I have very limited knowledge of this situation, but, I'm gonna pile on anyway:
With that kind of money raised, the founders didn't get "nothing". They got a salary, probably a decent one, for however long they were running the thing. Which is more than many startup founders get out of businesses that fail. If they don't have personal debt, or didn't lose relationships or friendships, they came out ahead of many startup founders who started a business that failed.
They raised more money than the business was worth. I don't blame them for doing so; many people have done it, and no amount of seeing other people make that mistake will necessarily prepare a founder to turn down several million dollars of extra runway to try for the big exit. But, it sounds like there is simply less money on the table than there are people wanting that money (and that have contractual rights to it).
Given the interests of GetSatisfaction were always misaligned with the interests of their customers (i.e. the business model was effectively a shakedown, in the same vein as Yelp), it shouldn't be surprising that eventually their dreams didn't align with the reality of how many people wanted to pay for it. No matter how good the product is, if you have to extort people to buy it, you're not building a sustainable business.
I'm all for ranting about VCs being assholes, because sometimes they are. But, as far as I can tell, that's not the case here. Founders made some bad calls, probably some other people did, too. The business failed. It happens. If I were them, I'd take this as a valuable lesson...and probably wouldn't burn bridges with the people who invested in me in the past, because history indicates they'll be the same people to invest in me in the future (a failed business is not a death sentence in the valley, and many investors have invested in the same team for multiple businesses).
We'll see! The founders of GetSatisfaction weren't spring chickens, unaware of the costs-of-capital raised. But sometimes later management and investors do engage in shenanigans. Some will remember Naval Ravikant et al's suit against a cofounder and VCs back in 2005:
More seriously, I remember bringing up Get Satisfaction at a VC meeting and the VC said "Don't talk to me about Get Satisfaction." I guess now we see why.
> prepare a founder to turn down several million dollars of extra runway to try for the big exit.
Every huckster thinks he can pull off the big pump-n-dump. Most don't.
> the business model was effectively a shakedown,
Sure sounds like it. Protection rackets only work if you can beat people up and burn their stuff, and GetSatisfaction failed to do either. Too bad, so sad.
VCs aren't assholes, generally, but their standard terms are a bad deal for founders, generally. I've thought about this a lot over the past 25 years. In the past I've seen VCs do really bad things (like force decisions that set the company back 18 months bad.) The problem is, when you get a "good" VC that doesn't force bad decisions on you ,the cost of the money, mostly in deal terms, is too damn high.
And when you push back on them about this the response is you get are generally:
"This is a standard term" eg: everybody else is doing it. Well, tough. I'm actually reading before signing.
"If we don't have this method of double dipping [one of the four different ways they are doing so], then you could take the company and sell it for the money we put into it and that would be a bad deal for us." You mean your share of the company in such a situation isn't equal to the amount of money you put in? First off, I don't believe you because this valuation is kind of a joke and you've spent weeks telling us scary stories to try and keep it down, and secondly, your inability to get the equity you want for your money is your problem, not mine. That is like saying you think you're getting a bad deal so you want to cheat me to get a better deal? So let me get this straight, I took real risk and built up sweat equity, but you want my shares to be discounted effectively because you don't trust me? Ok, how about we discount your shares because I don't trust you? (I don't trust anyone who doesn't trust me. Usually they're projecting their own intentions.) Also, all you're doing-- at best-- is putting money in. Money can be acquired from any number of places and methods. The expertise we gained while building the company is irreplaceable and the knowledge of our own product and the risk we took getting it to here is far more valuable than your money. So, we have a split of the shares that accounts for that. The shares you get account for all of that.
"trust us". Nope, if you don't trust me, don't do a deal with me.
Don't even get me started on founders vesting their shares. You build a company, you have sweat equity, but the VC wants to reset the vesting? Why ? You can't vote unvested shares. They will give you a song and dance about "what if a founder leaves?" Well, we covered that in our articles of incorporation because we're not idiots, but they will ignore that and insist that "all founders must vest all their shares". (this is more common on early VC deals.) That's straight up taking paid for (with equity) and earn shares and turning them into a class of potential shares. Nope Nope Nope. Give founders part of the option pool as an incentive, fine. But reseting is just setting you up to be sucker punched when they want to replace a founder (because they don't like how things are going and need a scapegoat, no matter that it's the worst thing for the business at that point. But Tada! All your shares you already earned are now vesting again! Look at that! Even thought the other founders don't want you out, you don't have enough votes!
I think that the culture of "startups" over the past decade has become a bit cargo cult where there's a specific plane you build to get the money to rain from the sky.
This is: Go to accelerator, do VC deal, take the VC money and buy growth, use that to do another VC deal, rinse and repeat until you either stumble onto a working business (Uber, AirBnB) or you go bust (get Satisfaction)
The problem with this is that the cost of those VC deals are not in the founders interests. Far too often they hit base hits and build viable fast growing companies and then get taken out and don't get adequately compensated (and all the non-founder employees really get screwed.)
The other problems with this is once you take money from a VC you're locked into trying, and repeatedly betting the company, on being the next Uber. Being 37 Signals is not sufficient. Being Github (before the A18Z investment) is not sufficient.... even though both of those are obviously great fast growing companies that would make their founders and employees a lot of money at a liquidation event. And such event is far less likely under VCs because they want a $1B valuation (in fact their fund NEEDS a $1B valuation to cover all the losers)... whereas a $50M, $100M, $250M or $500M valuation (with no dilution from taking VC money) even though it's drastically smaller would result in the founders and early employees getting rich, and even the later employees getting a nice bonus.
Take angel money on good, clean, simple terms. If you need that to get going, go for it.
I think the age of the VCs is past. They just haven't realized it yet.
Ok, whenever I say things that are critical of VCs I get a lot of responses that are sorta knee jerk defenses of VCs. I've been working for startups and founding startups for over 25 years. I've seen it back when it was much worse and it cost a lot more to do a company. I've ridden this industry from BEFORE the dotcom bubble started to inflate. I'm speaking form experience here. Even when the VCs are "good" - in the top %10 of the VCs I've had direct experience with-- the deal isn't good for the founders in the end. They paid too much for their money.
You want VC money. Ok, why? Because that's your dream? Your dream should be to build a company.
Your plan should be to build a compelling product or service that really makes people go crazy with desire to throw money at you for it. I'm talking about CUSTOMERS.
All the time you spend dealign with VCs takes away from that and the deals aren't good.
You need money? Ok, go on Angel.co, get backed by a syndicate. Find Angels in your community. Charge for your product from day one. If github can do it, you can do it. Plow your profits into growth and product development. Take as little money as you can to get top product market fit. VC money is wasted before that point anyway. Even angel money should just be used to keep the lights on until you get to product market fit. Once you haver that, you have revenue, maybe take some more angel money to jumpstart marketing, but plow your operational profits int growing the business.
Don't delude yourself into thinking your pokemon website is a billion dollar business. It isn't.
Don't even waste time chasing VCs. By definition that are bad at picking and they will try to force you to bet it all only our pokemon wiki being a billion dollar business.
GS may have made a bunch of mistakes, but I'm using decades of experience here to reach my conclusions.
If you go thru YC or TechStars (but not any other accelerator) then maybe you might have a real business that could be a billion dollar business, but even then why not raise angel money instead of VC money? And I mean angel money on terms like the YC deferred-valuation deal that replaces convertible notes. (can't remember the name at the moment.)
Don't do any deal with liquidation preferences or any other kind of shenanigans. (And don't wave your hands about why VCs need LP in front of me. Your math doesn't add up, it can't add up.)
The model will never change until VCs realize they are dinosaurs. Or let VCs fund late stage deals, I'm sure their terms are not so terrible (unless the company is dying.)
One problem that arises with the bootstrap-off-revenue model (assuming of course you are lucky enough to find product/market fit quickly, before you run through your seed money) is that you become vulnerable to company B that was willing to take crappy VC $$$ and is now able to kick your ass on price, right down to the freemium, eyeballs-are-value goose-egg giveaway.
Free markets are always prone to a race to the bottom. Just because you insist on reading the fine print and haggling over the downside scenarios, doesn't mean the 23 yr old recent grad no expenses (family fallback) guy won't take that deal. He damn well will.
But there will be company C raising even more money and beating company B. And then comes Google and beats company C.
In short, if you are building a company you need to built it based on some "secret sauce". That could be your team. That could be your patent. That could be just customer base. That could be your unique understand of the market. But money is never "secret sauce".
And please do not take me wrong here: raising investment is very important to make your company big. But first thing first.
"...you become vulnerable to company B that was willing to take crappy VC $$$ and is now able to kick your ass on price, right down to the freemium, eyeballs-are-value goose-egg giveaway."
If that's physically possible, if price is the differentiator, you probably don't need to be in the business anyway. (Now, I'm not saying that you're wrong, in most cases, but....)
> Don't even get me started on founders vesting their shares.
As an average Joe angel (not blessed with any inherited wealth), I personally think it's fair ask to ask founders to vest a "majority" of their shares. IMHO, if angels take 10% for a company in its infancy and leave founders with 90% vested equity, there is simply too much risk if one of the founders decides to leave! Especially so when the business itself hasn't really been properly built.
As someone who started the first travel site on the web (GetThere) and built it to 600 employees, an IPO and later sale to Sabre, and who debated this with my co-founders and myself, there is a most definitely a happy medium (we started with 18 months of vesting on a 48 month plan).
If founders start 100% vested then the pre-money will simply be a different calculation, and founders will earn additional shares to continue to provide incentive post-funding. Don't delude yourself that somehow your equity will provide sufficient incentive for you to continue to perform. This might be somewhat true in startups with one founder, but it's considerably less true when there are 2 or 3. And it's also protection for you as a founder. Why let one of your co-founders be able to cut out early on and get the same deal you did when you still have to put in the time in order for the opportunity to truly prove its potential. It's important for the founders to continue to vest-- and also, when things take longer than 4 years, as they did for us, more shares are appropriate for founders that remain essential to the business.
There is definitely a need for a response cheat sheet to the most typical term sheet bullshit and while I get not all deals are equal, there are accordingly only so many stages of startup where the range of responses are necessary.
> Don't even get me started on founders vesting their shares. You build a company, you have sweat equity, but the VC wants to reset the vesting? Why ? You can't vote unvested shares. They will give you a song and dance about "what if a founder leaves?" Well, we covered that in our articles of incorporation because we're not idiots, but they will ignore that and insist that "all founders must vest all their shares". (this is more common on early VC deals.) That's straight up taking paid for (with equity) and earn shares and turning them into a class of potential shares. Nope Nope Nope. Give founders part of the option pool as an incentive, fine. But reseting is just setting you up to be sucker punched when they want to replace a founder (because they don't like how things are going and need a scapegoat, no matter that it's the worst thing for the business at that point. But Tada! All your shares you already earned are now vesting again! Look at that! Even thought the other founders don't want you out, you don't have enough votes!
I'm really interested in what you're saying but I can't understand what you mean in this paragraph. I'm not sure what part is your position and what part is meant as sarcasm. Can anyone spell it out for me? Thanks :)
The parent is, basically, disagreeing with the practice of making founders vest their shares when a VC comes on board.
They're saying that VCs use that approach as an additional means to control the company in case things aren't going the way they want.
The parent's position is that the founder shouldn't have to vest their shares like that, because they built the company and their shares should be regarded as fully vested since the founders put in sweat equity to start it all (essentially saying that the shares are fully paid up from the process of starting the business, and that vesting the shares takes those shares back from the founder, sort of like taking away that sweat equity effort).
Vesting should be fine if the VC's are willing to pay the founders for the sweat that was already dropped in... most of this sweat would have been at Zero pay to boot.
Asking founders to re-vest nullifies the effort they have put until now and makes it unattractive for founders to seek VC money.
Generally whoever has the greater need makes the bigger compromises...
Additionally, they had the opportunity to capitalize on Campfire in a way that they could have closed the market for realtime collaboration before Slack. Obviously Slack is a superior product (and given 37signals opinionated product philosophy I don't think they would have ever built something so comprehensive) but still... they had a 7 year head start on Slack. A lot of orgs used Campfire every day, and probably plenty still do.
But I appreciate their commitment to focusing on one thing.
Basecamp's revenue and efficiency is of course impressive, but I'm not sure a multiple like Atlassian's would apply. Investors could reasonably assume (or know, if they're privy to their plans) that Atlassian is planning to use those 1100 employees to go after a number of markets, whereas Basecamp has shown their preference for focus and managed growth.
Sounds like the premise of the latest episode of Silicon Valley (season 2)
The raised more than they they needed, sold for less. Founders got nothing. Literally the same :)
"They got a salary, probably a decent one, for however long they were running the thing." - I want to second this. I worked for a startup that the C level's made huge bucks (we were paid really well too) and they would wine/dine on the companies $$ all the time. They sold the company for a little more then the funding they got, but spun a new company off where investors got little and they cashed out.
"With that kind of money raised, the founders didn't get "nothing". They got a salary, probably a decent one, for however long they were running the thing. Which is more than many startup founders get out of businesses that fail. If they don't have personal debt, or didn't lose relationships or friendships, they came out ahead of many startup founders who started a business that failed."
Well, you should always consider the alternative cost. I don't know the founders but I can assume that if they would have work somewhere else they had much higher salary/ benefits etc
"I don't know the founders but I can assume that if they would have work somewhere else they had much higher salary/ benefits etc"
I think you'd be surprised. The A-round term sheets I've had come my way over the years specified a salary for founders bigger than any I've ever received working for other companies. It was more of a suggestion than a requirement of the deal, I think, but it gave some clues about the salaries the investors would be comfortable with the founders being paid. It was always generous. Not "C-level at Google" high, but certainly better than "low or mid-level developer at almost any company in the US, including good ones".
By the time you are raising millions of dollars, you are drawing a decent salary. Maybe you could make more somewhere else, but I believe it's more likely you'd make less.
Yeah, but ycombinator's involvement seems like it would keep vcs on their best behavior. It's (I believe) common knowledge that all the founders and the yc principals share info on vcs, so screwing founders (for real, not just in the founders' opinion) has much higher costs.
The VC industry is ripe for disruption it would seem?
I wonder how quickly the landscape would change if billionaires from various other fields started investing arms to fund tech. Considering the trend in club football where billionaires who have nothing to do with football started investing in football clubs all over Europe. The way they went about running the whole business changed the face of club football forever. Disruptive is mildly putting it as European football's premier footablling body (UEFA) has tried to regulate the flow of cash and has imposed strict investment guidelines ever since, to cope with it. Sort of.
Instead of having VCs who don’t respect hackers and work hard to rip them off on behalf of their LPs, you’d have VCs who don’t respect hackers and also don’t understand technology, which sounds like a great way for their LPs to lose all their money.
I wanted to say “this is how pets.com got funded” but actually it turns out pets.com was started by the CEO who led Berkeley Systems, the flying toaster people, into an acquisition where she got laid off; and she was funded by Hummer Winblad and Amazon. And so while Julie Wainwright may not have exactly been Brin and Page getting funded by Andy Bechtolsheim, she certainly had experience managing technology companies, and her VCs certainly knew what they were getting into. And other ridiculous stories from the same time, like FireDrop/Zaplet (business plan: send DHTML by email) had similarly impeccable pedigrees (funded: US$90M by Kleiner, Joe Kraus, Bill Joy, Esther Dyson, et al.)
So, how much worse would it get, really? Hundreds of billions of dollars a year of investment capital desperately chasing any Ivy League graduate who knows how to tie a tie and promises to hire an army of monkey programmers just as soon as they get funded?
If the evidence from football is anything to go by, billionaires adopting startups to run as their personal fiefdom would have even the most activist and unethical VCs seem like a founder's dream by comparison.
The emergence of liquid secondary markets for companies not big enough to IPO would be the founders' dream; suddenly the long term sustainability of the business would matter as much as numbers of potential acquirers and potential for aggressive growth.
Agreed, although GetSatisfaction describes itself as "the leading customer engagement platform" - a broad area like customer engagement seems like it has gigantic revenue potential and if they're the leading business in that sector..
Maybe my memory is incorrect, but they were kind of sketchy; their page implied companies not paying them weren't interested in customer interaction and they wanted $1200/year to get rid of competitors' ads before 37 signals called them out: https://signalvnoise.com/posts/1650-get-satisfaction-or-else
I seem to remember at the time there was about 1/2 year - year where Google loved them and you'd get a Get Satisfaction result for googling "[company name] support". GS were HN darlings for a little bit, then started getting annoying because you'd land on this pointless page, then 37signals (rightfully) publicly called them out, then google seemed to delist them in a panda or something and then everyone forgot about them.
Easier just to ignore it completely, why should I waste my time on overriding their stupidity? Actually Google seem to be dropping them down the ranks, as I rarely see a Quora link now.
Off topic, but this code blob broke the formatting of the HN comment page, causing text to extend horizontally off the screen. It'd be great if you (or a mod) could add some (4, I think?) spaces in front of your code to make it appear in a code/pre tag.
Yahoo Answers is nice and not at all spammy. Some of the answers are bad (and some of them are very good), but the site itself is clear and simple, and doesn't have the obnoxious login nonsense of Quora.
I'm a former Get Sat employee (I left about two months ago). While the company may have done that early on, we definitely did NOT continue that at any point when I was there. There were a few communities like that we still kept up because there was some activity, but we certainly weren't adding new ones. In fact, we were actively pruning communities that had no activity and were on the old, free accounts when I left.
In the 2.5 years I was there, the only communities we launched were ones we were paid to launch.
Whenever I ended up on a getsatisfaction page after searching for something I always felt like I had landed on some kind of dodgy crappy aggregator rather than anything official.
Wow, the arrogance of expecting 'hush money' and complaining if you don't get it? Liquidations preferences are pretty much the norm in Silicon Valley, if they didn't understand how they worked when they chose to get outside investment, then they never should have agreed to the liquidation preferences to begin with (which may easily mean they never should have gotten outside investment to begin with).
When startups don't sell for above their valuations, the investors are going to get their money back first (and in varying cases more, depending on liquidation preferences).
Post valuation at over $50M - no data yet on the amount of the acquisition, but if it was equal to that or less (or if the liquidation preferences for the A/B rounds were greater than 1X) it's pretty clear the founders wouldn't have gotten anything from the acquisition. But as someone else pointed out, it IS likely they got a salary from those early rounds of investors, which, is better than most startup founders see.
The acquirer, Sprinklr, is funding multiple acquisitions out of their recently raised $46M, so it's fairly certain that the amount of this acquisition was less than $50M
The thing I was surprised by is that the preferred stock had a 6% dividend. Is that common nowadays?
Back around 30 years ago when I was at startups, the preferred didn't get any dividends. It existed to allow the VCs to stay ahead of founders/employees in case of IPO, liquidation, etc. Not to collect a dividend along the way.
Founder liquidity in a B round for a company that wasn't extremely competitive for capital seems pretty uncommon, IMO, especially back when Get Satisfaction would have been raising (I remember "Series FF" and other founder-preference vehicles being novel in the ~2006 era). Why do you think they'd have cashed out at a series B?
This is interesting, because according to the screenshot from PitchBook elsewhere in the thread, OATV and First Round both participated in the Series B, which was the last equity round.
If that's accurate, in order for OATV and First Round to get nothing, whoever did that debt financing in 2014 would have had to have gotten 100% of the proceeds, with none left to trickle down to the Series B.
We don't have the details, of course, but taking on debt and then selling for less than the amount needed to cover the debt a year later certainly sounds like a party foul. If your company's in such a precarious position, normally you can't even get debt financing.
Based on the equity rounds, the founder has nothing to kvetch about - they raised and the company didn't get to where it needed to be. But if I were investigating this, I'd dig into the terms of and decision to take that final debt round. Could be nothing, but there's a lot that could've happened there that'd make a founder tetchy.
As a technical founder, I'd be very careful to start a company again.
I used to ignore finance and bureaucracy, but the industry has changed a lot. The popular quote 'just passionately build something' is nothing but a trap. Although something like YC doesn't fit this profile, one will eventually find himself in a hostile situation.
Maybe don't take buckets of cash that you don't/shouldn't need? That $XXmm isn't free and is a good way to hand someone a leash tied around your neck.
It looks like Get Satisfaction raised $20mm. Why that much? Did all that money contribute towards success? Or was a good chunk of that money not utilized well? Why did the company tank? Were they not acquiring enough customers? Was their business model unsound? What forced the fire sale?
I don't think founders are supposed to get a big payout for a failure, but we need more info before agreeing with this sob story of founders who didn't get a dime.
The issue is that the founders were pushed out. Lane indicates that business tanked ever since they left, which is what presumably led to a fire sale.
It's one thing if the business tanks when founders are in-charge. You can blame them for failure and say it's fair that they din't get a dime. But why did the VCs take over the reigns? It's criminal to take over from founders and then run the business into the ground, like it seems to have happened here.
Of course, that Series B happened looooooong back. There was no Series C in the following year or two years after that, which might be why investors got jittery. The timing matters - did the founders get pushed out after a decent amount of time after the Series B? Or was it right after the investment? That would tell whether the VC had some reasonable cause to get desperate or they were just trying to "screw" the founders.
I think that's a pretty blind statement. Just because you're a technical founder doesn't mean you have to ignore the finance and other non-engineering activities. That's just a bad way to run any company.
Also, being a technical founder doesn't mean you don't have common sense. Yes, GS's founders got nothing, but really it's the employees that saw the largest loss... They signed up to see the company really take off, and it didn't.
But at the end, if your company doesn't make enough money and requires raising amount of money you just don't know how to waste you shouldn't expect a big payday. Being technical isn't an excuse.
I think as more and more tech co-founders go through the meat grinder and deal with the realities of the business side of VC backed startups, we'll start to see technologists start very interesting companies with very different ideologies and goals then people seem to have today. Diversity in how we approach business is a great thing.
I'm not sure what you and the parent are alluding to but tech founders have been founding massively successful venture-backed companies since the dawn of Silicon Valley.
Founders probably had a lower liquidation preference than early investors. The acquisition didn't meet the minimum return requirement of these early investors, so nobody else received anything.
Read your term sheets carefully, this isn't uncommon nor something to be surprised about.
According to their website they have 1000s of customers paying 1200+/m. At the low end they're getting 1.2 million in revenue a month and only have 9 employees. Why did they sell? Something is not adding up.
According to the pricing page, Get Satisfaction's only public pricing is the $1,200/mo subscription. ZenDesk starts at $25m/agent for the community solution.
Granted, they are slightly different products; I was just grabbing the nearest competitor I could think of. (They're in the same space, though, and competing directly for the community/knowledge base part of their products.)
Not sure where you're seeing 9 employees. At the end of 2013 they had 40 employees, and while they laid 10% off in early 2014, they still had over 30 a year ago. Larger customers (of which there weren't 1000's) were paying much more than $1200/year, too. But still, the money coming in wasn't anywhere near the burn rate.
There were more than 9 employees at GS - about 40. There's only 9 employees / former employees that have CrunchBase accounts, so that's why you're seeing that number.
That's happened to other companies. Havok, the physics engine people, went through that. The founders and early investors way overexpanded the business (they had locations in three countries), blew through the initial funding, and tanked. Another group bought the business cheaply, replaced the management, and eventually sold out to Intel.
That's extraordinarily strange - in general, the founders will always get a bonus when a company is acquired. The only scenario in which I've not seen that happen, is when they've left the company - in which they are treated like any common shareholder - they are wiped out if the preferred liquidation preference isn't covered - but, of course, that's precisely why the common is valued at 1/10th of the preferred early on - because it really is worth much less.
The one scenario I've seen where founders who have left the company still get a "consulting" fee during a liquidation, is where they held enough common shares to cause issues during a lawsuit over minority shareholder rights - but typically the employees/founders still with the company being acquired have enough shares to not make it an issue - and, as I noted earlier, it's almost always the case that founders still with a company being acquired get some type of bonus, even if it's a retention fee.
Every time you raise money you negotiate the terms for that private placement. Lets say your start up has 3 rounds, A, B, and C, and raises $1M, $2M, and $10M with a 1x liquidation preference. Now you're business is sagging and you're about to close up shop, but an investor comes in and says "We'll provide the money but we want 3x senior liquidation" which is to say they get paid back 3X their money before anyone else. Lets say they put in $1M, and the company sells for $3M. It all goes to the last investor because they were senior in liquidation rights. Nobody else gets any money.
In terms of that last raise it is sometimes "nothing" (ie close the doors) or one more shot at making it. So from the founder's perspective the 'close the doors' option has them getting nothing, and keeping it alive long enough to sell it may or may not give them a return.
It's not at all uncommon. My third startup, Smart Charter, was acquired pre-launch by Richard Branson and launched as Virgin Charter. Virgin then ran it into the ground. I never saw a dime. :-(
Sounds like some investors took a wash too, so it's likely they had significant debt. Otherwise, it's because other investors held liquidation preferences (possibly at a multiple).
Liquidation is usually the multiple of the investment money, that the investor gets back before anyone else gets their money. Like earlier explained, later investors generally get senior rights to earlier investors; so they get their money out first.
It's simply about (real or perceived) risks. A senior liquidation preference is a way of mitigating risk for later investors by increasing the chance they can get a return on their investment, or at least their money back in the event things doesn't do great, while giving up less upside potential for earlier investors if things does go great.
"...if you prefer to provide great support on your own site with your own forums and your own help section and your own feedback mechanisms and your own FAQs, well, Get Satisfaction doesn’t play fair." ~Jason Fried, 37 Signals
Almost any significant round outside of seed would come with liquidation preference. CrunchBase says a total of $20.9 was raised, so if the final sale price was less then $20,900,001.00, there's likely no money left for common stock.
Interesting. I didn't know that. I understand that if expectations are not met there have to be consequences. But leaving the founders of a company with nothing while others earning money feels completely wrong.
I forgot about the debt holders. So if there was any debt (including un-converted convertible notes), the pecking order is:
1) Debt holders
2) Most senior shareholders and their liquidation preference
3) Less senior shareholders and their liquidation preference
...
99) Common stock holders
This is actually to align the founder incentives in shooting for a big exit. Insert any other order of preferences, and the founders have a stronger incentive to flip the company as quickly as possible in order to create a payday for themselves, screwing investors in the process (which also happens to be a very irrational proposal for investors, which is why you rarely see a round on those terms).
Investors don't inherently get screwed in the process of a quick flip if they have common shares. It means the investor is directly aligned with the founders, and makes it harder for the investor to get a return at the expense of the founders.
Investor puts in $1m for 20%.
Founders quick flip for $30m. The investor just made six times his money, and earned a payout fully aligned with the founders. Absolutely nobody got screwed.
The reason investors like liquidation preferences, is so they can improve their odds of getting their money back at least (and yielding the first dollars of return). They aren't aligning their interests with the founders in this case, they're putting their interests in front of the founders, just as debt does. Liquidation preferences are a way of saying: my equity is more important than your equity; you need my money, so I'm going to make sure my money is treated with more importance than your equity.
Liquidation preferences exist solely to protect investors from their own poor choices at the expense of the founders / earlier shareholders.
Liquidation preferences exist to protect against a company raising $10 million for 20% and selling for $5 million, with the founders taking a nice payoff of $4 million and the investor losing all but $1 million.
In that scenario, without liquidation preferences, the interests of the founders and investors aren't aligned--the founders profit while the investors lose money.
So does this mean employees could be owed something in terms of debt (i.e. if they haven't had their benefits paid out fully) or are they what I assume:
In the US you'd have to make a profit to have the tax liability, and if that's the case, the company is unlikely to be going through a fire sale. There's a host of payroll taxes associated with employees, but those get paid as employees get their paychecks, so qualifies under "debt".
See item 1) debt holders. Within the class of debt holders, the tax man and/or employees with salary claims often have special preference amongst creditors in many countries.
Put yourself in the shoes of an investor. Someone asks you for money after their company hasn't been doing that great. You think here is potential, but you think there's a chance you'll lose some/all your money. So you provide the cash with the stipulation that any sale means your cash comes back first.
The alternative is for the company to tank and the founders - who tanked the company - walk away with your money. That is completely wrong.
Founders don't accept deals for money which are bad for them if they don't need it. You need money, you get the terms.
Same goes if you lose a house by default and then go and ask for money for another house. The subsequent mortgage is going to be at terms significantly less desirable than you may have got on your first try.
But they did get something. What they got was more money to keep trying. They didn't have to take the deal, but most likely would have been still left with nothing.
They got something before. They are paying for that now.
>But leaving the founders of a company with nothing while others earning money feels completely wrong.
Why? They founded a company which tanked. They made poor decisions along the way which led to said taking. They did it on someone else's dime. No one made money here, so why shouldn't the investors get some of the investment back?
Isn't the whole point of venture capital that you take on a large risk in return for a large potential payout. VC is called "risk capital" in a number of languages for a reason.
But at some point the risk gets so large that the choice is for you to not get any investment at all, or get one with additional clauses to reduce the risk to levels acceptable to your potential investors.
It's a tradeoff. And sometimes it can work to your benefit. E.g. if you and your potential investor disagrees about the level of risk and/or about the potential size of an exit, you can try to negotiate a multiple liquidation preference in return for less shares.
Yep, you're right, the lesson out of this is "stick to the common stock for as long as possible". I'm aware of at least one company (5 years running, raised a B round with numbers in mid-eight digits), that still had only common stock floating around.
Unfortunately, the only way to afford that luxury is to not actually need the money, but be in high demand for investors to keep pinging you, and relent at some point with "alright, we don't need money, but if y'all agree to X valuation with common stock, we'll take your money".
Vcs deal in these companies like poor people deal in Beanie babies. No factory worker in China ever got a bonus when a beanie baby got sold for 10k. Cry me a rive.
With that kind of money raised, the founders didn't get "nothing". They got a salary, probably a decent one, for however long they were running the thing. Which is more than many startup founders get out of businesses that fail. If they don't have personal debt, or didn't lose relationships or friendships, they came out ahead of many startup founders who started a business that failed.
They raised more money than the business was worth. I don't blame them for doing so; many people have done it, and no amount of seeing other people make that mistake will necessarily prepare a founder to turn down several million dollars of extra runway to try for the big exit. But, it sounds like there is simply less money on the table than there are people wanting that money (and that have contractual rights to it).
Given the interests of GetSatisfaction were always misaligned with the interests of their customers (i.e. the business model was effectively a shakedown, in the same vein as Yelp), it shouldn't be surprising that eventually their dreams didn't align with the reality of how many people wanted to pay for it. No matter how good the product is, if you have to extort people to buy it, you're not building a sustainable business.
I'm all for ranting about VCs being assholes, because sometimes they are. But, as far as I can tell, that's not the case here. Founders made some bad calls, probably some other people did, too. The business failed. It happens. If I were them, I'd take this as a valuable lesson...and probably wouldn't burn bridges with the people who invested in me in the past, because history indicates they'll be the same people to invest in me in the future (a failed business is not a death sentence in the valley, and many investors have invested in the same team for multiple businesses).