I sold Baremetrics(baremetrics.com) |
I sold Baremetrics(baremetrics.com) |
That is incredible and, as the author says, classy. If I ever find myself actually doing the investment rounds for anything I create or help create, I hope that people like General Catalyst take an interest.
This is an excellent insight
For those curious, more here: https://www.brownadvisory.com/us/qsbs-tax-exemption-valuable...
I've worked with a mobile analytics company in the past and it was pretty much the same story. Only, they weren't as transparent and couldn't walk away with a profitable exit.
So this really looks like the best way he could exit without burning himself out.
Do anybody know how much Xenon Partners (te same buyer) paid recently for UXPin.com? I think that UXPin is 5-10x times bigger, but saw that their CEO after selling the company instantly joined Google as a senior manager.
UXPin had a few investors and 3-4 cofounders. So probably different outcome?
I respect the soul searching that you went through and the decision that you took.
Thanks again. Wish you the very best in whatever you _start_ next.
I have never seen this before. Guaranteed outcome regardless of DD. Is this an outlier company?
4M is a lot, but an amount I can wrap my head around.
What about gross profit (or more precisely, EBIDTA)?
> I wanted them to at least get their money back, but ultimately, for the $4m purchase price to work, we’d need to ask them to walk on their [$800,000] investment.
He clearly didn't want it very badly, then. Nearly $3 million wasn't enough? That's about $420k per year for the time he put in, not counting anything he already took out. Keeping the extra money only increases that to about $530k/yr.
And it sounds like the early employees get nothing, other than not getting fired immediately.
I like the Baremetrics product but man this really leaves a bad taste in my mouth about Josh personally.
If you wanted to say how it seemed to you and raise the questions you felt were unanswered, that's of course fine. But jumping to psychological interpretation and personal denunciation based on a handful of beans in a blog post is not the kind of magic beanstalk we want here.
I mean, in this example Baremetrics actually had a pretty good outcome, better than most, and the employee's basically got very, very little for their overall equity. Even the founder probably got less than a mid/senior level FAANG employee would get (and the FAANG employee had no risk).
Of course, not everyone can get an offer at a FAANG, but again, if you could get an offer, startups basically never make sense anymore. You almost always will get more even if the startup hits, which is rare.
Note that this is true for many reasons, not all of which are related to technical ability. Not everyone should try to get a FAANG job, either.
Factors candidates may consider:
* how much time they want to spend interviewing/prepping
* what their previous experience has been
* where they went to school
* where they are willing to live
* what type of work they like to do
* what type of organizations they enjoy being part of (largeco, smallco)
* how much control they want over their work
* what kind of impact they want to have
* how much they want to learn (and what type of knowledge--general vs specific)
In addition to salary, all of these play a role in determining whether a startup, small biz, other software company or FAANG make sense for an individual.
And most importantly, the company can afford to pay well. Not quite FAANG level, but plenty for you to reasonably plan to retire (in a FIRE way) at 50 instead of 65.
And heck if it does hit, you’re early enough for a nice cushy bonus.
edit: yes the difference in comp is easily 100k+, but making 180k+ cash to not be a small cog in a gigantic machine, to me, doesn’t sound that bad
If the company sold for $10 million, I would have ended up with about one years worth of the lower end salary...which was about 1/2 of what I could make from an average offer in rural parts of the US.
Ten years later, the company finally sold.
And you're kinda simultaneously arguing it's a good outcome and a bad one, in both cases the reason is the founder owned most of it. The net is that it's a mediocre outcome, just that in this case one guy did ok. If you can get nine other people to contribute towards building up your side project to sell for an average market price of the technology and business, you can get more, sure. But it's not "successful startup" more.
Not really... he's been working on the startup for 7 years. Let's assume he had an average salary of 150K during those years. Plus he got $3.7M on the acquisition (it's not clear from his post if that's what he takes home or if it's pre-tax). That's 4.75M.
Now let's assume a senior engineer in FAANG with a an average salary of $350K for 7 years. That's 2.45M. That's a very rough comparison and not taking into account taxes (the FAANG engineer is likely to pay more money in taxes overall).
But the bigger difference is how he spent those 7 years. He spent it building and managing his own company with all the freedom in the world. Compare that to a senior engineer in FAANG...
Update: someone in the comments mentioned he'll likely not need to pay any federal tax on the acquisition money. That makes a huge difference and the take home gap is much larger than my initial estimate.
I don't even like VCs and I feel like what was pulled here was pretty galling. How does someone rationalize calling up an early investor and telling them to eat their investment because...more money for me?
Of course plenty of people prefer to work at startups because the environment is more fun and you have direct influence on what ships and often direct contact with customers.
Remember when Google suddenly gave an across-the-board 10% raise to every employee to try to stave off defections to startups? Sure, there are certain jobs that are fun (depending on your interests) and of course it's easy to find "phone it in" positions at FB and Google, but most of my friends avoid FAANG or are glad they left.
Once your comp hits $X there's more to life than money.
Why do you deem it immoral for a founder to do what is best for himself within the bounds of the agreements he has made?
This kind of calling-out is common in HN and quite distasteful. Comments like this all amount to saying "X is immoral because they refused to give a charitable donation to Y". Charity is not a moral requirement and arguably it's not even a moral good.
On what planet are "business decisions" not bound to moral judgements? That's one of the craziest things I've ever heard.
Frankly there's nothing distateful about recognising that in a hierarchical system such as a corporation those higher up the tree have a duty of responsibility to protect the interests of those below them.
Quite how modern capitalists have managed to convince people that this shouldn't be the case I'm not quite sure, but the results are hostile to a functioning society.
Why early employees should get anything from an acquisition ? If they don't have stocks, they shouldn't, that's how it works, a company belongs to its shareholders, not its employees.
VC startups don’t generally pay dividends due to the cost of capital requiring reinvestment of profits (if any) to make the growth targets work.
Yes, a founder gets compensated significantly more than early employees. Massive shocker. If those early employees were talented enough, they’d be founders getting compensated.
I don’t know when this dramatic shift happened to Americans to believe building a successful company is mostly luck, but it’s depressing.
Shame on you, HN.
To say that’s a naive and inaccurate view of the world would be an understatement.
Because it's true? Studies (Gompers, et. al. (2009)) indicate that a second time entrepreneur has a 30% chance of success versus a 20% for a first time one. So there's some skill in it but it mostly comes down to luck.
edit: And if you're arguing skill then clearly the skill of the early employees matter tremendously and not just the skill of the founder. So why do you think it's wrong for those employees to get more stake?
Have curious conversation; don't cross-examine.
We detached this subthread from https://news.ycombinator.com/item?id=25045906.
A VC leaving money on the table out of the goodness of their hearts just seems inexplicable.
If it don't make dollars it don't make sense.
This is the flipside of all of the VC deals that completely fuck over the founders.
There is what is for them a teeny tiny pie, and rather than demanding their small slice back they said "you know what? Go ahead without us. Bon Appetit :)"
So, did something go wrong here? What is it about this analytics business that makes it so expensive to operate? Were all the employees necessary? Was the pricing or marketing wrong? Or is this just the reality of most SaaS?
I gotta say, this really puts a damper on what I always thought was a fairly lucrative business model, if you could make it past the early bootstrap/product-market-fit period.
The median and modal ARR for SaaS businesses 7 years after founding is zero.
>practically speaking, never need to work again
Yikes, does someone want to tell him?
Assuming he keeps ~$3M after taxes and can earn a conservative return of 4%/yr in investments, that's $120k/yr just from his investments. Many Americans live on far less. Also, he lives in Alabama, where cost of living is quite low.
So yes, he can retire for life.
Someone should tell you that $85k/yr NET is top earnings in some parts of the country.
Average household income in my state is $50k/yr.
I'm in the UK, if I could earn a guaranteed £40k a year without working I'd be set for life and would have a pretty great life! That's would give me close to twice the national average salary.
£80k a year would put you into the tiny percent of top earners.
For reference, in California it is ~10%.
I'm not saying running a company is not stressful. Of course it is. Even is it's yours and no one can fire you. But it's very different when you're the one who is making the decisions and not depending on other people and politics.
As for $3.7 vs $2.9...that was basically the number that, to oversimplify, would roughly give the outcome I wanted for "retirement" when it comes to investment interest over the next 50 years.
Basically, it's the number I felt comfortable with to not instantly feel like I needed to get back to work in a few years.
So you're being asked to give up $100-200k/year worth of salary by joining a startup which isn't trivial. For a tiny fraction of equity with multiple restrictions (10 year expiration, 90 day window to exercise on leaving, can't sell it, etc.).
> I don’t have any specific plans for what I’ll be doing next, other than not doing any kind of software for a while. I’m itching to create more tangible things, especially art and music, so I’ll likely put a lot of effort in to exploring those things more.
Nothing in there says the art/music can't make any money, nor does he rule out software again in the future. As he notes, "I absolutely love starting things..."
Retirement frequently means something different for a 30-something CEO who just exited ("I don't have to work") versus a 70-something year old ("I'm done working").
That clearly shows a vast improvement in skill. A luck doesn't improve over time. If it was "mostly" luck they would get roughly the same outcomes the second time.
And to your last point, who is saying it’s wrong for employees to get more stake? Of course it’s not wrong, but as an employee you have to negotiate that. People can’t just magically get what they feel they deserve because it would add up to way over 100%. Remember, the company exists because of the founder, doesn’t matter how much you think you contribute, because at the end of the day the company does not exist without them. If you can convince them to give you more then you should, and if you can’t you are free to start your own company. I do not see what is so unfair about this situation and I say that as instrumental #1 employee who got less than 1% for a 9-year effort building a moderately successful company. You don’t get what you deserve in life, you get what you negotiate.
The two aren't mutually exclusive.
Startup outcomes are mostly luck, led by people who (have to?) believe that they aren't.
You people seem to fixate on the Facebooks of the world instead of the other 99% of businesses built on blood, sweat and tears.
Probably because most of this website sits behind a desk writing software thinking it gets sold because of magical fairies and luck, not 10000 agonizing cold calls.
And negotiation require knowledge. This thread is about being told to not discuss that knowledge publicly and to not acknowledge the real life implications of certain equity splits.
As I said in another comment, this is like saying employees should have negotiated better salaries and then firing them for discussing salaries.
Whoever wants to do the first 3-6 months (or 3-6 years) without a paycheck while figuring out the problem, solution and funding gets to be the founder.
If employees were lowballed underpaid, screwed out of vested shares etc that’s different but of course the person that decides to make the company owns most of it and gets the biggest payout when it sells.
The market doesn't care about your fragile ego or low self-esteem.
Seriously, what is your point here, besides acting like a jerk? I mean, I totally agree with you, but that's why I think this thread is important. It should be a lesson to potential startup employees about how extremely lopsided the risk/return considerations are, that most equity deals are complete shit at startups, and that you should usually demand more equity if you have any negotiating power.
Indeed, the purpose of threads like this should be to convince startup employees as a whole that they're getting screwed on equity so they should demand more.
Your point is 100% right though. Early startup employees rarely understand the risk/reward. Surely none of the 10 employees at a 7 year old software company doing 1.6M a year thought they were on a rocketship.
Average software engineer gets compensated with 6 figure income for 7 years leading to a $70k cash payout. What a jerk that Josh is.
Rise, proletariat, rise.
I suspect you're also one of those people who says employees should just have negotiated better salaries but also fires them for discussing salaries.
Hopefully he puts some of it in interest-earning stuff prior to that point.
> We aren’t spending Silicon Valley-amounts on salaries, but we’re certainly not on the low end. From the perspective wanting my team to love where they work and not have to worry about money, I’m very happy with the salaries everyone gets.
We sold for a similar sum and the bonuses were pretty small by SV standards - a bit more than £20,000 for a few, down to a few £00 for people who had just joined (maybe 50% annual salary for a few).
Me & my partner had a fishy earnout clause over 12 months, but I got us pleasantly fired after 3. Half the staff got made redundant after 6, which I don't believe was a surprise to any of them. Nobody buys a business for its cosy culture, or sells one expecting it to stay.
I think it's right for founders to be up-front about the likelihood and consequences of an exit, which is why we put it in our employment contract. But IMO more than 10% would be very generous for these ordinary private buyouts at 4-5× profit - no rocket ship valuations. At least that's clearer and more certain (and less tax efficient) than the kinds of games people play with options & rounds of funding.
UK tech companies, salaries & employee expectations are a whole different world from what's discussed here. Maybe Baremetrics was closer to that world than SV.
(In another life I wish I'd looked into what our old customers Torchbox did last year which is form an employee-owned trust and sell to that - https://torchbox.com/blog/not-selling-up/ )
The only realistic value to assign is zero.
It's not guaranteed like a FAANG salary (which actually isn't completely, the past few years have seen great stock appreciation), usually it takes a few rolls of the dice, but it's just not accurate to describe it as a definite 0. Startup selection ability pays a serious role here, I've seen people whose picks I shake my head at consistently, and some people who can home in on successful ones like heatseeking missiles. If you're the type to take the story of a business person about lofty valuations and prospects at face value, though, you're probably going to have a bad time and end up bitter and talking about how bad a deal startups are on the internet.
Each of those employees signed up for a salary and equity.
That equity turned out to be of very little value to them in the end, probably less than they were hoping for.
If they all got paid out anyway, they would not have learned that small equity stakes can turn out meaningless, and that exits are way less profitable for employees then founders.
Some of these employees might now go on to be founders because they learned the dangers of working hard on something in which there is no equity. In the end they might create something of massive value, which the world never would have had if they simply benefited from charity.
I think the lesson of this exit is also more valuable for all HN readers than it would've been if he had just paid out the employees, for the same reasons.
They might then go on to create something of massive value which the world never would have had if they simply did not have the financial means to do so.
Remembering the "charity" they received in helping build the business that enabled them to succeed as founders they then pass that same "charity" on to their own employees upon a successful exit, kickstarting a cycle of innovation that spreads much farther.
There's an argument that "that's not the way the world is" but the world is as compassionate or dispassionate as we make it. Personally I'd like to see it move towards a point where taking everything just because you can isn't viewed as acceptable.
It's not clear to me what you're actually suggesting.
You think that when someone takes more than they need, they deserve to be shamed? How do you determine how much one can take?
We all want the world to be more loving and compassionate, but rules and financial incentives drive productivity in our economy. If the financial incentive to start a company is reduced, there will necessarily be a cost to innovation.
Imo, the goal should be creating a system where the rules are fair and clearly outlined. The rules and incentives for employment were very clearly outlined in the employment contract these people signed. And, the founder does not seem to be the type of person who over-promises. So, I see nothing wrong here.
I think I understand your reasoning but I don't agree with it. It implies that workers don't already know they're in a much worse position compared to founders/business owners when it comes to acquisitions. Generally it suggests that workers "learn" through pain until they become founders. Which might apply to some people but certainly isn't the case for everyone, let alone a good reason to treat your workers badly. I much more agree with the sibling comment by Jochim.
If I agree to sell you my car for $5,000 then you show up with the money and give it to me and take the car, I don't get to change my mind later and get mad that you didn't give me more and call you immoral.
A lot of startup exits seem to take the form of you then selling the car to someone for a break even amount, who just happens to also pay you individually an extra $5,000 on the side.
Is it a good deal for you? Yes. Is it a scummy move? Yes.
One of my startups sold for about $25-40MM depending on whether you count pre- or post-earnout. The typical engineer got maybe a quarter of a percent of options on common stock. You’d think that would net out to $62.5K but we had a messy cap table. Various investments’ preferred status ate deeply into what remained for common stockholders.
Even if there were no cap table issues, the engineers wouldn’t have been happy, because they hung their hopes and dreams on a multi-hundred-million dollar exit. We experienced 90%+ engineer turnover over the next six months. (We got by just fine.)
Rule of thumb: do not join a startup for the money.
But on the other hand, if you’d agreed to sell me your car at a price under what you might be able to get elsewhere—maybe because I was financially struggling and you were doing me a friendly favour—you’d probably be pretty miffed if I won the lottery and still demanded you stick to your offer…
They chose not to, which would seem to indicate they weren't miffed. Nobody forced them to do anything. It's not immoral to ask someone for an accommodation and accept it.
The investors didn't give him the money as a friendly favor to help him it out. It was an investment. Presumably they make a lot of them and understand the risks involved in doing so. If you're going to get hurt feelings whenever one of your investments doesn't pay off, you're not cut out to be an investor.
I mean "how much time they want to spend interviewing/prepping"?? If a FAANG will average 2-3x payout, it would be insane not to be willing to prep for literally months if that made the difference between getting a job and not.
It's not for me (or you) to decide for others, however :) . I just think there are many more dimensions than raw salary to consider. You could work like a dog for 5 years at a FAANG, make a ton of money, and die just after you retire. It's all weighing the risks and rewards and there isn't a formula for that.
BTW yes, 2-3 months of free time to prep may not be worth it given:
* one will miss/sacrifice other aspects of life
* one may not get the job. Nothing's guaranteed, after all
* the job may not be right even if they get it
At that salary you're looking at probably a 15 minute commute. By bike even if your office isn't in SF itself or you don't mind the hills. It's the startup employees in the bay area that don't have the money to live closer or have their own places.
>You could work like a dog for 5 years at a FAANG
From what I've found, startups and non-tech companies work you a lot more than FAANG especially if you're not looking for fast promotion in FAANG.
(A $1.5M mortgage is around $6k per month today.)
And at the end of the year, even if what’s left over in terms of percentage of income is the same (and it’s usually not, because many COL expenses don’t scale linearly with the cost of housing), you end up with more in the bank to send your kid to college or to retire.
You are presenting a theoretical ideal that is probably close to unattainable.
- how many tech startups are in Birmingham?
- how many VCs would be OK funding a startup in Birmingham? I know we're in COVID era now, but how long before VCs again start telling you to move to SF/SV (or perhaps NY)
- how many 150k salaried tech startup jobs are in Birmingham? I'd estimate in the single digits, probably zero.
I earn well, so granted I'm not turning down as much as some would, but to drag out a tired old saying, I work to live, I don't live to work. I have plenty of things I want to do - some of them I can do in the right job, many I can't.
Of course one of the luxuries of already earning well is that the multiple of my current salary it'd take to convince me to take a job I don't actively love the sound of is far higher that it otherwise would be.
I don't know many other professions where high salaries are pretty much a given, without cutthroat competition among your peers?
You can get high payouts building a company, becoming a top lawyer or medical professional, but the investment in time, effort, and money is much higher, and the chances of success are lower.
Could I speed this up by another 5-10 years by moving to California to help monopolists serve ads, suppress competition and lure users into walled gardens? Sure I could. And what's wrong with stoking the world's most overpriced und undersupplied real estate market with another willful participant in the process.
That said, "insane" strikes me as an extreme choice of words for someone forgoing this golden opportunity.
My experience in the one of them has been the opposite of what some of the bullet points implies, or at least in a 'positive' direction.
I know for a while the rumors were basically that if you hadn't gone to a place like Stanford, you weren't getting a job, at least at Google (Maybe Facebook too?)
Is this still the case? (Was it ever the case, or were things a more flexible?)
If you have experience already, where you went to school gets dramatically less important the more experience you have. I went to a decent (but definitely not top tier) state school and have 15 years experience, had no trouble getting interviews at FAANG companies and passed interviews at a few.
This is at all relevant only for getting into the interview process, which is something that is largely handled by recruiting. Once a candidate makes it to a phone screen with someone like me, where they went to school has no bearing on whether they move forward in the process.
But basically, you really need to do your homework and treat it like you’re making an investment.
For everyone else, the last point is CRUCIAL
> treat it like you’re making an investment
Remember, if you are giving up a market total-comp package (e.g., 200 or 300k+) for a below-market startup package -- you are literally investing the difference. Treat the difference as an investment.
Also keep in mind, unlike public stock or real estate investments this major, you also often have no visibility into financials -- discount for that.
You also cant sell when you may need to -- discount for that also.
Unlike a property or stocks, you dont get interim dividends/yield -- discount for that also.
You may also be forced to invest heavily or forgo stock if you leave the company -- discount for that.
If you want "returns", you're better off getting a stable, higher paying job and investing the excess in public markets. You have diversification and liquidity.
And, as I've said elsewhere, startup salaries are rarely on par with the industry average. Working at a startup is typically sold as "you'll be paid less, but if we sell you'll get a payout to make up for it".
Correct me if I'm wrong here, but isn't another major issue faced by early employees that the math might look good when they join the company, but further rounds dilute their stake so much that it becomes meaningless?
The problem is when people anchor their calculations about their future lottery winnings to the current float.
I try to tamp down expectations when I’m hiring by trying to sketch out a wide range of plausible scenarios (basically the Drake Equation for startups) but I’m going to go out on a limb and guess that a lot of hiring managers and HR departments set new hires up for disappointment by not throwing cold water on their very optimistic math.
Those employees are just as responsible for the company’s success as the founder is; it sucks to see them get shafted while the founder walks away with “fuck you” money.
To badly paraphrase someone: “The idea isn’t what’s valuable, the implementation is.” That implementation is probably >90% thanks to “the help”.
Most of my startup jobs have paid market rate. The shares and options have compensated for the risk, not a lower salary.
I'm sure some accept lower salaries, and certainly the salaries won't be comparable with the very top end of the market, but most people don't work in the top end of the market.
A startup that tried talking me into a massive cut without offering me basically founder-level share amounts would be an instant red flag.
From the founder himself:
> We've had carryover losses for years, so from a tax perspective, there was no hit on either side.
I realize that tax losses can differ from cash losses, but are you so sure about that?
Shame is a pretty good motivator for encouraging people to behave in a manner deemed appropriate by society. I don't think there's an easy or definite answer for how much is appropriate. I guess the question I'd ask in return is: in the case of the woman caught on security footage dumping a whole bucket of Halloween candy into her plastic bag. Why is it that we find it appropriate to shame her and not a founder/ceo who does effectively the same thing? Why can we not apply these same rules of decency to business?
> If the financial incentive to start a company is reduced, there will necessarily be a cost to innovation.
I don't think this is necessarily true. By spreading the fruits of successful innovation more broadly you put the people who enabled that innovation in a position to use that experience to innovate further.
I'd argue that model where innovation centers around founders aiming to hit unicorn status and then retire with 'fuck you' money limits it in the sense that those once you've earned your 'fuck you' money you aren't really incentivised to innovate any further.
> The rules and incentives for employment were very clearly outlined in the employment contract these people signed.
I'm questioning whether they were fair, not in this specific case, but I'm asking more generally is our approach to employment as a society reasonable and fair.
In the case of Halloween candy, the owner of the candy is offering each person up to a few pieces of candy for free. If you take more than a few pieces, you are stealing from the candy owner. Stealing is bad because we believe in the right to private property. Stealing is, in fact, illegal. Of course, our legal system isn't set up to enforce punishment for small actions, so shame is a useful alternative form of punishment.
> Why can we not apply these same rules of decency to business?
In the case of employment, each employee is offering the business owner his/her time in exchange for a salary and equity. The expectations are crystal clear to both parties. When the business owner sells the company, taking his fair share of the purchase price (as determined by his equity stake) is NOT stealing. Nor, is it breaking any norms or expectations.
> By spreading the fruits of successful innovation more broadly you put the people who enabled that innovation in a position to use that experience to innovate further
I actually agree with this specific point for an isolated case. That is, in isolation, spreading the purchase price for a huge acquisition evenly across the employee base would probably lead to greater innovation.
However, this only makes sense in isolation. If you make it common practice to share acquisition price more evenly among employees, you destroy the financial incentive that drives much of entrepreneurship.
Startups are very risky, and without a huge payout for success at the end, the expected values just don't work out anymore. Smart engineers will be much better off applying for a traditional FANG job. In fact, this is already the case! What you're proposing would just make the math even worse. Remember, for every success case like this, there are 4 or more founders who failed. There better be a sweet reward at the end of the tunnel to keep them motivated to keep trying!
Furthermore, for small acquisitions like this, even if you were to split his 3.7M payday across his 20 employees, each person gets $18.5K. Hardly an amount that would spur innovation.
> In the case of employment, each employee is offering the business owner his/her time in exchange for a salary and equity. The expectations are crystal clear to both parties. When the business owner sells the company, taking his fair share of the purchase price (as determined by his equity stake) is NOT stealing. Nor, is it breaking any norms or expectations.
I don't think it necessarily is crystal clear. A big part of the sales pitch to employees for many startups is that your.5% will be worth X when they reach Y valuation. This isn't too bad in itself, but when it turns out that the founders can issue new/preferred stock the incentives from an employees point of view become severely misaligned.
> Furthermore, for small acquisitions like this, even if you were to split his 3.7M payday across his 20 employees, each person gets $18.5K. Hardly an amount that would spur innovation.
I agree it that it doesn't look great for smaller acquisitions. Although there are some interesting (in my opinion) alternatives to selling to private equity. In my city for example, the founders of a print shop sold the company to the existing workers. The money was paid out over a few years from the company's revenue and they sat on the board to offer some advice on the transition. It seems like a more ethical alternative in that the workers are rewarded for their part in building the company, and the new owners are less likely to asset strip and gouge existing customers to recoup their investment. It has the added bonus of not adding to the concentration of capital in a small number of holders.
We’re also a company that has purposefully operated right around breakeven for years. So, unless you’re a “strategic acquistion” that throws acquistion multiples out the window, a slow-growth software company without lots of profits and a product that’s technically quite complex is ultimately just not going to get a huge multiple.
I don't agree that employees deserve to be rewarded for their part in building the company above and beyond their cash and equity compensation.
> Personally I'd like to see it move towards a point where taking everything just because you can isn't viewed as acceptable.
I still am unsure what you're actually proposing we do.
I initially thought you were proposing we shame Josh for taking more than he needs. I strongly disagree with this principle for aforementioned reasons. To put it another way, Josh isn't taking "everything just because he can". He's taking what he owns, rightfully deserves, and worked and risked 7 long, hard years for.
EDIT: looks like copy/paste deleted some of the post, adding back:
$450k is likely $200k base, $40k bonus and $210k RSU (source levels.FYI). Most lenders won’t touch RSUs unless you had 2+ years at the same income level and even then they don’t like it. So taking 45% DTI (debt to income) ratio of base + bonus nets $9000 payment (principle + interest + taxes + insurance) and translates into $2mil purchase price assuming the hypothetical person also has $400k downpayment and reserves. That price point gets something like this:
https://www.redfin.com/CA/Mountain-View/2507-Alvin-St-94043/...? (3/1.5 1500 sqft 5800 sqft lot)
Let’s say RSUs take care of savings/extras.
Schools don’t look great for this house. This is where commute comes into play - you can trade long commute for more house and better schools.
Unfortunately, the geographical reality of Bay Area mean that there isn’t a lot of middle ground between short commute/lots of cost/other trade-offs or very long commute, but better everything else.
If you want a house, median is above $2M: https://sanjoserealestatelosgatoshomes.com/mountain-view-ca-...
Another thing to consider is that housing stock in Mountain View is very old on average, so the $2M price point doesn’t get you a mansion, but rather a very modest house (especially when considering that we are talking about TWO MILLION DOLLARS after all)
Did they take a full standard salary? (Doesn't have to be SV 100k+ salaries, but standard for whatever is paid in their area). Did they do more than just code? etc etc
By your logic, the butcher who worked for market wages in a meat processing company should get a big pay day because Nestle decided to buy them.
As for entitlement, what entitles a founder to get ~50x the payout of their employees? Especially when they're also taking a SV level salary (not living in SV) and spending VC money.
Add to it the last four years of "culture" growth leading all west coast tech workers to demand you add 10% overhead to your business to advance diversity, equity, and inclusivity, which in reality is just advocation for the right kind of politics to be brought into company culture, and you get a crazy stressful soup for any founder.
Moving on to your second point about entitlement. Of course the founder is entitled to 50x the payout. You seem to be severely discounting risk. Did you see this founder's list of other failures?[1] They can pay themselves whatever they feel is right. They took the risk, failed multiple times, and finally got lucky. Of course they can reward themselves how they see fit. There are so many founders who never see the reward and end up with worse careers because they only kept founding companies rather than choosing a "stable" career. To me it seems like, in your view, the guy who didn't take the risk founding companies and got to join a "sure" job by joining a rapidly growing startup gets to be rewarded comparably to the guy who started something, working, spending years not sure where it was going to go. Why would anyone take the risk of starting a company? I'd rather join a fast growing startup if my reward is quite comparable to the founder's. Low risk, high reward.
If a founder is spending VC money and paying themselves a SV grade salary, I would have trouble calling that a significant amount of risk.
If you can, you should get a job at Google and get a great salary (which is still a tiny sliver of Google's monster profits).
If you can't then you have to settle for lower paying job at a company that doesn't have monster profits like Google and therefore cannot pay you outsized salary.
Employees don't "deserve" anything other than the market salary.
It goes both ways. Employers don't "deserve" Google-level programmers for half the salary that Google is willing to pay. And I'm sure they would love to get great talent at reduced prices just like you would love to get great salary regardless of your talent and contribution to the business.
The market salary happens when both parties work to advance their self interest. "deserving" has nothing to do with it.
> As part of the structure of the deal, Xenon guaranteed I’d take home $3.7m, regardless of what came up during due diligence
Interesting, I wonder how this is structured - surely there are items that can come up during due diligence that are deal-breakers for Xenon, and surely due-diligence is performed before the contract is closed?
> But they were incredibly gracious and both agreed to write off their investment. General Catalyst’s (who had the lion’s share of that $800k) response showed just how classy they are: “We recognize the work that’s gone into the past 7 years and it sounds like this is a great landing spot for the team. We’re grateful for the opportunity to have supported you along the way.”
I have no idea how they managed to get the investors to walk with nothing, when the founders walked away with so much.
> Interesting, I wonder how this is structured - surely there are items that can come up during due diligence that are deal-breakers for Xenon, and surely due-diligence is performed before the contract is closed?
The company was inherently transparent with everything. A big part of DD is QoE and there wasn't much to audit there. This was a deal term that reduced any walkaway risk.
> I have no idea how they managed to get the investors to walk with nothing, when the founders walked away with so much.
Deal flow and it's not worth their time. Be nice to successfully exited founders and they'll speak your praises for eternity. General Catalyst wants $1B exits. If the founder leads to dealflow that brings that in, the $800k will be an easy ROI.
Now if (theoretically) some founder reading this thread ever has to choose between General Catalyst and another VC, they will ALMOST ALWAYS choose General Catalyst
Over time it will lead to General Catalyst finding a non zero number of 10X or 100X companies because of that
Or its the cost of a lesson to stay away.
I only know what's on that Wikipedia page, but it doesn't look like it's as simple as the investor owning a stake, rather there are events that have to be triggered first which were perhaps very unlikely to be triggered.
I'm wondering if the math worked out that the firm would end up with less than half their investment, it's in their best interest to have a write-off and the founder benefits and potentially comes back to them with a new business later, instead of squeezing the founder for a few dollars.
If you're not going to make any money and the amount you'll lose won't piss of your LPs then the goodwill from an entrepreneur you like working with is worth more than the cash.
Keep in mind it’s a relatively small purchase price.
It must be tough though to bear your soul like this and take the heat he's no doubt been getting (including here).
>>>General Catalyst’s (who had the lion’s share of that $800k) response showed just how classy they are: “We recognize the work that’s gone into the past 7 years and it sounds like this is a great landing spot for the team. We’re grateful for the opportunity to have supported you along the way.”
It also goes to the heart of how messed up our economic system can be. I can be mollified by saying that he worked hard and earned his ~$4 million by building a business. But I can't internally justify the VCs gifting him $800k for AFAICT nothing. I'm going to have to work for the next 4-5 years for that but he gets it basically on the whim of some person at a VC.
Supporting the founder (and earning goodwill for it) is probably worth a lot more.
And here is the problem. Take VC money and now you are forced to run company at breakeven point.
This company would be perfectly fine operating with half the staff and generating for the CEO half a million in profits per year - every year.
He could have met his family financial goals long ago and still keep the company.
This is what folks at 37signals figured out years ago and good on them. Do not take VC money unless you are already a millionaire and aiming for the moon.
My guess is that this wasn't all luck.
The VC's in this case knew how transparent this founder was being in reporting his startup journey. They knew that this decision would get publicity.
With this knowledge, the VC firm probably made a calculated decision to forego their liquid pref in return for the good will generated by the founder's transparent PR.
It's cool to see the founder being financially rewarded for his transparency.
They are investing $1B over all their funds.
Will the impact a founder-friendly reputation has on deal flow and close rate increase their fund's ROI by 0.8%? Almost certainly.
This is _brilliantly_ targeted PR. (To the extent that I suspect part of the deal with General Catalyst was that he blog about it and do his best to get it on the front page here...)
I can't think of a better advertisement for these VC's. Calculated or not, it is a great move
Years ago Jonathan was in a position where we needed to buy back his shares in a company in which he invested early. He could have asked for a much higher price, and instead he graciously agreed to a different outcome - he understood the situation and did the right thing.
Glad to see that General Catalyst did the same in relation to Baremetrics, writing off their investment. These things don't go unnoticed. Sometimes reputation is way more important than a few more bucks for your LPs.
Folks, this is a founder who's openly sharing the kinds of things we usually keep hidden. I doubt there's been a startup exit in the last decade where a healthy skeptical HN'er couldn't find some wrongs being done, if the details had been available. It's extremely hard to get everything right, from every perspective. The only difference here is that the details are actually available.
Please go easy. We want more posts like these, not fewer.
Then I checked General Catalyst, they manage multiple funds in the $500M - $1B range[1]. In that context the $800K really is a rounding error, around 0.1% of a single fund's size.
It never ceases to amaze me how money stops being money past a certain amount (which would be life-changing for most people), and just becomes numbers to move around.
[1] https://www.crunchbase.com/organization/general-catalyst-par...
It's not common for investors to write off $800k out of good will (doesn't seem like something in the best interest of their LPs).
Edit:
> It’s a really exciting day here at Baremetrics! I’m stoked to announce that General Catalyst has invested $500,000 in Baremetrics, as part of a new fund they’ve created for businesses on Stripe.
Turns out there is more to the story.
Baremetrics got their cash from a fund specifically intended to promote companies integrating with Stripe. In other words, the goal of the fund was to promote Stripe moreso than to generate returns for LPs
That makes a bit more sense now.
https://www.gyford.com/phil/writing/2013/02/27/our-incredibl...
See also the recent example of https://www.slingbox.com/discontinued, which makes this funny pair of claims:
Q: Why is Slingbox being discontinued?
A: We’ve had to make room for new innovative products so that we can continue to serve our customers in the best way possible.
Q: Will Slingbox be releasing any new products?
A: No.
So the investors just accepted to lose $800k while the founder was getting $3.7M?
Can someone explain the logic here?
$500k came from a fund General Catalyst set up specifically to encourage startups to build new businesses that integrate with Stripe. [0]
The goal for the money was to enrich the Stripe ecosystem. Not generating returns for investors.
If the money came from a regular fund without the Stripe affiliation, General Catalyst 100% would not have accepted the $800k loss.
[0] https://www.prnewswire.com/news-releases/general-catalyst-in...
It's pretty obvious the business didn't pan out as well as intended. It's not really worth their time anymore.
Still. They could have caused troubles and tried to recoup their $800k out of the $4M. They were nice not to.
The money will be written as a loss and go through some accounting/tax trick to minimize the effective loss.
Something doesn't make sense. $800k is not a small enough amount for any responsible investment fund to walk away from.
I wonder if maybe it was actually worth way less. I think he said they walked away from their $800k investment, but maybe that was at a much higher valuation. If it was only worth $80k I can see them not bothering.
If it went to the existing employees (they have 7 of them on the About Us page), that's ~$42k per employee.
If the business is >1 year old, it's treated as capital gains. Since the company is >5 years old, he can likely take advantage of the Qualified Small Business Exemption up to $10m and pay no federal taxes.
https://www.investopedia.com/terms/q/qsbs-qualified-small-bu...
So I am super happy to see some real transparency with real numbers and a real talk about the earn out.
I enjoyed even my first impressions at the interview process and I'm happy Josh got a nice payout, congrats!
I do hope Baremetrics transparency continues in some fomr as its a big inspiration.
EDIT: saw that the founder lives in Birmingham, Alabama. So yes, $3.7 million IS a lot of money.
For those who have gone through an acquisition, how much more Josh could have netted if he accepted to stay 2-4 years?
The company could have potentially netted more overall, but I’d say Josh’s take would remain about the same. If nothing else, he’d take on a lot of risk... the potential package could seem higher, but a lot can go wrong over 2-4 years (both personally and with the acquiring company).
If the investors insisted on recouping that 800k, leaving Josh with ~3M, it sounds like it wouldn't have hit his number, he wouldn't have sold, and.... the investors would be in the exact same place. Effectively, it sounds like they just chose to not block the sale for something that, in the end, would have made no difference to them (but would have prevented the founder from leaving).
Josh ended up better, the employees ended up better, and the investors _really_ didn't end up in a worse place (in actuality, they probably now get to write this off as a loss and not worry about it anymore, so maybe a bit of a pro?).
It wasn’t a growth story, so from that point of view it was dead money for the VCs anyway. But why would they agree to the founder’s payout at their expense?
Either the VCs are very impressed with this founder and plan to participate in his next company, or they’re fed up and just wanted to be rid of him.
I thought this was a key insight, and I'm happy the author is frank about it. Some people enjoy building things from scratch, others enjoy taking a good idea and scaling it. IMO, both are hard problems and its good that he bailed before trying to go down that route.
Multiples of trailing 12 months net profit would be more common for a smaller entity.
Curious about this one; are the acquirers not bothered about the possibility of everyone jumping ship? They have a new CEO and generalists on hand to take over the business immediately? And/or the business is basically in “runs itself” mode, with most of the work being done on growth opportunities?
Normally I think of the golden handcuffs as a necessity to stop the business from imploding and being worth zero, but interested to know why this wouldn’t apply.
Seems to me that with a small team, you're more likely to have N=1 bus-count processes which would be sensitive to someone leaving.
Josh gets the exit he really seems to need for his personal and financial well-being.
Xenon gets one heck of a product for honestly quite cheap. Better marketing will actually go a long way here.
Conrad Black literally went to jail for selling newspapers and taking a personal commission on the side. [1]
When you're selling company value, but taking the money yourself in the form of some kind of arbitrary comp, that's defrauding investors, it's a form of embezzlement.
That the investors 'didn't care' is fine, but I don't see how it could have been arranged in the first place - the acquirer does not get to decide how much the 'founder' is going to get.
Also - the $800K write off seems odd. A million dollars is not nothing, and there would definitely not have been $800K in lawyers fees, far from it.
Something here doesn't seem quite right.
Also - folks - if he is negotiating comp outside of share value, that's not only hosing the investors - but any employee equity as well.
A small team where some other guy has 5% of the company, that's $150, not a lot, but not nothing. If the package was dealt outside of equity, those equity holders were screwed, if in fact there were other shareholders/equity holders.
I've taken the profit optimization route for my own business, and often wonder how much money I'm leaving on the table by not hiring a larger team and chasing (profitable) growth.
For a lot of other people, a half mil a year profit from a successful small company they'll own pretty much in perpetuity might be what they'd choose. I can see why he didn't. (I'd almost certainly have made the same choice myself.)
You're comparing apples and oranges - 500K/year of profits first needs to get taxed. Then distributed to shareholders pro-rata, then taxed again at the personal level. Also, you're assuming he could have made 500K year in profit from the very beginning.
But 37signals/Basecamp DID take investment money.
They took money from Jeff Bezos investment company named Bezos Expeditions - back in 2006 (14 years ago).
https://signalvnoise.com/archives2/bezos_expeditions_invests...
What surprises me most is the lack of understanding of founder risk. Most negative comments are related to employees not walking away from this exit. It feels to me that many here seem to conflate the inner workings of heavily VC-backed businesses with a slowly and sustainably growing company like Baremetrics. I see a lot of assumptions all over the comments.
I appreciate the discussion, though. It's nice to see people sticking up for employees. But a sub-10-people SaaS that's ALMOST self-funded is not the same as a prospective unicorn.
- General Catalyst: $2.5B+ in Assets Under Management
- Bessemer: $4B in Assets Under Management
DISCLAIMER: If you take venture capital, you should obviously always do it as a responsible fiduciary of both the company and the capital.
With that said, I'm positive both of those firms will be fine. They're looking for 100x returns, a $400k write-down from a seed investment is nothing. If anything, it's worth doing that on the off-chance Josh goes on to create the next Uber or Salesforce and they want to invest again. SV runs on relationships.
However, no matter how much money General Catalyst or Bessemer made last year, I would not want to invest with them going forward. I get that this is only money on the margins, and they get a benefit from a write off. Still, how hard would they have had to fight to get some of their money back? It sends a disturbing signal to me to write the whole thing off.
Someone will reply: "But they made $10b last year! You don't understand the business." And I am sure I don't. But the world is full of people who made a lot of money or were in the process of making a lot of money and then get careless.
Or reply: "It's part of the model! If they don't get 10x-100x they just want to write it off as fast as possible. That's what there investors want." Sure, but if you are careless people will take advantage of you. Also, I just don't buy that all institutional investors that back VCs are that savvy. A lot of them are just following a trend and over funding an asset class.
Tell me I am wrong. I am no expert.
Of course, some posters here are talking about employees getting a raw deal, but it was there for all to see that the company had decided long back to prioritize profit more than growth. Any employee that would have expected a unicorn like exit would have known it wouldn't be the case and would have left long ago. Blaming Josh for that doesn't feel right to me.
My own personal takeaway is crystal clear: if you want to benefit from the sale of something, you need to be the owner!
Much like a gardener or builder who doesn't get paid out when the house gets sold, unless you have a LOT of equity as an early employee, you will not be getting founder-type payouts (and rightly so as you took little to no risk)
Of course we were a traditional SV startup -- people are different these days.
We may also interrogate this arrangement.
Deleted the production database and customer data? You could apologize and move on. There should have been backups to restore from but clearly there weren't.
The gitlab way: Go in great details about how there is no automated backup and the last one that was done manually 3 months ago doesn't work... and how there was no testing/staging environment to try the change before production... and how any intern could delete it the same way by accident on their first day.
There's a reason companies don't publish gory details and internal discussion. At best there's nothing to gain from it and at worst it's highlighting incompetence and wrongdoing.
$4mm after tax (hopefully Josh is getting the QSBS tax break) for a decade of extremely high risk high effort contribution to our economy is not a good risk-adjusted return, but it's at least a decent exit at the end of the day.
We don't know how much the employees are paid, for all we know they could be paid the prevailing wage for their location.
However, over the years, I've learned that facing critics and doing impactful work goes hand in hand.
Put another way, if you don't have critics, you're likely not doing anything very impactful.
In my experience, the key to maintaining equanimity in the face of harsh criticism is to:
1) Have a strongly held mission and set of core values. Commit to this mission/core values regardless of what anyone says.
2) Recognize that it's sort of funny how pretty much any action can and will be twisted and criticized by critics online. There was an article a few months back about Bezos dedicating $10B to fighting climate change, and the entire comment section was negative. Lol!
Prefer just "good job" comments, or what?
I’m unsure which exact BVP and GC funds Baremetrics raised from, but that $800K likely doesn’t matter to either of their returns with funds of that size. Even at $100M, it probably doesn’t matter to a fund. VCs expect over half of their investments to outright fail.
What’s much more important to the VCs is the good will they just built with that founder. Most founders will give back door reference checks to other founders about investors. Josh is likely to say good things about BVP and GC now. Also, they got that mention in his blog post too. It’s likely they knew Josh would write a post like this and chose to just write it off for the “we’re founder friendly” story vs. looking founder unfriendly.
As a founder, I don’t think there’s anything wrong with what happened here for the investors given their fund sizes. They’re professionals investing other people’s money and expect this type of thing to happen. In fact, most VCs likely expect you to fail. If these were angel investors putting in their own money, I’d have a different opinion.
Did they get anything? It doesn’t sound like it.
What are we missing here?
1. At the end of the day, investors are people too. They may care that the team ends up whole.
2. 800k is non-trivial money, but it’s a small percentage of, say, a $100MM VC seed fund. The economics of VC are that some investments will net zero return. While they could have tried to claim back something here, letting go with grace gives them a lot of goodwill to be first to invest in the founder’s next project (assuming there is one).
Some investors are gonna be ruthless sharks. Others are not.
Other startups looking into them will see this. And breaking even might be about the same as taking the thing as a loss in the grand scheme of the VC model to them. I do wonder if other lower profile companies would have gotten the same deal.
Unless you're doing infrastructure stuff at Netflix, ad work at FB or Google, or some high level stuff at Microsoft you're not making half a million a year, and you're not doing it at a mid-level anything, anywhere.
Addendum: it's very rare to make more than twice the average wage in Belgium as an employee. It's a different matter if you're self employed.
If you're talking finances, Google/Facebook will pay you more, with less risk, and better work life balance than pretty much all startups. There are entirely justifiable reasons to prefer a startup, but you should take a second look at your calculations if you think finances come out favorable on the startup side.
There was a little bit of “pick the rocket ship” gamble - I had an Uber offer that probably would have been ended more like $250k/year, but it’s not unreasonable to get half a mill joining a late stage pre-IPO startup, and base salary is high enough you do it with little risk.
Hell, I know some mid-level post-IPO folks at Square making $700k due to it 10xing in share price.
I was told FAANG-ers make even more than him, so yeah I tend to believe these numbers.
Josh seems to be extremely entrepreneurial and independent (https://joshpigford.com/projects) and maybe being a part of a trillion dollar machine isn't worth the $ to him. He succeeded doing what he wanted to do and that's fantastic.
Admittedly, people's attitudes to work differ immensely and being able to live the entrepreneurial life is a privilege, but from my POV, you only live once, so $3.7m made from several years of doing things your own way would handily beat even $10m made from several years of employment (and neither are guaranteed).
It's been repeated a couple times in this thread, but VC make money by 10x-100x their original investment. They invested 800k expecting to make back 8M-80M. Anything less than that isn't worth the additional time, especially for a seed stage investment where they might have 50-60 of these per year.
I think, for anyone trying to start a company and take VC funding to understand how the VC business model works. A VC incentives are much different than a founder's much of the time. In this case, the best case for the VC is for the founder to continue working on the company.
There would be zero negative PR fallout from that.
This founder basically ripped off his investors, it's completely unethical - and he'll never get a dime of VC money again.
If VC firms didn't care about getting their 1x money out then the terms wouldn't be there in the first place.
It's normal to do that, and a $500M firm returning 10% a year takes 20% of that, so 2% which is not really a huge amount of money for a team of people.
One of the hard parts of the process, from the point of view of the company, is gathering all required documents/materials. I'm guessing a bunch of that work can be "reused", assuming they kept all the documents organized, which they would've for due-dilligence.
Let's say I do a diligence on behalf of PE Firm A (and the deal falls through) and PE Firm B wants to use that diligence because they're looking to buy the company now. Legally/contractually I cannot let that PE Firm B see the diligence report I created, however I have seen situations where PE Firm B would purchase the report from PE Firm A, or the target would purchase it and give it to PE Firm B.
I'm guessing it's more that the buyer was only prepared to go to 4mil, and the _seller_ had run their numbers and came to the conclusion "4mil minus that $800k isn't enough to secure my families future, and I'd need to walk away from the deal unless they agree to forgive that $800k" so he asked them, and they agreed.
Decent link here: https://www.svb.com/blogs/svb-private-bank/understanding-qua...
I believe, but can’t find, that you need to trade cash for the shares to qualify, so if your basis isn’t zero, it might require writing a check into the entity to cleanly qualify.... moral of the story here is pay someone to help you on this :)
“ Billionaire’s Secret Buyout Formula: 110 Instructions and an Intelligence Test
Robert Smith’s private-equity firm revamps software companies by following detailed protocols; ‘their process is like a factory’”
https://www.wsj.com/articles/billionaires-secret-buyout-form...
But I wouldn't start generally inferring that it makes sense to take secretary jobs at startups on the chance the founders decide to pay off my mortgage.. Baremetrics is a more typical case, I would think.
Advertising money well spent?
That's terrifying.
In some ways it's terrifying to be able to see those risks too. But then we need to remind ourselves that those risks are there in companies that don't dare to tell us as well.
1) Works as a club for developers to get the time they need to improve processes and code. "Do you want to be responsible for the HN article about the incident this will cause?" would give most managers pause.
3) Gives customers the confidence that you'll let them know when issues that might affect their experience or data are occurring.
4) Proves to customers that you can fix these issues when they come up.
5) Makes people wonder what's going on in your competitors that they're not hearing.
On the other hand you don't get to pretend the sun shines out your ass, but that's disingenuous and most people will see through it anyway, you only trick the people that also want to go along with you.
Much like TFA I think there are things to be learned from that level of transparency and hope the experiments continue.
Also a halo effect with other people who are reading this.
But I'm guessing there were some animated discussions about this.
Plus, per https://news.ycombinator.com/item?id=25045874
> We've had carryover losses for years, so from a tax perspective, there was no hit on either side.
They would end up with more than the initial $800k if they wanted it.
Let’s take a specific example. General Catalysts 2001 fund is projected to generate a 11.9% annual return per the public disclosure from Calpers. (1, sort for the name). That same fund is shown as a 7.1% net IRR by the state of New Jersey. (2)
The PR is soooo good, per some of the comments in this thread, General Catalyst is totally fine eating a bottom quartile return in a risky asset class (VC), which if you believed was their general behavior would prevent them from fundraising (therefore existing) going forward? Please.
Maybe the fact pattern is as stated, but it seems fishy at best.
https://www.calpers.ca.gov/page/investments/asset-classes/pr...
https://www.state.nj.us/treasury/doinvest/pdf/AlternativeInv...
——
This thread comes off as very tone deaf.
As a small minority shareholder the fees to receive a $800k wire round to zero. Plus it’s not $800k, it’s $800k plus whatever the preferred instrument yields on top.
This CEO seems super slimy and the story doesn’t add up. Much more likely he’s lying for some reason or other.
It would be different if you were an angel and that represented more 1% of your total portfolio, but it's just not the case when it's these big VCs.
Isn't this only if the distributions are immediate? Forgive me, not an expert in LLC v. corp structures but I have an LLC so I'm curious to hear your expanded thoughts. Thanks in advance.
And I'm assuming that he would have been promoted at some point. I am comparing what someone with his skills could have earned at a FAMANG, not what an average software developer would earn (they wouldn't even be able to get a job there tbqh).
Which is it? "Decent" developers being courted with $500k+ offers or "average" developers can't get jobs?
The bigger reason is reputation. If Techcrunch posted an article saying, founder screwed out of acquisition by billion dollar VC, it wouldn't work out so well for the next founder considering that VC.
VPs likely make millions.
https://www.glassdoor.com/Salary/Facebook-Vice-President-Sal...
Check out levels.fyi for something more accurate. You’ll see L6 engineers make $500K+.
There is definitely a discussion to be had about property, smarter people than us have had it for at least 150 years (even more, if you include the discussion between Locke and Filmer), don't see anything that cynic about it. I'd go on to say that even Cynicism itself was a really interesting philosophical school [1]. I do agree that that there are some people on this website who still take the IQ thing seriously, but even there, I think that the majority regards it as bogus.
I'm actually a really disappointed in Josh's response. I thought that his open stance on what he'd been doing would mean he'd being open to people criticising what he'd done. He doesn't need to agree with that criticism, but dismissing the whole site as toxic based on that disagreement just feels flippant.
From what I've seen and participated in, the discussion mostly centered around whether this was a good deal for everyone involved and whether or not a greater proportion of a company's success should be attributed to it's employees. At least in my eyes very little of it focused on Josh personally.
His goal in publishing this information seems to be to foster a community of transparency. To that end, his actions appear entirely consistent.
Put another way, what additional information do you want him to convey? His goal is to accurately and openly convey information, and he's basically laid it all out on the table.
You're free to have an opinion on whether his actions were right or wrong, but don't expect him to engage with your criticism when that takes a lot of time and effort (and is not part of his goal).
I think his goal was to help people. The goal of many people in HN comments is to ‘be right’. It’s a cultural thing. What we prioritize, how the community started etc.
I think HN has ‘trying to be helpful’ forces in the long run. There are ideas, content, links to new information that are helpful. But it’s not the priority compared to what many people think is decent. If you look at other online communities that’ll be pretty self-evident.
But again I think the key to HN is it has no direct interest in being helpful. Only as secondary effects. There’s nothing wrong with that - just as there’s nothing wrong with an incubator with a certain philosophy or writing essays that you think are insightful. In the long run, they help. But they don’t prioritize human decency or kindness and there are a lot of false negatives (startups missed in YC, entitlement and biases in some essays, dismissal of what isn’t clearly the right comment, etc).
It’s a cruder world that way. Take for example the culture of ‘X, Y, and Z read drafts of this’ that everyone has emulated. I used to admire that. Team building and acknowledgments! But it’s also encourages a culture of not being open and trying out new ideas. Living in fear of new ideas that will be rejected etc.
And that is something Josh had the balls to reject. There’s no hiding behind his Harvard / MIT connections. There’s just honesty and transparency. HN and YC people could learn a lot from that bravery.
I don't expect him to engage at all. I do think he should be able to handle dissenting opinions without merely dismissing the whole site as toxic on twitter.
Apple wants to alert users to genuine / non-genuine batteries (to mention latest downvote blast). That is evidence of how evil apple is (not even considering how many folks were getting screwed by all the trash batteries going into iphones pretending to be real).
Zoom is so evil for X/Y/Z reason - except zoom is actually easy to use which is what most non HN folks care about - so their "evil" is just optimizing for different goals in some cases.
The negativity and the myopic focus on personal need / preferences really highlights sometimes how just out of touch with the rest of the broader world HN can be.
For a fund to realize that the company can live on, even if it's not the 10-100x they were hoping for, shows class. Listen, it's not curing cancer - but, it shows a level of maturity and understand that we should praise and not take for granted.
The way that fund economics work, they can write off a lot of small bets. However, the way that partnerships work, there are big egos at play. It's a dirty game, but when people do the right thing, it's worth praising.
Because if we set the bar at curing cancer (not that that's what you were doing my friend), then nothing is meaningful. I get that that's a more pragmatic/logical perspective but I believe that change starts small. So it's key to be very vocal about great things they we perceive as small because that can create ripple effects.
I worry when we bash people that do good things with some variation of "Good, But Not Good Enough!" [1] Because, it doesn't inspire people to do even better. In fact, it creates the opposite behavior "why should I even bother at all, can't win with these people."
It's, more or less, impossible for them to do worse than $0.
I get that there's some scenarios where they're not going to make money but the business can be viable as a lifestyle type business. But someone is buying this one for $4 million cash. So this isn't giving someone a company worth 0. This is handing out 800k+ in cash.
Of course they can. They can do $0 _and_ fuck someone else's life over out of spite, vindictiveness, or company policy.
I'm with all the other poster saying what General Catalyst, while almost certainly at least party for self interested reasons, deserve praise and respect for doing this. I know with certainly that there's a bunch of people reading here who'll now move a General Catalyst offer/termsheet right up the top of their pile sometime in the next few years. I hope this works out well for both General Catalyst and for future startups and founders who work with them.
There is a lot of money chasing those, and this is one great way to stand out from the crowd.
Alas, that is not at all true. I once sat through a presentation by a VC on how bad things can go, and they can possibly go much, much further south than $0. Lawsuits, crimes, and total time suck for years are some of the things that can go negative.
> It's, more or less, impossible for them to do worse than $0.
Every VC investment is a speculative bet on the future success of the company.
If Baremetrics sold for $800 million, they would have made 1000x their money.
If it was their only investment, then it would be a major fail but VC business model works by making 100 bets. Few bets deliver 1000x return but many of them are 100% loss.
The VC knew what they were doing and their $800k got them exactly what they paid for: an option to make a lot of money in case of a big future success.
That's why they gave Baremetrics $800k 5 years ago. Why they are giving the founder $800k today is far less clear.
> Why they are giving the founder $800k today is far less clear.
They aren't. They are just writing off their initial investment.
They lose $800K (which is less than that because it can be offset for tax purposes), not $1.6M.
If company grows 1,000 times, their stake also grows 1,000 times
The former tend to think everyone is corrupt and that if people have success or wealth or anything, it’s because those people swindled someone out of it or were connected to the right people.
Those who grew up in the USSR tend to have a more meritocratic worldview, where hard work and intelligence and studying for exams will result in a better life.
Maybe the people I know [strike]are[/strike] aren’t representative of those times and places. No matter, you can find justification for either worldview in nearly any situation, whether it’s 1970s USSR or ‘90s Russia or ‘50s America or Trump’s America. Reality is nuanced and filled with thoughtful insights that oppose each other and yet are equally true. The loudest people on HN are not people trying to square that circle.
You are aware that he's not, not by a long shot, the first to have that opinion? There's _way_ more than an element of truth in it.
Obviously some people have made some incorrect assumptions at varying points, but I haven't seen anything that would remotely qualify as toxic.
I've had multiple offers to buy and invest. And always do your due diligence. One turned out to be a shell company - which means a bigger company secretly trying to low ball acquire my company
In some cases it's VCs or celebrities and you do your due diligence
*
At the end it comes down to one simple thing
If the VC feels this founder and his team worked very hard and not taking that $800,000 (or $800K + x) means those people will get a bit more (and for the company people it means a lot while for VC it means nothing
Then VC doing it is a genuinely good thing
Now consider what it means to someone considering General Catalyst
At best - they are great guys
At worst - they are smart
It also means for sure that they are not
parsimonious spiteful shortsighted vindictive penny wise and pound foolish
So now any founder taking investment from General Catalyst knows that there is a good chance that
General Catalyst are honest and reasonable They will not sabotage an exit to try and maximize their cut at the expense of founders
*
Is this deriving too much from a simple act?
Perhaps
However, in an industry where VCs are usually known for kicking out founders, this is a welcome change
* Health Insurance
* No paid time off: Want 4 weeks off a year? That's a 7.6% reduction in pay.
* You have to pay both the employee & employer side of payroll taxes
* You're not eligible for unemployment, so you need to save more money to cover that possibility
* No retirement fund so you don't get any matching funds and have to really be on top of what your long term needs are and take that off the top of your income.
As an example, I have a normal salary full-time job, but I also have a hobby business on the side. The money I make from that given the tax bracket I'm in, federal, state, payroll taxes, means my "take home" pay from is taxed around 43%. And that's without needing to take anything extra out of it for paid time off, health insurance, or retirement, all of which are well covered by my salaried position.
Is your daily rate very high, are you delegating work to other people, or what is it?
I know a couple of guys in the UK who are essentially just coding all day, in full time jobs, making £100k a year.
BUt it's very rare IMO, I'm not even on 50% of that.
At one place where I worked with a permanent contract, the consultants were billing at 800-1200 gbp per day depending on seniority. There was agency cut of course but overall they made real well. this is when working at the same office at the same hours right next to me, just like an employee.
I haven’t been in the UK since a while so I hear that now things changed so you can no longer pretend to run a company when being essentially an employee.
That's actually been the case for about 20 years now. The relevant term is "IR35".
I'm graduating this year, and many of my friends (and myself) are going to work for FANG+ and finance companies and hitting that figure.
L5 (senior engineer) Facebook [1] Google [2]
Facebook L6 (lead engineer) [3]
[1] https://www.levels.fyi/company/Facebook/salaries/Software-En...
[2] https://www.levels.fyi/company/Google/salaries/Software-Engi...
[3] https://www.levels.fyi/company/Facebook/salaries/Software-En...
https://stackoverflow.blog/2019/10/16/coding-salaries-in-201...
Or generally contract work in Switzerland.
This year for a brief, beautiful moment(two months) I was making 750CHF daily before taxes.
Regular, experienced employees can count on 100k+ before taxes.
You get less as a salaried employee in France though...
In California
>it's very rare to make more than twice the average wage in Belgium as an employee
Yep, software engineer compensation is crap in the EU, while the cost of living is almost as high as in Silicon Valley. Solution? Apply for H1B at a FAANG. Fuck the EU.
Yeah? Well that's just, like, your opinion, man.
Why do people keep saying this? The dude sold a company for $4 million dollars. Asking for the $800k back that you invested isn't screwing him over.
They put in $ for 20%, you put in sweat for 80%. Why again is them not getting 20% the right solution? Unless the agreements said “hey look, sub 5x were okay with you getting it all”.
The business didn’t work. Arguably since only management is involved with running the business, it’s managements fault it didn’t work...why do the investors get 0 and the management team get bailed out? It’s not like they took zero salaries / weren’t compensated...
The world doesn’t work if you sign stuff and then later decide to not honor it just because you can torpedo the guy or girl on the other side of the table.
The ceo also doesn’t seem to have paid the staff either, based on his self disclosure. Not sure exactly how jamming a VC and not giving them at least what they put in back isn’t honorable.
But that's not what happened. The business was sold for $4 million. The only difference the VCs actions made was that the founder walked away with 3.7 million instead of 2.9.
Anyway, apparently the changes are postponed to April 2021 at stationery frame of reference: https://www.taylorhopkinson.com/ir35/
The reason this is big news anyway is that for the first time, large clients will themselves become responsible for determining whether an engagement falls under IR35 or not, and may also become liable to the government for the shortfall if the determination made is incorrect. Until that point, it's the freelancer/contractor operating through an intermediary who is on the hook (except for various government contracts, where the analogous change came in a while back).
In a surprise to no-one who has ever worked in the independent sector, this has made lots of big businesses that were formerly quite regular users of the flexible workforce much more sceptical, and many big names appear to have outright shut down this way of working for now.
At some point, presumably our government will realise that it has to pay for its spending spree during the coronavirus and that getting the economy back on its feet is going to need that flexible workforce, so with a bit of luck they'll come to their senses and finally do something about IR35, though I'm not holding my breath.
>>>As part of the structure of the deal, Xenon guaranteed I’d take home $3.7m, regardless of what came up during due diligence. This was important because many times, after months of due diligence, things invariably come up that reduce the purchase price: working capital requirements, unpaid PTO, unrecognized revenue, and a thousand other things. And I wasn’t interested in dealing with that.
I wanted stability and I wanted that $3.7m outcome to hit our family’s financial goals.
Given those terms, I believe the author when he says that this was the best offer he could get that met his terms. If that is true, had the investors insisted on their cut, he founder wouldn't have hit his family financial goal, and would not have sold.
What a VC does with their money is their choice, a 800k return isn't worth their time and energy if they can spend that time and energy on a billion dollar company within their portfolio.
VC funds have a duty to their LP base to maximize returns, but I would argue the good will generated by moves like this are what protect their ability to get into "hot" companies and thus protect those returns. Pursuing your strategy would likely harm the fund's reputation and their ability to return LP capital in the future.
Also - a point of nuance. VCs are not in the habit of writing off everything, that would be a false takeaway from this article. If the amount invested was bigger or the exit was more like 2x or 3x for the VCs, your points of criticism would be more valid.
They are not 'squeezing' remotely.
Otherwise, there would be not such thing as 1x participating in the deal in the first place.
Getting your $800K back while the founder gets $3M is not 'squeezing' it's literally just a transaction.
Also - a founder negotiating a price outside the valuation of the shares is getting very close to illegal (Conrad Black went to jail for this).
I think the founder was actually lucky that the funds simply didn't care.
So their choice was between nothing today or nothing later.
Tax-wise it was probably better to write it off now than carry a zombie investment into the future.
Like you said: their investment was a transaction and they made rational choice.
It's the emotional "we can't loose money" or "how dare the founder sell without us getting a cut" that would be a worse choice.
It's one thing to maximize your returns in a successful exit. But for Baremetrics' investors, the returns on this investment might as well be $0; the model is that the winners pay for the losers by generating outsized returns. The ultimate returns that these funds will generate for their LPs are defined by the 10+x's, not by the Baremetrics'.
Straw man argument. 1x participating are standard terms. I'm not sure why any investor would forego using standard terms, even at the early stage, to their detriment.
re: "squeezing"
You're perfectly free to have that opinion. Clearly both firms with extensive investment experience did not feel that way.
re: "illegality"
I have no idea what parallel you're making here, or what "negotiating a price outside the valuation fo the shares" means. Financing documents typically make it very clear what rights each party has upon a financing event and/or exit event. Whether each party chooses to exercise that right is up to them. There is absolutely no reason to believe Josh did anything illegal here.
See Sequoia walking away AFTER giving $21M funding b/c of a conflict of interest with Stripe - https://techcrunch.com/2020/03/09/sequoia-is-giving-away-21-...
To any normal person or small business, that's a lot of money to be captured and ignoring it is mind boggling, but again for them it's not worth the time and effort. The relationship or good will is worth a lot more, not to mention whatever write off stuff they get and the opportunity cost of their team. There is nothing careless about this.
If you wouldn't work with a VC because they aren't a penny pincher then man you are really going to be in for a reaaaalll treat!
Top tier VC firms aren't like Vanguard. They are choosy about their LPs --- that's why they're called LPs and not "investors". They have an investing thesis, and they go sell it to university endowments and pension funds.
Those endowments and pension funds, in turn, have their own investment goals, and they are not as simple as a first-principles analysis on HN would suggest; in many cases, VC LPs are putting money into that asset class knowing that it's going to underperform other asset classes.
So it's a little cringey reading comments about how people here would choose not to invest with Bessemer based on how they handled a liquidation preference. They really don't care what you think here; you and the partners at Bessemer aren't even working from the same premises.
(A good, though very dated, source on this is the old Kaufmann report on VC as an asset class).
If they have standard term sheets from GC or Softbank, likely the founder will go with GC
No one is talking about GC's investors....
How many future founders will read that blog?
If you were a founder, would it influence your choice of investor, to know if things don't work out, they will be magnanimous, rather than squeeze?
It isn't worth it for either of those funds to play hardball over $400k when hundreds of founders will read that, and will ultimately decide if they want the fund on their cap table for the next Uber/Lyft/Data Dog/Airbnb/etc.
I said it before, but it's worth repeating - SV runs on relationships.
The age-old adage, "There's two kinds of people in the world..." applies to an enormous amount of traits, but here's one where its exceptionally true:
The kind of people who become VCs and have billions of dollars of AUM (assets under management) understand time-value of money calculations, and they understand them almost intuitively. $800,000 sounds like an enormous sum for most people, because for 99% of Americans, $800,000 is life-changing money. It pays off your entire mortgage, or most of it. It sends all your kids to college. It pays for their private schooling.
For the venture capital firm, $800,000 represents a minor clerical error.
Even discounting the goodwill that this displays, engaging the machinery to recoup this $800,000 investment will incur significant financial costs, but more importantly, it incurs opportunity costs. Sometimes its better to just flush the money down the toilet and move on.
How? They write 1x participation into most contracts, and that's the normative expectation. It's not a 'legal battle' is literally a normal transaction between parties.
$1M is not 'nothing' to a firm with $500M under management - that $500M is not their money, it's other people's money.
If they are getting a %10 return for their LPs at $50M a year, and they are keeping 20% of the upside, which is $10M. So the $1M loss comes out of the fund, not their pockets, but still, $10M/year gross revenue doesn't 'feel' like a huge company now does it? A lot of these VC's are just 'rich' not 'rich rich' like mega-exist founders, just for some perspective.
The real choice was likely this deal where we let the 800k go, or future uncertainty.
This isn't "rich people don't care about 800k". This is more like "400k write down makes sense at this time".
Investors have given them $2.5 billion for a reason. One of those, undoubtedly, is that they are not stupid. Suffice it to say that they believe that this decision is worth at least $800k to them in the future, or they wouldn’t have done it.
If you are ever in a position to become a LP with General Catalyst, then perhaps you can ask them for their rationale and decide for yourself if they are trustworthy based on all the facts. Until then, making judgments based upon not even close to all the facts is just useless speculation. Your conclusion - that they are just stupid or terrible fiduciaries - is almost definitely wrong. You are no expert, but they are.
If a single founder decides to accept their money based on this action, and then has a VC-style outcome, they've made a good decision.
There's no 'straw man'.
>>> Asking for the 1x back on a sale is not 'squeezing' - it's literally in the contract, a normative part of these transactions. It happens all the time.
"Clearly both firms with extensive investment experience did not feel that way." - no, that they didn't 'go after the money' doesn't imply they would be 'squeezing' if they did. What it implies is that in all likelihood, it probably just wasn't worth the hassle.
The investors got robbed, but at least they can write it off. Asking for money from someone who is essentially refusing to give it back to you is not 'squeezing' by any definition.
>>> "Illegality" - in the article Josh mentioned that he had some kind of deal with the acquirer whereby 'not matter what, he would get his $3.7M'. If the acquirer is agreeing to terms with one 'insider shareholder' to the detriment of the others, that's fraud, and it's illegal.
Josh has a fiduciary responsibility to represent in good faith on behalf of all of the shareholders. Clearly in this situation, he came out with a nice exit, while his investors got $0. It also seems pretty clear that Josh and the acquirer were going to make sure that Josh was 'taken care of as part of the deal'.
Conrad Black went to jail because he was selling off assets of the company, but also getting a large 'consulting fee' from the acquiring entity to him personally. The shareholders felt that was defrauding them of what would otherwise be valuation/money they should receive.
In this companies transaction, it seems pretty clear that the investors were probably into it for $800K (participating) and then 15% or whatever they owned - but they got nothing.
He benefited while the other shareholders did not - this looks like it might illegal - but it probably would only be considered so if someone took them to court over it, which obviously they wont.
It's a fine line between 'negotiating hard' and simply saying 'I have your money, you're not going to get it, so that's that'.
He should have sold the company, honoured the terms of his agreement.
And not just "future uncertainty", but "the future of a company that's spent 7 years trying and doesn't look any closer to launching the rocketship, who's founder is onto his second attempt to sell out, and clearly is out of enthusiasm and ideas".
There was no 3x or even 2x future here for them, certainly no 100x - there was just another 2, 5, or 10 years of slow flameout with a 0x - or a quick and tidy 0x with a significant PR goodwill upside.
>>>> If there was 'no future good outcome' for the company then in what way is the founder's 'threat' to 'not sell' credible in any way? <<<<<
Why would he 'march on for 5 more years with little hope of exit' (by your very own projection?)
He's threatening to 'not sell' and therefore probably end up with $0?
That's an empty threat - and it's also acting agains the best interest of shareholders, which is his legal duty.
The situation is obvious:
They have an offer for $4M, it's probably their only way out, it's a nice 'few million' for the founder, the investors get their 1x participating + a tiny bit.
That's it.
It's not uncommon.
What kind of person would even think to sell a company 'on the premise that the other investors get nothing'?
He basically told the investors to bugger off and that's that.
'There is no significant goodwill' for the investors.
There is however some 'bad PR' for the founder unfortunately.
It's plain as day.
No, He asked, they agreed. There’s clearly something they both know that we don’t, and the outcome that happened happened. I guess it’s just as easy and valid for you to interpret it as being a bad thing, as it is for me to interpret it as a good thing. Only the VCs really know, I guess.