7 ms·

Not to be overly emotive, but honestly, fuck Sam Altman on this one. If a person founds or cofounds a company worth >5million, they should become a millionaire

by toasted 12y ago

Not to be overly emotive, but honestly, fuck Sam Altman on this one. If a person founds or cofounds a company worth >5million, they should become a millionaire and have lifetime financial security. The VC already in all likelihood already has lifetime financial security. VC's bank on an 80-95% failure rate, so they are basically sacrificing lifetime financial security for 9/10 of their founders in order to increase the likelihood that 1/10 will be a bit more miserable and therefore work harder to increase the chance of a big exit. fuck them, take financial security.

toasted 12y ago
Just out of interest, is there a company which provides covert early exits for founders? For example I meet with a founder, they sign a contract saying secretly that they will give me a share of their equity in 2 year's time or whenever a major liquidity event occurs, and in return I pay them an amount based on current valuation?
- hglaser 12y ago
  I have heard of loans either secured by or "based on" shares of privately-held startups. I have no idea how common this is -- probably pretty uncommon. See e.g. https://www.svb.com/private-bank/founder-liquidity/ https://www.svb.com/private-bank/founder-liquidity/ and http://www.founderscircle.com/services/ http://www.founderscircle.com/services/
- gwillen 12y ago
  I would be interested to know (1) what the legal and regulatory implications of such a deal would be, and (2) what the implications would be with respect to the deals the founder would have signed with regard to the equity they were holding. My suspicion is this couldn't be done without causing problems in one or both domains, but I don't base that on anything solid.
- tptacek 12y ago
  Founder stock agreement boilerplates restrict founders from encumbering or pledging their shares without the approval of the board.
vecter 12y ago
As a founder of a company that's raised $25M combined over our seed, Series A, and Series B, I think Sam's coming from the right place. We raised a $2.5M seed round and a $7.5M Series A. At no point during our seed and Series A (the time period you're talking about) would it have made any financial sense for the founders to cash out even a penny. We felt this way because we had and still have genuine intentions of building a huge company, and every penny should be invested in growing the company. If we had instead felt differently, we would have tried to cash out some of our equity (which we didn't), and that should have been a red flag for investors to stay away. There's nothing wrong with trying to build a company to flip it for a few million in a year. Even better if you can do it without taking any outside money. If I were even an angel investor though, I would run away if I had any suspicion that that was the case. Also, if your company is worth $5M on paper due to investor term sheets, there isn't any really meaningful way you can achieve financial security unless you sell almost your entire stake in the company, which investors obviously wouldn't want to partake in. $5M from a term sheet doesn't meant $5M of liquidity. As an aside, I think your reply is incredibly immature, but I'm not going to use that as an argument for why you're wrong.
- toasted 12y ago
  Congrats. You guys have a great product and deserve your success. Tomorrow Youtube or Twitch could expand their offerings to include your business model and you may find yourself irrelevant within 6 months. I had a liquidity event last year in which I had the opportunity to sell either none, a part, or all of a holding in a product I strongly believed in for $6 million. I cashed out $2 million, kept 2/3rds equity. Since then, despite my belief in the product, it has lost most of it's value. I am very relieved (as is my girlfriend!) that I took (some) money and ran. When you are young you can feel a sense that success is inevitable and you want to keep doubling down, but there are a truckload of people in their late 30s and 40s and 50s for whom things just never quite worked out who would give anything for the security that a couple of million dollars provides.
  - vecter 12y ago
    Congrats on the liquidity! There will always be competition. I'm a huge fan of both YouTube and Twitch. I spend most of my leisure hours watching videos on those sites. They may enter the space, but even if they do, they'll have a long way to go before they can make us irrelevant. If we were ever to become irrelevant, it would most likely be due to other things, not those players.
tptacek 12y ago
The mindset here is that financiers owe company founders financial security. Financiers are rich. But, relative to the economy, so are founders, even out-of-the-money founders. Why are they uniquely deserving of redistribution? Why aren't we instead arguing for a 95% tax on VCs that funds job training for people in the manufacturing economy?
- toasted 12y ago
  Because the founders have created the business and have created several million dollars of value (based on the VC's own valuation). Why should they not be able to cash out for a lifetime of financial security?
  - mikecb 12y ago
    if the founders create the value, why would you give them a chance to leave with discounted future profits before the value is realized in a real (not discounted) profit stream?
    - toasted 12y ago
      Because regardless of whether profit is there, they should be able to extract value if they want to.
      - mikecb 12y ago
        If profit isn't there, value is theoretical. You're just taking money from the VC (and the business' growth). You may find future rounds harder to fund.
        toasted 12y ago
        So amazon's market cap of 144b is theoretical because they don't have profits? And bezos should be paid enough salary to survive but not so much that he is no longer "hungry"?
quizotic 12y ago
> fuck Sam Altman on this one Really? Most early investors make 90+ % of their return from the tiny fraction of investments that become huge. If the founder is willing to cash out for current market value, doesn't that imply the founder doesn't believe the equity will quickly grow 1000-fold? And if the founder doesn't think the company will become huge, wouldn't the investor be foolish to think so? This isn't about squeezing the founders, it's about passing on stuff that might be glittery, but probably isn't the mother lode.
- AndrewKemendo 12y ago
  If the founder is willing to cash out for current market value, doesn't that imply the founder doesn't believe the equity will quickly grow 1000-fold? I don't think it is that simple. The reality of startups is that there is too much happening in the market to accurately predict outcomes based solely on actions of the founders. Given that, a smart founder probably should hedge this inherent market risk by liquidating so that in the case of a failure, given the high percentage chance of that, they aren't destitute and can start something else/get a job. Arguably an investor should look at this as a prudent strategy given the risk profiles. Unfortunately there are too many confounding factors for it to be seen as a "rational" economic decision. Investors want fanatics and such behavior is way more pragmatic than fanatical, so it signals that the founder isn't rabid for full tipped scale risk/reward balance. I think red flags start flying if founders are doing this and spending time on other things, but just as a general case it seems very rational to liquidate some portion early if given the opportunity.

by toasted 12y ago

toasted 12y ago

Just out of interest, is there a company which provides covert early exits for founders? For example I meet with a founder, they sign a contract saying secretly that they will give me a share of their equity in 2 year's time or whenever a major liquidity event occurs, and in return I pay them an amount based on current valuation?

hglaser 12y ago
I have heard of loans either secured by or "based on" shares of privately-held startups. I have no idea how common this is -- probably pretty uncommon. See e.g. https://www.svb.com/private-bank/founder-liquidity/ https://www.svb.com/private-bank/founder-liquidity/ and http://www.founderscircle.com/services/ http://www.founderscircle.com/services/
gwillen 12y ago
I would be interested to know (1) what the legal and regulatory implications of such a deal would be, and (2) what the implications would be with respect to the deals the founder would have signed with regard to the equity they were holding. My suspicion is this couldn't be done without causing problems in one or both domains, but I don't base that on anything solid.
tptacek 12y ago
Founder stock agreement boilerplates restrict founders from encumbering or pledging their shares without the approval of the board.

vecter 12y ago

As a founder of a company that's raised $25M combined over our seed, Series A, and Series B, I think Sam's coming from the right place. We raised a $2.5M seed round and a $7.5M Series A. At no point during our seed and Series A (the time period you're talking about) would it have made any financial sense for the founders to cash out even a penny. We felt this way because we had and still have genuine intentions of building a huge company, and every penny should be invested in growing the company. If we had instead felt differently, we would have tried to cash out some of our equity (which we didn't), and that should have been a red flag for investors to stay away. There's nothing wrong with trying to build a company to flip it for a few million in a year. Even better if you can do it without taking any outside money. If I were even an angel investor though, I would run away if I had any suspicion that that was the case. Also, if your company is worth $5M on paper due to investor term sheets, there isn't any really meaningful way you can achieve financial security unless you sell almost your entire stake in the company, which investors obviously wouldn't want to partake in. $5M from a term sheet doesn't meant $5M of liquidity. As an aside, I think your reply is incredibly immature, but I'm not going to use that as an argument for why you're wrong.

toasted 12y ago
Congrats. You guys have a great product and deserve your success. Tomorrow Youtube or Twitch could expand their offerings to include your business model and you may find yourself irrelevant within 6 months. I had a liquidity event last year in which I had the opportunity to sell either none, a part, or all of a holding in a product I strongly believed in for $6 million. I cashed out $2 million, kept 2/3rds equity. Since then, despite my belief in the product, it has lost most of it's value. I am very relieved (as is my girlfriend!) that I took (some) money and ran. When you are young you can feel a sense that success is inevitable and you want to keep doubling down, but there are a truckload of people in their late 30s and 40s and 50s for whom things just never quite worked out who would give anything for the security that a couple of million dollars provides.
- vecter 12y ago
  Congrats on the liquidity! There will always be competition. I'm a huge fan of both YouTube and Twitch. I spend most of my leisure hours watching videos on those sites. They may enter the space, but even if they do, they'll have a long way to go before they can make us irrelevant. If we were ever to become irrelevant, it would most likely be due to other things, not those players.

tptacek 12y ago

The mindset here is that financiers owe company founders financial security. Financiers are rich. But, relative to the economy, so are founders, even out-of-the-money founders. Why are they uniquely deserving of redistribution? Why aren't we instead arguing for a 95% tax on VCs that funds job training for people in the manufacturing economy?

toasted 12y ago
Because the founders have created the business and have created several million dollars of value (based on the VC's own valuation). Why should they not be able to cash out for a lifetime of financial security?
- mikecb 12y ago
  if the founders create the value, why would you give them a chance to leave with discounted future profits before the value is realized in a real (not discounted) profit stream?
  - toasted 12y ago
    Because regardless of whether profit is there, they should be able to extract value if they want to.
    - mikecb 12y ago
      If profit isn't there, value is theoretical. You're just taking money from the VC (and the business' growth). You may find future rounds harder to fund.
      - toasted 12y ago
        So amazon's market cap of 144b is theoretical because they don't have profits? And bezos should be paid enough salary to survive but not so much that he is no longer "hungry"?

quizotic 12y ago

> fuck Sam Altman on this one Really? Most early investors make 90+ % of their return from the tiny fraction of investments that become huge. If the founder is willing to cash out for current market value, doesn't that imply the founder doesn't believe the equity will quickly grow 1000-fold? And if the founder doesn't think the company will become huge, wouldn't the investor be foolish to think so? This isn't about squeezing the founders, it's about passing on stuff that might be glittery, but probably isn't the mother lode.

AndrewKemendo 12y ago
If the founder is willing to cash out for current market value, doesn't that imply the founder doesn't believe the equity will quickly grow 1000-fold? I don't think it is that simple. The reality of startups is that there is too much happening in the market to accurately predict outcomes based solely on actions of the founders. Given that, a smart founder probably should hedge this inherent market risk by liquidating so that in the case of a failure, given the high percentage chance of that, they aren't destitute and can start something else/get a job. Arguably an investor should look at this as a prudent strategy given the risk profiles. Unfortunately there are too many confounding factors for it to be seen as a "rational" economic decision. Investors want fanatics and such behavior is way more pragmatic than fanatical, so it signals that the founder isn't rabid for full tipped scale risk/reward balance. I think red flags start flying if founders are doing this and spending time on other things, but just as a general case it seems very rational to liquidate some portion early if given the opportunity.