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Comment by koolba | Hacker News Reader

> Since it began in 2013, the company behind the purportedly anonymous messaging app has never had, and still doesn’t have, any obvious source of meaningful revenue. Yet somehow, Yik Yak was valued by venture capitalists at $400 million in December 2014 after Sequoia Capital invested $62 million.

Do investments of this size/nature typically have a raise-or-pay-us-back date associated with them? i.e. are they usually done as a convertible note to force the issue or pure equity?

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Investments in money-losing companies have a natural raise-or-do-something date called "zero cash day". And generally, the company can't raise new money without having a majority of each class of preferred stock vote for it, i.e. a majority of the money in every previous round. So if enough investors have lost confidence in management, no matter how much board control management has, investors can let the company run out of money.

> Investments in money-losing companies have a natural raise-or-do-something date called "zero cash day". And generally, the company can't raise new money without having a majority of each class of preferred stock vote for it, i.e. a majority of the money in every previous round. So if enough investors have lost confidence in management, no matter how much board control management has, investors can let the company run out of money.

I was thinking more about the situation where the founders fire all the employees, run the operation as lean as possible (to maintain their obligations), and stretch the $62M as long as they can. At $2M/year that's 31 years without accounting for any growth of the money itself.

Besides due diligence on the part of the investors to not give money to the kind of person that would do that, what prevents that situation?

If the founders retain board control and don't run out of money there is little the investors can realistically do. Both sides are taking a lot of risk, I wouldn't rate this as a terribly concerning one. Far far more founders spend too much money and nosedive into the ground.

xenadu02 is correct that your scenario is vanishlingly rare. After a nosedive, the next most likely scenario is that a failing business cuts its way to semi-profitability, which leaves the investors stuck with a low-growth investment in a fund that's nearing its end.

I would assume the board seats that the investors get in return for their investment provide this kind of protection. If the founders do not want to raise another round then the investors can boot the founders out and replace them with someone that will play ball. With board control then this might be more implied versus explicitly defined in the fundraising terms.

Disclaimer: I've never been in this situation personally

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