IIRC PayPal was very similar - it was sold for $1.5B, but Max Levchin's share was only about $30M, and Elon Musk's was only about $100M. By comparison, many early Web 2.0 darlings (Del.icio.us, Blogger, Flickr) sold for only $20-40M, but their founders had only taken small seed rounds, and so the vast majority of the purchase price went to the founders. 75% of a $40M acquisition = 3% of a $1B acquisition.
Something for founders to think about when they're taking funding. If you look at the gigantic tech fortunes - Gates, Page/Brin, Omidyar, Bezos, Zuckerburg, Hewlett/Packard - they usually came from having a company that was already profitable or was already well down the hockey-stick user growth curve and had a clear path to monetization by the time they sought investment. Companies that fight tooth & nail for customers and need lots of outside capital to do it usually have much worse financial outcomes.
This. Founders are better served maximizing traction at the lowest outside investment possible. If it doesn't become big, then you still hold a large chunk of a small company. And if does, then you hold a fairly large chunk of a large company.
I don't know it seems to me that Silicon Valley is littered with folks who've made a shit ton of money by founding companies and taking chunks off the table during funding rounds. Kevin Rose/Digg come to mind. This way if you become huge you still get a payday but even if it doesn't you're still a millionaire (and maybe an angel investor in companies that do become huge, Kevin Rose/Digg comes to mind).
You typically need leverage to do this too. Zuckerburg was famous for popularizing the practice, but he could only do it because Facebook was taking off like a rocket ship and everybody wanted in. It's very rare that a startup without traction could successfully negotiate founder cash-outs.
This can happen for multiple reasons - but more often (IMO) is being driven by investors who know they need super outsized results, and at some point <insert giant tech co> will come shopping for the portfolio company.
So investors are willing to give founders significant liquidity so they are comfortable (or locked in to) "going all the way" (snapchat comes to mind [1]).
Remember, investors need billion dollar returns to return a fund. So giving founders a few million to pad their pockets, reduce their own risk, and extend their companies timeline is occasionally a simple decision.
I don't know all of the history, but I was under the impression that this was a relatively recent phenomenon. Does any one have any examples prior to Rose?
> I don't know all of the history, but I was under the impression that this was a relatively recent phenomenon.
It is. It used to be seen as a sign of lack of confidence in your company that you would take money out, because if you believed that your company was heading for the moon you would want every share possible. BTW, the same was true for earlier investors: Non participation was the kiss of death.
The game is to minimize investment, not starve the company of it. If it's clear it isn't on a hockey stick, then best to not stuff the pig, get diluted to almost nothing, and then sell for a low number. It's a judgement call.
Founders need to balance the amount of time it takes to acquire traction on the cheap, vs. via through the acceleration having a larger marketing and dev budget provides. Stagnation can kill and smaller founder equity is better than dead.
That's a false dichotomy encouraged by VCs. More money does not necessarily accelerate. It's making sure you're getting the max value for every dollar spent, something that's quickly forgotten when you raise millions of dollars.
Some of the more savvy and founder-friendly VCs actually say the opposite, eg. "Keep the team as small as possible until you reach product/market fit" (Andreesen) or "Perhaps more dangerously, once you take a lot of money it gets harder to change direction" (PG).
I think the overall point is not to never take outside investment, it's to carefully consider where you are in your product's lifecycle and what your market actually looks like before you take outside money. Refusing VC money if your market is huge means that someone else will take it and eat the whole market. Taking VC money when your market is small will kill your company just the same, because you won't be free to make the trade-offs necessary for a small company to succeed in a niche market.
Strictly in financial terms, yes you're right. There are, however, other benefits to bringing your company to IPO that don't involve your own company's investment...in other words - you get minted. IMHO, that opens up way more doors than just personal wealth.
Wal-Mart might be the most extreme example of this, though their IPO was many moons ago. I can't find a solid number for what percentage Walton owned at the time of IPO (in 1970), but his heirs, 44 years later, still own a combined ~50% of the company. Unless nobody has sold anything in the decades since, I would guess he must've owned in the 70+% range at the IPO.
edit to add: This is an interesting equation though,
> 75% of a $40M acquisition = 3% of a $1B acquisition.
In a strict sense yes, but they differ in some interesting ways. In favor of the $1B acquisition is that it's typically a much bigger deal: in terms of PR and what you're credited for, you get a lot more of it for being the founder of a $1B company than for founding a $40M company, even if your takeaway is the same in both cases. On the other hand, in the 75%-of-$40M case you are usually in a better position to control the disposition of the company, which may be important if you care about it & its product, and want to keep working on it (whereas in the 3%-of-$1B case, you generally will have to be satisfied with the cash, and wash your hands of the company). And the $40M case also probably has better odds of success.
I remember reading about the Walmart IPO in Sam Walton's autobiography (an excellent book!) but I don't think he gave specific numbers. I think he owned pretty close to all of the company, but was in a lot of debt. He wrote that he was very worried about what his wife was going to say when she found out after he signed the deal to do the IPO :). There may have been a few store managers that had a small interest in the company, though.
It also means Aaron Levie could be fired from Box anytime if Box's stock fails to perform. It adds a significant amount of pressure and sort of handicaps him from taking some risk. In my view this devalues the long term value of the company.
However, they could kill it at enterprise and introduce some game changing product or service,
Are you sure? There is a difference between different types of stock and I'd be surprised if he didn't hold a majority in some form of preferred stock.
Prior to the completion of this offering, we had two classes of common stock...identical except with respect to voting...
Upon the completion of this offering...All currently outstanding shares of our Existing Class A common stock, Existing Class B common stock and redeemable convertible preferred stock (including shares to be issued upon the exercise of the Net Exercise Warrant immediately prior to the completion of this offering) will convert into shares of our new Class B common stock.
After the offering there will only be one type of shares, not two as at Facebook.
To add to this, so what if it is "$200K" ? Basically that is enough to completely cover one kids education at a state school, put down 20% on a million dollar house, or seed fund your next "big thing" for easily 6 to 18 months. On top of that you've been working for a salary that probably paid all your existing living expenses so you were not accumulating debt. That is a pretty cool thing.
Further, if you continue to work there and it continues to appreciate (as it would if Box proves out their model) then you're looking at $200K * x where 'x' is the appreciation multiplier.
Even if your company does a reverse 5:1 split as a friend of mines did just before it IPOs that ISO option is now a 'something' rather than a 'nothing' which was what it was when it was illiquid.
Good point! Although, you didn't really talk about what the engineer gave UP to work at the company.
Depending on the time, $200,000 over 4 years is not a really good reward. In the mean time you have forgone:
- better healthcare (if you have a family this ups the cost a lot)
- lower stress job
- better bonuses at 'big companies'
- better options at public companies
Remember, that a great sr engineer, the kinds that startups allegedly hire, tend to be getting $30-80,000 a year in options at companies like Google, Apple, etc.
So now your $50k/year is looking like... well it's looking like a loss frankly.
It is a fair point that you have to consider the null hypothesis. My experience, and granted its really only about a dozen startups where I actually know the full details of the deal, are either a "huge" win over an established (already public) company or a "huge" loss (the go out with no additional value). And I happen to know that in this specific case folks that were senior engineers at Google and are now senior engineers at Box, and at least one of them is happy they didn't choose to stay at Google. But like anything, Box could IPO and fall through the floor like Zynga (I doubt it, but it could) or GroupOn. Or it could do a Facebook and fall for a while and then recover quite nicely. So the play isn't over yet as they say. In my own experience if Google hadn't repriced everyone's ISO shares I would have made very little money on them after they had vested and I exercised them.
The key though is that its really really hard to compute the expected value of a share, even with Black-Scholes, such that you know what the right answer is :-)
I will say that I have not yet met anyone driving their life based on expected value of their choices who is really happy. I find that strange sometimes because when it is a conscious choice you would think they would be happy to be doing what they want, but so far haven't found anyone.
"My credit is great and I have a strong cash position, but even so, getting a jumbo loan is seemingly 10x more difficult than it has historically been."
"Then, a whole two months into the process, they wanted me to go to my HR department and provide written compensation guarantees using language my HR department was not comfortable with (and neither was I, to be frank)."
"All this for someone who has perfect credit, a comfortable salary, plenty of equity in his property, and the ability to pay off the entire house tomorrow if necessary."
I made the down payment on my first house selling my ISO shares, and then when we sold that house and moved to a slightly larger house my wife and I both sold shares we had in ISOs to make a larger downpayment. Neither time did the bank consider it a 'gift' (nor did the IRS, they took their pound of flesh too)
During the dot.com boom there was an interesting series in the newspaper about people who took their IPO proceeds and immediately sold them and bought a house. The question was "Gee, look at all the future growth they are giving up by converting hot stocks into stodgy real estate."
Depends on if it's $200K while working at market rates, or $200K vested over 5 years while working at 50k under the highest market rate you could have had because, hey, you had equity.
Using an unrepeatable windfall as the down payment on a loan seems wildly inadvisable. The point of the down payment is that you're able make good on the loan.
No. The point of the down payment is to reduce the loan-to-value ratio which, in turn, reduces the risk taken by the bank (as the property value would have to fall by more than the amount of the down payment before the loan collateral is worth less than the loan).
This risk reduction is why the bank will give you a loan at y% rather than 1.5y%. This reduces your monthly payments to an amount you can afford each month from your salary.
This is exactly correct, loan to value differences change both your APR and whether or not you need private mortgage insurance (PMI). If your loan to value allows the bank to give you their best rate and waive PMI (which they do because they believe if you default they can sell your property at a profit) then you will save a tremendous amount of cash over the lifetime of the loan.
As I mentioned down thread, it's not that easy. Mike Davidson, who sold Newsvine to MSNBC and had enough liquid cash to (more than) cover his mortgage that day in its entirety still went through hoop after hoop even refinancing his loan.
I would be really really cautious about taking anything from Mike Davidson's blog, for one if you notice the dates it was during the worst Mortgage Meltdown in history (july 2008, and may 2009) and he was attempting to get a construction loan which is an entirely different sort of transaction than simply buying a house that already exists.
I was responding to a parent comment: "The point of the down payment is that you're able make good on the loan."
I don't agree with that statement, as I believe the primary purpose of the down payment is a source of risk reduction for the lender, whose only guaranteed recourse is the collateral on the loan. In the UK, home loan products each have max LTV (loan-to-value) thresholds, and prices are inversely related to those (though not linearly of course). Lenders don't care whether the LTV being less than 100% is the result of years of saving, a gift from parents, a windfall of some kind, or just because you happened to make money when you sold your previous property. They care mainly about the LTV (which affects their downside risk) and the ratio of your regular monthly income to the monthly payments (to make sure you can comfortably afford the repayments).
Do you disagree with my statement, or are you just pointing out that the down payment is only one of the factors which affects the risk of the loan, and that the risk of the loan is only factor which affects the lender's decision?
If it's a bona fide gift, the lender will consider it equivalent. If you claim that the deposit is a gift, they may request a letter from the person who gave you the gift to confirm there are no strings attached, i.e. that:
- it's non-returnable
- it's not interest-bearing
- no interest in the property will be retained by the person giving the gift
If they didn't do this, the gifting party could later claim that the gift was in fact a loan, and that it is secured on the property. This could cause complications for the lender, who is relying on a first charge on 100% of the property as security.
To my mind (and I don't know exactly how much) - even $1.5MM at a 3% return would nearly make your mortgage payments without touching the capital, so maybe that's why.
To add to this, so what if it is "$200K" ? Basically that is enough to completely cover one kids education at a state school, put down 20% on a million dollar house, or seed fund your next "big thing" for easily 6 to 18 months. On top of that you've been working for a salary that probably paid all your existing living expenses so you were not accumulating debt. That is a pretty cool thing.
So, here's how to read startup and employee equity. Compare it to Wall Street. Yes, Wall Street.
Forget whatever negative image you have of banks or hedge funds. Whatever negative thing you might say about those also applies to most VC-funded startups. (After all, most VCs are ex-finance guys, MBAs who didn't do well enough in school to get into stat arb.) 95% of startups have worse hours than IT or quant or S&T roles in banks. (Analyst programs are a different mess.) 95% of startups have no moral edge in terms of mission or management ethics. 95% of startups fire more quickly and with less severance (sometimes zero, plus a ruined reputation because shit happens when arrogant kids fall into power) than any bank. 95% of startups aren't giving more interesting work to non-founder engineers than large companies (being CTO or first engineer might be cool, but a typical engineering role is inferior) do. 95% of startups don't have the prestige for their more liberal titles/promotions to actually carry durable weight.
So, there's literally no good reason to choose the startup ecosystem, unless you have a rare informational advantage, over Wall Street. Are there excellent startups out there? Yes, there are. I would argue that very few people have the skills necessary to tell the good few apart from the worthless many.
In the successes, the typical employee equity payout, vested over 4 years, is the kind of bonus banks give when they're looking to fire someone nicely (i.e. the "we'll disappoint him out" bonus).
Also, acquisitions are generally terrible for regular employees in terms of position, rank, etc. So you should literally think of liquidation as a severance, because the odds are high that the acquirer already has someone doing your job and he has the political edge. And $200k after taxes is really rare for an employee startup payout. That might be 98th percentile. I've seen lots of zeros in acquisitions considered "successful" by Techcrunch.
It really is a fucking scam, but it's not just a problem with startups. Software people are terrible at looking out for their own interests. Engineers either need to become savvy and self-interested like hedge fund quants and get what they're worth, or bring back the out-of-fashion but powerful concept of collective bargaining.
It is clear from the tone that you've got some emotional investment here, and I respect that, and with all due respect the facts stand in argument to your thesis.
Consider for that there are more millionaires and billionaires in the California than there are in New York ([1] [2]). The housing market that is the Bay Area exists not in a small number of neighborhoods, but from South San Jose to Novato in Marin. One has to appreciate the wealth building effect of the industry if it can raise the median price of a single family home over a thousand square miles by $500,000.
Yes, some acquisitions suck, and yes, even some IPOs suck, but no other industry puts as company value into the hands of the rank and file employees as startups do.
Do not look at the price of housing as an indicator of being wealthy! It's often an indicator of regulatory failure & NIMBYism more than anything. Otherwise my home area of Vancouver would be land of the wealthy, while it's actually became the 2nd most unaffordable city in the world. Unaffordable being housing price : annual income ratios. The bay area has started to attract mainland chinese cash too. Friends have been outbid by mainland chinese buyers with cash trying to buy a house in palo alto.
You don't even have the luxury of going over a bridge and housing prices dropping significantly. In Vancouver, the average house is $1.2mm - $800k+ and going 1 hour away from the city core just drops you $100k-$200k.
I wasn't going by the house prices specifically as an indicator, I was really trying to point out that Census data says that there are more millionaires per capita. In California. I used to be able to find it by county but the 9 bay area counties are well represented. All those millionaires are not "just the founders and a few MBAs"
Thank you for writing that. I'm at a conference and don't have time to correct all the wrongness on the Internet. High house prices are a combination of regulatory corruption ( NIMBY) and extreme price inelasticity.
Disasters that destroy housing actually increase the notional value of housing after the (very short) period of panic wears out, because the price spike more than cancels out the loss of supply. But wealth was destroyed, not created.
I think you're assuming that the employees were making large professional and financial sacrifices to work at Box. Considering the size of the company and the amount of funding, they most likely weren't. A random $200k payoff on top of a market competitive salary and benefits package is nothing to sneeze at. A job is not a scam just because it doesn't make you a multimillionaire over night.
Don't y'all know? If an individual receives a certain payout, we can reason backwards about the amount of risk they must have shouldered based on the amount!
(My apologies, nilkn, this isn't aimed at you. I object to the near-religious startup belief that risk = reward. Real life is so much less supervised than that. :) )
How much is that $200k after Federal income (and SS and Medicare/caid and various new obamacare taxes) and state taxes (likely California), and any other local taxes?
You can arrive at that perspective very easily by buying $400,000 of lottery tickets -- which is essentially what a lot of early startup employees do, by working for lower-than-market rates.
If you took a salary cut for the last couple of years to work there then $200k doesn't seem like a lot. That's probably a top engineers sign on bonus at Google.
are you serious? How much do you make? Remember we are talking $200k pretax. So maybe $120k after taxes. That's less than half a down payment on a shit house in this area. That's maybe one year of market value cash compensation for an engineer with 5 years experience.
I'm not saying it's nothing, but remember that we are talking about this being one of the rare startup equity "success stories" that you hear about so often in the media.
Of course, I'd take a $200k windfall and be happy for a few days, but it's hardly a life-changing amount of money. I save that much money every 18 months (remember pretax). I wouldn't consider myself wealthy unless I had 50x that amount in the bank
"So maybe $120k after taxes. That's less than half a down payment on a shit house in this area."
As of 2013, the average downpayment on a house is 16%, with a benchmark of 20%. So we'll go with the lesser, as "less than".
So I can probably presume you're likely living in the Valley or NYC if your viewpoint is that $750K will buy you a "shitty house".
Based on assumptions, admittedly, say you own a $1M house (as scoffing at a $750K house as 'shit'...), with a healthy downpayment of $200K (see above) leaves you paying about $5,000/month on an $800K 30 year mortgage.
So, we add that to your savings of $6,600 a month, and we look at a calculator of front end ratios and we arrive at you making about $250K+ a year. Of course, most people at that level of income are not living like paupers in their million dollar houses, savagely squirreling money away (as $250K minus $11.6K/month for mortgage and savings only leaves $2,300/month for car(s), bills, entertainment, etc), so it's probably a reasonably safe assumption that it's at least $300K.
It's interesting your perspective that you wouldn't consider yourself 'wealthy' unless you had (either) $6M in savings, or a (household?) income of $10M+ / year, when in reality, "You are the 2%".
I don't make 250k, but I am pretty frugal overall. I'm not a foodie, so I'd rather spend that money elsewhere. I cleared just under $200k with bonus last year
You would also need to know the # of options outstanding. You can't really calculate the value of options without knowing the complete cap table, and details of different share classes (particular liquidation preferences).
I don't know whether it's common for small companies to share all of this information outside the senior team or potential hires for that team.
Based on the S-1, Box is growing at 100% YoY and has retention / upsell of 134%. These are world class numbers. If they can keep that momentum, that $200k could grow substantially over the years to come. It could be much better than holding Google stock or getting a Google sign-on bonus. Not sure why everyone is so focused on the IPO value; the IPO is just a fundraising milestone, not an end point to exit.
I've worked at a couple startups as well as a couple big companies. My salary + bonus has always been much, much higher at large companies than the startups. I also worked much less, so my effective per hour pay was double or more. Perhaps I got the short end of the stick, but I've never seen a dime from my stock options at these companies. One of which was aquired for a decent amount more than the valuation of the company at the time my shares were issued. I suppose the preferrreds took it all. It wouldn't have been that much anyway. Maybe 50 or 100k.
In the best realistic case, you are looking at 3-5 years of engineering pay as a one time exit after years of putting in extra hours and probably being underpaid. That's been my experience at least as well as everyone I personally know who has worked in the Bay Area the past decade.
Certainly a lot of start-ups take advantage of engineers, I was more making the case that Box isn't really a start-up so I wouldn't expect them to have a big upside on IPO.
There are some specific reasons to join a start-up, and hitting the unicorn lottery shouldn't be one of them. Also, you should be taking a market salary and working sane hours, which seems to be more the case in the last 2-3 years, though YMMV.
This sets alarm bells off for me, of the kind saying the large investors are looking to claw as much back as possible via IPO because the core business isn't as viable as they thought. Demonstrating profitable quarters in the run up to IPO is highly valuable, so if they aren't doing that . . . yuck.
DropBox, for better or worse, appear to have cleaned up on the consumer front, and you'd have to be blind to not notice the trend these days is consumer tech getting into enterprise IT, and not vice versa. GDrive isn't too hot, yet, but I'm sure they'll eventually get there. Then MS probably have the biggest motivation to chase the enterprise market.
Sorry Box, I just don't see this working out at all. Something smells bad.
i have started to see it used in the construction industry, when the general contractor already has some infrastructure typically on a windows domain. that is where they are going to push for further and further integration for business and project mgmt
Random question: When a company finally IPOs, how much equity are the top guys expected to hold onto?
I know it's common for founders to be allowed to cash out some of their equity during financing rounds, usually enough to make them comfortable (a few million).
The reason I ask is if you're Aaron Levie and Box IPOs, are you expected to not sell much of your remaining stake unless you leave the company? It just reminds me a little of the investment banks where partners understood that it was frowned upon if they sold their equity. Many of them lost everything when the banks collapsed (some would say rightfully so).
I view this as being smart. Box is under heavy competition not just from Dropbox, but from Google and Microsoft. 4% of $250 million is better than 50% of $0. The landscape is littered with founders who drank the koolaid and thought they were going to billions and ran their companies into the ground. Maybe Levie won't own 50% of Box, but maybe he will own 4% of a viable company with a real business going forward. And if all else fails, he'll walk away with $10 million.
That's a "problem" I'm sure many of us would like to have.
They'd be raising $250mm in the IPO. That wouldn't be the valuation of the company. Presumably, it'd be >$2B which was the value of their last private round.
Your point stands in that 4% of that isn't too bad either.
I agree with the article that since startups are pass/fail, the founders must due whatever they have to do to succeed. Marc Andreesen says to even take that highly diluted fourth round to get to product/market fit and increase your chances of success. http://www.stanford.edu/class/ee204/ProductMarketFit.html
What he says is you should get to product/market fit. If you don't get there then whatever business plan you have will fail and so will you. When Aaron dilutes himself massively he does so to buy time to get to product/market fit. Only by dong so can he later turn on the growth engine and know that users will stay and love the product. A top VC knows that he can never trick a founder into making him a large exit. The founder just needs the "right" plan, not "his" plan.
Again startups are pass/fail. So what can he benefit if they fire you and bring some professional CEO who tanks the company? The truly big outcomes come from the founder who stays and does well (Apple, Google, Facebook, etc) That is why they stared Andreesen Horowitz http://www.bhorowitz.com/why_we_prefer_founding_ceos
"I didn't miss a thing. When a company raises hundreds of millions of dollars I would have been diluted to nothing. But the bigger issue is that I'm not a fan of situations where you have to raise hundreds of millions of dollars to do tens of millions in sales. It's a lesson learned from the tech bubble
It was one thing when the valuation as a multiple of sales was in stock. It's a bigger thing when that multiple is my cash."
advice pulled out of from where the sun does not shine... really, give talks at open source conferences, that would raise value how much? or library for brainfuck?
Having dev evangelists presenting cool shit gets people aware of your platform and it's free marketing, the best kind.
Further, Java, Python, Ruby, Obj-C, Android and C# isn't complete. [0] JS for browser front-end and node back-end is clearly missing or third-party. A somewhat smaller shop, Segment.io, has all of those and PHP and Clojure. And a metric ton of integrations comparatively. [1] [2]
Something for founders to think about when they're taking funding. If you look at the gigantic tech fortunes - Gates, Page/Brin, Omidyar, Bezos, Zuckerburg, Hewlett/Packard - they usually came from having a company that was already profitable or was already well down the hockey-stick user growth curve and had a clear path to monetization by the time they sought investment. Companies that fight tooth & nail for customers and need lots of outside capital to do it usually have much worse financial outcomes.