable remainder trusts are a standard old money tax dodge. He gets a tax free income for life, and when he dies, the charity gets what's left. It also saves him 3.3 million dollars in federal capital gains taxes. It is shrewd but not particularly ascetic.


The income a person earns from their charitable remainder trust is absolutely not tax-free! It's taxed as regular income, for life.

The charity - the final beneficiary - is the one that gets an additional 3.3 million dollars in your example, since the money was put into the trust before capital gains tax - instead of the donor paying tax first, then giving to charity after.


I image that is easy to do when you are relatively rich. He has no doubt made "enough" money through owning the company over the past 10 years.

I agree it's admirable to give the capital away. But, not uncommon now-a-days with owners. I think one difference is many owners continue to grow their personal wealth until they die or turn to philanthropy (with a successful track record they can likely grow that money better than most trusts).


You know, that's the response a lot of people have when they hear of Bill Gates' or Warren Buffet's donations. But the truth is, they are unique. Billionaires don't all give their money away. In fact, very few.


I personally know a few people worth 5-50 million and they are giving most of their money away either right now or when they die. So at least on a personal level that is not true. Those that I know - are not in the tech industry and they are not living on the coasts. I think this changes the mindset a bit. They are normal successful people.

I think you'd be surprised how many executives and owners give their money away. I'm talking about executive management in fortune 1000 companies and small business owners. The ones that aren't in the limelight and don't have anything to prove. They choose their most meaningful causes and make a difference there. From my experience most of successful people I know are responsible and understanding of their success and wealth.

Now that doesn't mean there isn't a small minority that are a bunch of jags - but it does mean the silent majority is exactly that - silent.

[EDIT: Wording]


Wow I thought Galant stopped making this show. Its has been so long since the last episode but it is nice to have it back. This is a solid podcast and much can be learned from the people he has on and their stories of success and failure.


"I let the CFO choose the profit-sharing plan and blindly trusted her choice, until 6 months later my accountant showed me it was giving almost all net profits back to the employees, and had doubled most people's salaries."

How could a business owner be ignorant of policies for a full 6 months? Wasn't his signature required to implement the plan in the first place?


I have bought CDs from there a few times, it's a good outfit.


Anyone read that as How Derek Rivers sold Baby for $22M?


The title is misleading.


Did the CD Baby sale include Film Baby?


No. That's owned by my friend Jamie, not me. Sold him the name for $1.




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