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Comment by pc86 | Hacker News Reader

A bird in the hand and all that.

Surely the VCs have the data on how often they get burned by blocking a profitable exit. How often do they block a 2x return and later get 10x? Is it really enough the compensate for the (sure more common) result of getting 0.2x or 0?

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I worked at a .com era startup that went through something similar. Biggish acquisition offers came in circa 2001, but much smaller than the theoretical enterprise value if the product worked out.

Company finally sold in 2005, preferred shareholders got everything but still lost money. Founders got nothing, employees got nothing. But everyone got to keep their jobs which was better than just going out of business.

This seems to happen pretty often. Also common is founders turning down acquisitions because they are sure they can make more if they keep at it. You wouldn't start a company if you didn't believe it.

I "lost" well over a half million dollars because founders turned down a $50-$60mm acquisition offer to try to hit a home run. The problem was the ceo had been previously acquired and left before he fully vested in order to start the company I worked at, and had walked away from $5m in the process. (Which is crazy, right? That's a $5m bird in hand if he just didn't get fired for 2 years.) Anyway, he was really attached to the idea of building a company worth $300m plus so instead he built a company worth a handful of millions.

It was pretty damn frustrating for me.

There are so many of these stories of wealthy founders turning down bird in the hand offers and then losing it all X years later even though the company got 'big'. I too got burned by one myself.

I advise friends now to avoid those companies as employees, because an exit that would be very good for you might be turned down by wealthy founders. Joining a startup with a wealthy founder means they will go huge or bust, and nothing in between. Great if you want to do that yourself, but you usually want to be wealthy already.

Which is kind of funny advice since essentially you're suggesting to avoid working for companies with successful founders.

Yes, because even though the founders are "successful" you won't see any money beyond your salary.

It underlines the fact that as soon as you take VC funding, you're effectively working for someone else - even if you're the CEO.

As all the FTC standard warnings say, past performance is not a guarantee of future performance.

A wealthy founder has already past the point of "fuck you money" and financial independence. Adding another $10 million to his current $10 million isn't going to have a very meaningful effect on their life. Another $+100 million will, which why they go big or die trying, because cashing out with a $10 million payoff is the same thing in their lives as failing. Also running your own company is fun in itself.

You as an employee do not have financial independence most likely, and independence will be a huge change to your life. It's the incentive conflict of interest that is the fundamental issue here. Non-wealthy founders will probably have a cash out point in their heads and will take bird in the hand offers that would give them financial independence.

Also I say wealthy founders, not successful founders. A founder can become wealthy via many means. He could of been an early employee of a successful company (like BeOS and Jean Louis Gasse). Had a relatively minor success after a decade of struggle and made it super big (uber). Cashed out halfway through and is now wealthy (evernote, twitter and many others), etc.

Wealthy founders will do things like reject $400m offers when a company has existed for a year and only has $10m in series A funding because they want to be the next superstar / 'unicorn'.

Just because the founder is successful doesn't mean they have your interests at heart.

It's very naive to bet your future on the hypothetical benevolence of other people.

Yep. I too got burned by one. I wonder what the ratio is.

But surely for every number of founders like this there are Zukerbergs that turn down a $1B offer for FB by Yahoo in 2007 or whenever it was.

And how many Zuckerbergs do you know...?

counterpoint: I worked at a different startup in the last couple of years that got acquired for around $400 million (after I left) and the found was a very wealthy serial entrepreneur. Basically, you never know. Basically don't treat a job at a startup as a way to get rich.

Is this just hind sight talking, or was it obvious the idea didn't have legs at the time?

In hindsight, there were definite revenue challenges -- customers would try the product, like it, but not sign purchase contracts very often. How much of that is me being grumpy and how much is normal growing pains I don't know, but customers definitely weren't jumping up and down throwing money at us. Had the company been earning even millions of dollars, it would have been a different story. We made like $40k the first full year of attempting to charge money for the product. That, to me, augurs towards a poor outcome and supports selling.

There may not have been enough situations to give good data, but even if there were, my point was that it changes the thinking of the company leaders, who are now forced to "swing for the fences", which is great for the VCs with their diversified portfolios, but not so great for the founders who have all their eggs in one basket (who admittedly put themselves in this situation).

To be clear, I'm not talking badly about the VCs, I think they are making the right decision for their situation.

I'm saying it's a bad place for the founders to be.

The main reason not to block deals is that 1) this should not be a single-round game for VCs 2) people talk.

If you block an exit in a way which angers founders/employees, even if you have a higher expected return on that particular deal in doing that, you're now going to be "that fucking asshole VC who blocked our sale" every day until the company gets a 100x return above what the deal would have been (which is probably...never).

Not only will the founders hate you forever (both your firm and you personally, the partner); employees of that firm will hate you, and anyone those founders/employees talk to. Also earlier-stage investors/angels in the deal will also likely hate you for being "that asshole late stage investor who tanked our deal."

As a professional investor managing a large pool of other people's money, you probably have the greatest risk tolerance and most diversification of anyone involved in the deal. For employees, founders, and even angel investors, even a 2-5x exit, if it's the best/most likely thing, is probably going to be life-changing in a positive way.

People do not bite the hand that feeds. How many stories have you read where the VCs get lambasted by founders and employees? Not many right?

Remember it's a two way street. Sure maybe there is some incentive for VCs not to be ass holes. But there is equal incentive for founders (many of whom are serial entrepreneurs) to stay liked by the VC community at large.

Final point: people with "fuck you money" as mentioned elsewhere in this thread, commonly don't give a fuck.

People are much more willing to share information in private with their friends about which investors/vendors/employees/etc. are good/bad.

"Hey, I want to talk with someone at Firm X, who is good?" "They are asshats, call me, this is why..." leads to impaired dealflow for Firm X.

It's important for founders and employees to appreciate how often that happens – a VC might have a dozen bets going but everyone else is committing their future to just one. A great deal of casual conversation treats investment as unambiguously good rather than a real risk to be balanced.

Don't know the details of LivingSocial, but in general liquidation preferences can complicate it. Instead of 1x or 2x return for all investors it is often 5x for the last investor and 0x for the rest. So it not all investors have a reason vote "yes" at a given total.

You are assuming this is just a profit maximization problem for the VC firm. There is also a reputation problem for the people that are involved in a suboptimal exit. They may be motivated to kick the can down the road to avoid acknowledging an underperforming investment.

Maximizing profit is a good reputation to have in business.

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