Isn't that some amazing nerve? The Rick is offering the founder shares in his own company as compensation for not taking a salary!
The inherent assumption behind this asinine perspective is that "Preferred" shares are for VCs only... but the reality is that VCs offer nothing to warrant such preferences. Everyone who has put sweat equity into the company is just as much an investor, and is generally taking on more risk... but the VC expects to be given preferences because such terms are common, and they are common because too many startups cave because they are addicted to the cash.
Love that the liquidation preference is "only" 1X. The reality is that it is screwing over all the other investors in the company by saying that the VC goes to the front of the line, gets all their money back, and then gets the percentage of anything left over comensurate with their percentage ownership of the company. The implication being that employees have not actually invested in the company and if there's anything left over, then the employees and founders get some.
This is particularly insulting given that the liklihood of this preference being relevant is increased by taking VC money-- which in this day and age means forgoing almost certain profitability for a higher risk shot at hitting it out of the ballpark.
And the price for putting a bomb under your company and lighting the fuse? They get to be first in line when it explodes and the company is liquidated for much less than it would have gotten if it was a viable business.
An employee that puts in $100k worth of labor a year for five years and gets $50k in salary has invested $250k just as much as an investor who puts in $250k in cash.
The arrogance of preferences boggles the mind.
Nobody in YC should be looking for this kind of investment. Stick with angels. Give everyone common- recognize that investors who are only putting in money are fairly compensated by getting shares at a fair valuation. If they want liduidation preferences, they should pay for it- and thus be investing at a multiple of the valuation that common gets.
VC funding was made obsolete in 2000. You no longer need to have that kind of a burn rate.
One part that surprised me:
"You have not taken a salary in two years. Typically, founders doing that have kept records and get paid in shares."
I sorta figured working for free (or close to) for a while was just part of the deal if you want to keep burn rate down (or simply don't have cash). Interesting to note that you can get paid for it later. How common is this?
I've seen this before in business plans and such... the being paid in preferred shares part is new to me; I've seen it as deferred compensation accumulating as a liability for the company to be paid in cash at some later date. I suppose being paid in preferred shares makes sense if you are expecting acquisition or a later VC rounds, whereas deferred cash comp. makes sense in a cash-only organic growth situation, and gets factored into your break-even calcs.
I haven't done any VC deals myself, but I hadn't heard of this before either. I suspect the offer of preferred stock was a sweetener that the investor made for this particular founder -- a show of good faith.
The inherent assumption behind this asinine perspective is that "Preferred" shares are for VCs only... but the reality is that VCs offer nothing to warrant such preferences. Everyone who has put sweat equity into the company is just as much an investor, and is generally taking on more risk... but the VC expects to be given preferences because such terms are common, and they are common because too many startups cave because they are addicted to the cash.
Love that the liquidation preference is "only" 1X. The reality is that it is screwing over all the other investors in the company by saying that the VC goes to the front of the line, gets all their money back, and then gets the percentage of anything left over comensurate with their percentage ownership of the company. The implication being that employees have not actually invested in the company and if there's anything left over, then the employees and founders get some.
This is particularly insulting given that the liklihood of this preference being relevant is increased by taking VC money-- which in this day and age means forgoing almost certain profitability for a higher risk shot at hitting it out of the ballpark.
And the price for putting a bomb under your company and lighting the fuse? They get to be first in line when it explodes and the company is liquidated for much less than it would have gotten if it was a viable business.
An employee that puts in $100k worth of labor a year for five years and gets $50k in salary has invested $250k just as much as an investor who puts in $250k in cash.
The arrogance of preferences boggles the mind.
Nobody in YC should be looking for this kind of investment. Stick with angels. Give everyone common- recognize that investors who are only putting in money are fairly compensated by getting shares at a fair valuation. If they want liduidation preferences, they should pay for it- and thus be investing at a multiple of the valuation that common gets.
VC funding was made obsolete in 2000. You no longer need to have that kind of a burn rate.