Isn't the conflict - of - interest here just enormous? The best interests of the company, and in particular the employees, is the funding round with the least onerous terms. If all a VC needs to do to get a board to accept worse terms is to kick back some money to a few strategic board members, where does that leave everyone else? And while I'm sure Rand Fishkin (who I do not know from Adam) is not jacking up his company in this case, what about appearances?
I think it's pretty common for founders to take some money off the table in B+ rounds, so I wouldn't sweat appearances much here. It's also not uncommon for early angels to see liquidity (partial or total) in later rounds as well.
It's not a kick-back, it's a stock sale. If Rand takes a million off the table, he's selling a million bucks in stock (and reducing his ownership accordingly). This actually helps other shareholders a touch in the B round because the company has to issue fewer new shares (causing early investors to get diluted less in the new round).
But yeah-- theoretically an investor could sell broadly crappy terms to some founders by buying out a mess of their shares. If founders want to screw their employees, they can often find a way (see Skype).
I wouldn't want to be read as suggesting that every time founders "take money off the table" that they're getting a kickback; only that this is a vector for kickbacks.
> This actually helps other shareholders a touch in
> the B round because the company has to issue fewer
> new shares
I'm not following this logic. If a founder sells their own shares in a B-round and pockets the proceeds -- that doesn't do anything to allow the company to issue fewer new shares because none of the money from those shares went to the company.
It helps in the sense that VCs often need to invest a certain minimum sum of money or prefer to invest more thus giving better terms in this case.
If the company isn't strapped for cash it can be beneficial to allow the VC to attain a higher share through selling founder or angel shares instead of just diluting all parties equally.
Option A: Series B investor buys shares from the Company. Company issues new shares and the Series B guy owns 20% of the company. This dilutes everyone else's ownership (for him to own 20%, everyone else's stake has to come down).
Option B: He buys all of his shares from existing shareholders. This requires no additional shares so people who are NOT cashing aren't diluted at all.
I'm just guessing here-- I've never taken money off the table. But I can't imagine it working any other way.
Option B puts no money into the company. In option A existing stockholders are diluted but the company has more cash. So "taking money off the table" comes at the expense of what the company can raise. If there was additional demand for the stock (as evidenced by someone willing to pay for the shares in Option B) then this could have resulted either in a higher stock price (and less dilution for more money) or more funds raise (possibly with more dilution).
I think this is an increasingly popular viewpoint these days, and is being recognized by lots of startups taking funding and taking some money off the table. Money makes you comfortable, yes, but you need the rest of your environment to be comfortable (relatively) to focus on your business and put your effort into that.
And I, for one, am very glad that founders these days have this option, do to what they love and want to do without having to worry about financial security (well, in some cases anyways).
I just wanted to reflect on the point that $25,000 in the bank is "no personal savings".
To me thats 6 months at my current rate and a year being frugal. I'm aware its totally different economics than myself, but it just kinda made me laugh.
I'm pretty sure most American's could live frugally on 25K for 6 months. However, it's still considered foolish if you have the means to save more because that 6 months is based on your "normal rate of expenditures". A surprise medical emergency could easily wipe that out leaving Rand in a position where he might have to take VC money at much worse terms because of his financial situation.
I keep forgetting that Americans have to think like that, its nice that any surprise medical emergencies here cost nothing. I assume that surprise medical bills are one of the biggest fears for Americans. It would certainly be something i'd be afraid of.
I don't know where you're from or what your healthcare system is like, but I'm in Western Europe and six months in the hospital with your company without a leader will ruin you if you have only 25k in the bank.
I don't know why my fellow European are so self-righteous about 'our' healthcare system - don't believe the bullshit you're being told about how great our socialism is, I'm going through a 'light' version of it right now and it ain't all roses and sunshine. And I'm in one of the richest countries of the world that is consistently ranked at the top in healthcare - snicker.
(yes I realize that in the US health care is more expensive and that a broken leg will set you back there more than over here, but if you think that you're shielded from the financial effects of health issues over here you're deluding yourself)
This post is nonsense. You don't understand just how bad the American healthcare system is. Of course a medical emergency is going to set you back, the difference is it won't destroy your finances for the rest of your life.
Maybe I don't, but saying 'I don't need to worry about the financial side of medical issues because I live in Europe' is nonsense too, especially when you have your own business.
It's an exaggeration, but the difference between getting a "winning" ticket in the freak accident lottery in Europe is worlds apart from the same thing happening in the US. In Europe you might lose your business. In the US you'll probably never get a chance to try again.
He probably has insurance, and since he controls his company's insurance, he probably picked something reasonable. You also need to do that to be competitive at hiring in this space.
It won't literally cost nothing to have a medical emergency, but if you have decent insurance, it's manageable.
The thing about medical insurance in the US is that you really don't know if the policy you have is reasonable for major medical events. Everyday stuff yes, but until that rare major event happens, and you actually try to exercise what you hope you purchased - it's a giant unknown. e.g. The insurance regulators in CA are having trouble trying to stamp out issues where a major medical claim triggers a company review of your initial insurance application to see if there's any way to deny that you even have a valid policy - even if you've been carrying the insurance for years.
s/medical emergency/sudden unplanned expenditure/ to not miss the larger point. An unplanned expenditure could very well be a medical emergency, but there are many other reasons someone might need more cash suddenly. Car wrecks, legal fees, etc. With only $25k in the bank, even making a sudden trip to a close family member's funeral can eat up a meaningful percentage of total savings.
It's all relative, Tam. When I was 20 in college, $1000 in the bank was huge. Ballmer and Gates pull out at least $100,000,000 every 6 months from Microsoft.
I wouldn't call $25,000 nothing personally, but it's all about perspective, I suppose.
Perhaps. I do like to consider myself one of those people who think i wouldnt be like that, but obviously i'll never truly know until it happens. I remember when i had my first job, i thought my £650 a month wage was loads, now thats just my rent.
It's relative to your current level of business "success". When your time becomes worth enough at your business, it becomes false economy to be too frugal. This is what the article is all about.
I think the important bit here is the time/money tradeoffs. I mean, sure, I can live on two grand a month, but that means I'm cooking most of my own food, repairing my own car, etc... I mean, those are all fine things to do, but if you are investing in my business, it might be worth the cash to pay me enough that I can afford to pay other people to deal with my personal needs. I mean, if I spend the money on a new BMW, that doesn't help you. But for the same money, I can have someone come by and clean my house once a week, and have enough left over to get takeaway on busy nights. Both of those things will free up time for me to make money for both of us.
I think it depends on what he wants to do with the money? He already mentioned that money isn't going to change his life style (but we'll see if that's really the case) but having only 25k in the savings with a family? That's just being a bit reckless. I do agree with the points of a few commenters here that he should just take a 1M or 2 off the table so he can focus on the company and not worry about his personal financial circumstances. Also, you never know in this world when a medical emergency happens and he needs to use this money. Having the money gives him breathing room and overall the benefits of just having options in life.
If nothing else, he can reinvest that money to other startups as an angel.
I've always thought this is the way I'd like to go with a startup if it became successful.
Sure not having money is a great motivator, but the time spent doing other things just to save money often costs you more. As an example, I've spent a lot of time writing a script for a product overview video for my startup. I could be spending this time on more valuable tasks, like product dev or sales, if I had the money to go with another company.
It sounds like you won’t accept the “you deserve it” argument
Good for him then. That's an argument I hear far too often that, in my opinion, appeals purely to greed and fosters self-entitlement as if it was a good thing.
A counterpoint opinion: although "I deserve it" may be a rationale to which many greedy or self-entitled people cling, there does exist a point where a well-balanced person can make a reasonable value judgment about the worth of their efforts. If you deny that it's possible to make this judgment fairly, your perspective implies that there is no meaningful correlation between effort and positive outcomes -- it's a mentality of "nothing is good enough", which can work as a long-term view (perhaps better said as "there is always room to improve") but in the short- to mid-term is a destructive mindset which can lead to burnout.
My two cents, as a guy who struggled with depression for several years due in large part to having held such a negative opinion of myself that I couldn't celebrate any intermediate successes.
In my mind, you're talking about deserving vs. earning. To me, deserve is intrinsic (e.g. You deserve the right to a speedy trial) while earn is value-based (e.g. You've worked hard, you earned it)
The two words are close to eachother, but I am wary of 'deserve' because it seems to be abused.
> You are like Michael Dell and Bill Gates and Steve Jobs and Warren Buffet and Sergey Brin and countless others who have achieved financial success so massive it’s almost impossible to wrap your brain around the implications of their net worth, and yet their work ethic, drive, and ability to innovate hasn’t flagged for a decade or more.
Hate to do this, but Micheal Dell and Bill Gates have innovated in the last decade? Really? Is this the same decade or has there been a different decade I somehow missed?
I'm not holding it against him: I'm just questioning the statement. The Gates foundation is great, but its not innovative: Rockefeller/Carnegie/etc did similar things in their time. And I have no clue what Micheal Dell has done in the last decade that is noteworthy. So to all the folks voting my comment down: in the last 10 years what about the things Bill Gates and Micheal Dell have done is innovative?
