Meaningful Exits for Founders (2016) | Hacker News Reader

Meaningful Exits for Founders (2016)

medium.com

69 pointsdpeck23 comments

Key line

> a founder selling at the Series D price of $210M, would make the same amount of money at exit as they would have if they’d sold for $38M after having only raised a seed round

This is definitely an important point, but it doesn't consider the fact that most Series C/D rounds will involve share buybacks from employees and founders, i.e. "taking money off the table." Late rounds like Series C and D may as well be liquidity events. Most companies at that stage could IPO if they wanted to, and any investments are likely de-risking founders and employees anyway.

So the consideration is really the "11% of the post-series-D acquisition price," plus any money the founders receive in share buybacks at Series B/C/D.

Still, even considering this the point probably still stands that it could be smarter to raise less investment and sell earlier, rather than raise more and sell later.

It's an interesting stat, but are there very many companies that could sell for $38M before raising a Series A?

On point. It can happen if your company has great IP, or you managed to capture a niche market.

When that happens it's a no brainer: sell. You can still build another company while having a cushion for you and your family.

An exception to this would rule would be that you have a good chance at becoming a leading company in your domain.

It depends. If you have nothing from before then selling for $2.2M is not that great of an idea- you might walk away with $1.1M after tax. This would be the equivalent of a modest bay area property, or 4-8 years SWE salary.

In other words- if you had a family, you would find it difficult to support them and finance a new venture.

Going from nothing to $1.1M in the bank after tax is 'leveling up', and if you're smart you would take that chance immediately.

In your life there are maybe two or three opportunities for such a leveling up and missing out on a guaranteed one is not something I would do. Of course if you are dead certain that you will be able to get more out of it you should but if the certainty is anything under 75% or so you should probably take the certain route and see if you can be smart to do it again through some other route.

This is a tough call to make, but also a luxury problem, most founders never get to that point.

Advice I could have used last year. Thanks, it’s helpful now anyway if I ever get the chance again.

What do you do after this leveling up?

Try to find a larger table, and manage your risk very carefully because you are still fragile and it is probably easier to go from $1M back to nothing than it is to go from $1M to $2M.

The thing you definitely shouldn't do is change your lifestyle, that way you will be almost certainly back to square #1 after a couple of years.

If you're feeling conservative, find another well paying job in your preferred area. Use your windfall however you deem appropriate (like saving/investing it to cover kids/retirement/emergency fund). If you're feeling aggressive, launch into another startup. If you're feeling somewhere in the middle, save some, invest some, seed some startups, and find another interesting job.

$1.1m is simultaneously not that much and more than you think, it depends a lot on your chosen perspective.

You sell at the Series A raise timing in parallel with raising your A round.

Do you mean "valuation" instead of "raise"? Otherwise I don't understand this sentence.

If this is what you meant, $38M still seems like a pretty lofty pre-money valuation!

He means that while you are talking to investors, you should be simultaneously shopping the company around to potential acquirers. Basically, you're asking the investors "How much would you pay for 33% of the company?" and you're asking the acquirers "How much would you pay for 100% of the company?"

Their offers then serve as a floor - and potential bidding war - for each other. If an acquirer offers you $20M for the company but an investor offers you $5M on $10M pre, you tell the investor "Well, we have an acquisition offer for $20M, it doesn't make sense for us to do a deal at less than $20M pre." If an investor offers you $15M on $30M pre but the acquirer offered you $20M, you tell the acquirer "Well, we have a termsheet that values the company at $30M, we'll stay independent unless you can beat that." All firms are, of course, able to up their offer to try and beat the competition.

Assuming that $38M is based on a 7x multiplier of revenue... a company would only need ~$5.5M in annual revenue.

It's a bit of a weird area - it's a number that would be a bit too high for a standard acquihire/shutter, but probably not a massive bottomline boost for a company large enough to pull off the acquisition.

Unless you were really growing, or had a massive addressable market you're barely touching (in which case, you'd probably question exiting at that price, even if it's wise), it might be hard as a "bolt-on" to an existing org.

Those size acquisitions usually aren't based on revenue - rather, they're for companies that either have valuable proprietary technology or an early lead in a market that the acquirer wants to get into. The acquirer is paying for the ability to jumpstart their entry into the market - by dropping $40-80M they can get a ready-made product, team, and early userbase that's been assembled over 2-3 years and develop from that. If they instead tried to develop the product in-house, they run a serious risk of the market moving on and the startup becoming untouchably entrenched before they can get their entrant in.

Bingo. It’s pretty hard to get that kind of money unless you’re just exceptionally lucky.

What your comment tells me is that you believe it's easier to build a $210m company with the help of VC than it is to build a $38m company without VC.

Why would that be the case? The $210m company has 5 times more value - building up to that is really hard, and not really just a matter of how much runway you have available.

(Alternatively, you know that VC's overvalue things, so maybe it's easier to inflate the numbers on paper than actually building real value in the business. That's certainly true but really cynical.)

There are some alternative readings though.

It's not hard to make an argument that a VC will make it easier to find buyers for your company.

In the Bigelow HeroX challenge, they point out that the price range they see for private sales can range by well over 50%. Just finding those acquirers can be a challenge and it isn't obvious to me that it is 5 times easier to find those buyers at $38M than at $210M.

There's always a problem with using averages, for subjects that are innherently distributed oddly.

It's definitely useful to run through examples and the average case is as good as any. But, beware assuming the average case is you, or more likely to be you.

To boil this down... It may be that a founder is working for free or even taking risks for free, by continuing rather than exiting.

This is true outside of startups too. Musk only owns 10% of Tesla. If the board was going to hire a superstar CEO to run Tesla, they'd probably need to give him that much equity anyway over time. So, they basically get him for free.

I'd say for founders time spent is a much more important factor than it is for VCs since a founder can only bet on one company.

I have no clue about average time between rounds but if we say 1 year for every round, (1y for seed, 2y for A etc) only going from seed to A is a meaningful improvement if you calculate $/y.

It's about the same in practice actually. Founders and VCs both have the same critical resource: time. For founders because they bet on only one horse and it needs to work, for VCs because they bet fractionally on multiple horses and there are only so many bets they can place if the bets are to be meaningful. If you multiply the chances of success by pay-out in case of success it turns out the positions of a partner at a fund and a founder are roughly the same. The biggest difference is that the founder has much more control over the outcome than the VC (which is one reason why VC returns suck).

Money it's just work in pure form. Even stolen money are someone's work, it's just that the person holding the money is not the person that did the work. But somebody did the work! I have no problem with money.

Reply on news.ycombinator.com