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.
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.