What an astounding lack of mathematical understanding.
First, if you raise $36M, getting acquired for $100M could very well mean next to nothing for common stock holders.
The odds of a venture-backed startup failing may be 75%, but the odds of a company that's looking at a $100M offer failing are probably more like 10% for real "failure", a high likelihood of not quite being able to match that offer later, and a good chance of a higher exit at some point in the future.
"99.99% of entrepreneurs" include all those companies that never get the first customer, and never get a buyout offer. I can think of a handful of companies that have been successful after turning down an offer. So now I challenge the author of this piece to come up with the tens of thousands of companies he implies got a buyout offer, turned it down and regretted it.
You seem to have substituted your own guesstimates over examples in the article.
You claim that "the odds of a company that's looking at a $100M offer failing are probably more like 10% for real "failure"" yet the article cites four examples, of which two out of four (50%) peaked at $100M and are now in rough shape. The fates of the other two are still indeterminate.
Admittedly, this is anecdotal, and possibly cherry picked, but at least it's a modicum of evidence. Can you provide alternative data to back up your claim?
The terms could be literally anything. The grandparent was assuming that the VCs have 3x participating preferred. I won't say that's unlikely, since I've never seen a Series B or C term sheet, but those are gone from decent Seed Term sheets and I believe good Series A term sheets.
So you have to ask, how could a sale happen for $100M with a $36M investment. There are two options: the VCs agreed, or they didn't need the VC's permission. In the latter case, the common would almost certainly do well. But there are situations where the former could happen too: if the company was worth much less and they just felt now was the time to sell.
Once you reach a certain point money simply doesn't matter. They mentioned Groupon: Andrew Mason knew that whatever happened he was never going to have to worry about money again. When you have that luxury, you go with your heart, and it usually isn't with the money. Even after he was fired he made out like a bandit.
The same thing goes for a lot of these founders. When you get a substantial buyout offer, you've done something very few people have. Even if you blow it, odds are someone else will fund your next startup. Either way you probably won't have to worry about money. Once a startup is funded, the founder isn't rich but the company usually pays the bills so he can focus squarely on work.
I don't think we should reject the allure of money, it goes against human nature. But the ultimate motivation is freedom. That's what money gives you; freedom to do what you love. If what you love is building a startup the money becomes insignificant, but having enough to let you pursue your passion comfortably is very important.
This is why joining a startup as an early employee may not be a good idea. The founders' goals and your goals may be divergent.
At some point, the founders are already rich, or are guaranteed to be rich, and are looking for self-actualization or ego. To achieve that, they'll gamble your guaranteed payout by not selling--either because they want to remain "in charge" or they want to shoot for the moon.
>>>>>>When you have that luxury, you go with your heart, and it usually isn't with the money.
This is so true. The best start-ups I've worked at where the ones where the founders had real skin in the game and were working as hard as the developers to get the company off the ground.
The two start-ups I worked that were miserable failures were the ones where rich founders had a lot of private equity and just burned through the money in short order. The most incredible was a CEO I had decided to buy season tickets to each of the professional teams in town (5 teams), and spent hundreds of thousands to remodel our existing office. The office part was surprising considering it used to house a large tech company who had about 80 employees. At our peak, our company had around 20 employees and had plenty of space.
Money is just money. It can be squandered, mal-invested, taxed, or simply inflated away. However, the guts that all of those founders showed will forever be a reference point for their careers. Many can claim they would turn down 100M, but few have actually done it.
It's so much easier to start a new venture once you have had a successful exit. Investors throw money at you. My advice to founders would be to think of the impact that a successful exit can have on your entrepreneurial career. Think of paypal.
While I agree with you... I think Paypal is about as unique as it gets. See Paypal Mafia [1].
That company consolidated amazing talent (both technical & entrepreneurial) during the bubble, went IPO, which made many of many of those soon-to-be entrepreneurs wealthy. With cash in their back pockets, the started, fronted, and funded an incredible list of companies.
Ultimately, they utilized wealth, past success, and an incredible network to keep leveraging to build more of each.
That's the fall back. And it's not as bad is you'd think for those whose companies ultimately failed. The goal is to make the company into something significant.
I'm glad this is the first comment. We should be giving those who reject such offers MASSIVE KUDOS for having the gumption to turn down mere money for their dreams. Do you want to get rich or actually change this world? I hope we still remember why we tell each other tech is world changing - not just "life changing"
'Change the World'? They were holding out on the 100 million offers mostly because they thought they could become billion dollar companies, if the article is to be believed.
I think it goes both ways. Some founders actually believe in their companies and their vision, whereas others are just holding out for a bigger payday. While it is nice to hear stories about founders cashing out, we should also celebrate those who are actually trying to make a long lasting impact, regardless of whether they succeed or fail.
Sure, but then again we're too friendly to mercenaries in this industry. I don't hire those types because I'm very mission focused and work on real problems - not sheep throwing.
You get one life to make a difference.
You want to make shit tons of money and live conspicuously? Move to NY and work for a bank.
You want to travel the world? Nomadic freelancing is a far surer path than trying to play the Startup Lottery.
I disagree. There is no one specification for why a business exists. That's up to the creator/s.
I have customers so I can build. I do not build so I can have customers.
The enjoyment of creation is my motivation, making money comes after that for me. I'll choose poverty over not enjoying what I do but being better off financially (indeed, I've made that choice countless times).
Your approach reverses all of that. Which is fine, but it's not how everybody chooses to live.
HT to you adventured! Don't let the Startup-Industrial Complex tell you what you want to work on and in what way. If you can get to sustainability and live how you wish - do that for your agency and sanity.
There's too much conformity around a group of people who all claim to be mavericks...
Mark Zuckerberg was offered $1 billion dollars from Yahoo. After offered the money Mark and Peter Thiel (investor) had a talk about the offer. Marks comment was "obviously we're not going to sell here." Peter didn't feel the same way. Today Peter is very grateful Mark didn't sell. Mark had a vision for FB that Yahoo didn't, and he knew that if he sold he would never see his vision come true.
I actually think it's the other way around. When you're 22 it doesn't take a lot of money to feel like "man, I already have all the money I could ever need." You're living cheap, you're probably single, you're probably healthy, you're probably not thinking too hard about retirement. So money's not as big a pressure point in your life as it is when you're (say) 42, with a house payment and two kids you want to send to college someday and an underperforming 401(k). When you've got those worries, I have to think it would be harder to turn away $100mm in hopes of making a billion later on.
If you're driven and have a clear vision, it seems less unlikely. If you're just building things for the sake of building things because you like to build things, that's a little bit different.
Meh. On $100 million the common employees aren't going to see much anyway. Maybe for #1 and #2 it'll be a big deal, but for #10 with his 0.002 of the company, that's going to be a nice bonus and not much else. So I can understand the founders deciding to shoot for the moon.
That's still $200,000 if I did my math right. That's a little bit more than "a nice bonus" but definitely not "FU Money". But it might just be enough cushion for somebody to quit and self-fund their own startup for a year or so. That's not a bad thing to have, if you're interested in that sort of thing.
200k over four years, less taxes, which will be maxed because you'll realize all of the earnings as income in one year. So around 30k a year take-home. Maybe slightly more than the standard 10-15% salary bonus of an intermediate engineer at BigCo, but it's not why the guy is working at the startup, or at least I hope it isn't for his sake.
Sure, I definitely agree that - in general - "employee number 10" and later aren't going to get rich from their startups. And hopefully they aren't expecting to. Better, yet, hopefully the company goes public are more like a billion dollar valuation, so that they do get rich even if they only own 0.002 worth. :-)
Agreed. $200k for in many of these cases, a limited time at the company. Most/ all had raised some VC money, so were likely paying competitive salaries.
So, you're one of the last engineers @ foursquare (for ex.), Dens does sell to Facebook, you maybe get a slight raise/ comparable pay, more job security, and your handcuffs are the same as your vesting schedule was anyway. Oh, and you have $200k in the bank. So when you decide to leave FB and start your own thing (or buy a house/ take a year to travel) there is that.
It's a false dichotomy. If someone's willing to pay $X for your company, you can do a secondary sale at ~.75*$X pre-money valuation to give key employees some liquidity. No, it's not the same, but it's still real money, and certainly alleviates the $100M->zero risk.
And if it's a real business whose value is based on, say, an EBITDA multiple, there's even less reason to sell, unless you think earnings are going to tank. (Presumably you will have significant visibility into the factors that determine your revenue and EBITDA growth, and what might cause those to change.)
But if you made a little photo-sharing app that earns no money, and someone wants to buy it for a truckload of money, sell. :)
In Dodgeball/Foursquare's case, how do deals like this work? I assume when you sell a company you also sign a non-compete agreement.
For example, Instagram couldn't have just sold to facebook for $1B then turn around and make the same thing again. Obviously they no longer have rights to the code, but re-creating it wouldn't be that hard if you already did it once. It could be like forking an open source project, except you make a bunch of money.
Is that that in the Dodgeball/Foursquare example, the non-compete was apparently incredibly specific, and this allowed them to make a different location-aware social network?
Those agreements usually are for a certain number of years, not forever. According to http://en.wikipedia.org/wiki/Foursquare, Dodgeball was acquired in 2005 and Foursquare was started in 2009, the same year Google shut down Dodgeball.
Digg accepted a $200 million offer from Google. But during due diligence Google chew Digg up and spit them out on the floor. Digg became tainted goods after that.
While raising $100M sounds awesome, its really hard to increase the value of your company. This means unless you raise an even bigger round next time, you are risk de-valuing your company in the future by raising so much money right now (called a downround in VCs).
Raising so much money also runs the risk of ownership dilution and if you have a downround in the future, your ownership will probably get diluted even more to maintain the % ownership of previous investors.
What a negative article. I disagree that any founder is "stupid" for not jumping on their first chance at life-changing money. By BusinessInsider logic, Facebook should have been bought out by Friendster or Microsoft. Dropbox should have been acquired by Apple. There are other examples. This approach just encourages a "get rich quick" mentality, which is probably not the best way to create unique and impactful products.
The point is that turning down an acquisition is a gamble (past performance is no guarantee of future results). That's not "positive" or "negative". People remember the success stories but oftentimes don't think of the failures ("survivorship bias")
I found it well balanced. They included several examples of people like Zuckerberg who turned down large amounts of money and were later proven correct.
The chance that you are 'Facebook' good is slim, even if you have a $100M offer. If you're ever in the position of deciding to accept/decline a $100M offer on your company, then you probably want to be realistic about your options, even if you decide to go with your heart.
I think you cant have an ideology going into your venture whether it be "holdout for the biggest offer" or "shoot for the moon". You should take things as the come and do what you think is right. I also think there is a price that everyone will sell at and thats not a bad thing. Money is very important and they people who downplay its importance often have alot of it
Yahoo! turned down an offer of 60M from AOL in early days of internet boom.
Facebook turned down Yahoo!'s 1B offer.
Google turned down Yahoo!'s 3B offer.
When IBM was melting down at the beginning of the 1990s, they used Thomas Watson Jr. to reach out to Bill Gates and offer to buy Microsoft and make Bill President / CEO of IBM.
At the time Microsoft's market cap was around $10 billion (with IBM around $30 billion).
Gates would have lost out on upwards of a hundred billion dollars plausibly.
First, if you raise $36M, getting acquired for $100M could very well mean next to nothing for common stock holders.
The odds of a venture-backed startup failing may be 75%, but the odds of a company that's looking at a $100M offer failing are probably more like 10% for real "failure", a high likelihood of not quite being able to match that offer later, and a good chance of a higher exit at some point in the future.
"99.99% of entrepreneurs" include all those companies that never get the first customer, and never get a buyout offer. I can think of a handful of companies that have been successful after turning down an offer. So now I challenge the author of this piece to come up with the tens of thousands of companies he implies got a buyout offer, turned it down and regretted it.