We Spent $3.3M Buying Out Investors: Why and How We Did It
open.buffer.com
open.buffer.com
I give Buffer a lot of credit. They seem to deeply internalize the idea of "realistic expectations" and it sounds like the buy-out was a win-win solution where everyone got (mostly) what they wanted.
As he says, the investors might not have been happy about it, but at least he has the backbone to resist trying to squeeze growth out of a market where there's none to be had (in the short term). Most CEOs wouldn't be as courageous, preferring to try to spend like crazy in the search for growth, which just torches investor capital even as it adds little long-term value to the business's equity.
In short, a bold move by a very honest guy who's in it for the long term.
I don't want to say getting VC was a mistake for Buffer because I can see it might have had an upside of connections and advice for what was an inexperienced team, and I think at that time the management team was more bought into the VC model. Buffer has definitely transitioned away from the VC model, though, and buying out the investors now is the right decision IMO.
A lot of comments in this thread are quite harsh. I applaud Joel for having the courage to honestly share his experiences so others can learn from them.
I read the fluff around core values, but my first thought is that Joel would rather not risk his personal fortune by growing the company further. Better to ride the 25% margin as long as possible, giving himself enough liquidity to retire wealthy, than take a chance on growth.
Maybe I'm too cynical, but I admit I'd be tempted to do the same thing.
Employees obviously I can't know but the article includes him telling investors there might not be an exit.
Meanwhile, if the investor didn't want to sell at the number they came up with, they could presumably just say "no".
You are, yes, probably being too cynical here.
I wouldn't imagine that's the case. Especially if the investor came up with the number and agreed to it in a legally binding contract. It'd be an uphill battle in court to get around that. (yeah, you still need the funds to defend your company...)
Also, my anecdata says that most corporations have in their corporate bylaws (or whatever the right document is) the provision that they can forcibly recall shares at any time (presumably for current fair market value/409A valuation.)
It would be pretty funny if the legal norm among startups was that they can acquire their own equity back from investors based on their 409A valuation.
Maybe I've misread you here. Is this not a number the investors came up with?
As for the 9% interest rate, that starts sounding more like debt than ownership.
Again: it would be really weird if companies could simply demand their equity back. The whole point of investing in a startup is that their equity will end up wildly more valuable --- not 40% more, but 10x more --- than the money put in.
At any rate: they bought out their investors years before interest became due. It was a negotiated sale.
I guarantee you this has annoyed you more than a few times as a user of their products.
In a market where VC style multi billion dollar exists just isn't going to happen, trying to force it is just going to ruin everything good about your product and company.
And VCs would rather see you ruin it, with a tiny chance of succeeding, than see you have a successful small/medium sized company.
Every time I've told myself that, I later found out that I wasn't.
Under capitalism, the world always presents itself as better than it is.
I am seeing a lot of sentiment on HN that feels sorry for VCs. VC already get paid above 200k/year; no need to feel sorry for them.
People should feel sorry for the founders & the employees who did all the work. Now if they get liquidation, then that is good.
Entrepreneurs turned VC often don’t have the dry powder to pay themselves well when they use their own cash to start fund 1.
Not all Vc’s are equal.
Paycut Discussion
I can't say if this is close to the mark, but if so it makes perfect sense why the other founders left. Being at the head of a ship with a captain trying to slow down so he can line his own pocket is a special kind of hell.
I wouldn't be surprised if the founder tries to sell the company in the new few years a discount of the current valuation. With 45% ownership, that's a very large chunk of change.
make of it what you will but doesnt seem low
https://docs.google.com/spreadsheets/d/1l3bXAv8JE5RB9siMq36-...
- https://open.buffer.com/transparent-salaries/
With a calculator here:
And are open about their sales, subscribers, revenue, churn, etc
2) If any employees own equity it's also in their best interests to buyback shares since they'll own more of the company. It also means the founder(s) see a bigger potential pay out in the future and will continue putting all of their energy into the business.
The Buffer team's idea of success became different from the VC's who initially invested -- it's smart to capitalize on this and buy back your cap table if the price is right, you can afford it, and you think the company will succeed.
In the end it also means that their investors most likely lost their confidence in buffer, otherwise no investor would get out in a deal like that.
I can't imagine any employee joining this company from this point forward without demanding all-cash compensation. Management and the investors have effectively set the value of restricted shares at zero.
Investors are coming from a position of boom or bust to maximize that liquidity event because their success does not hinge solely on your company. If you are a founder, you are all in on it, and unless you are already independently wealthy, or come from money, you would/should most likely optimize for less risk with a healthy upside.
For most founders, making 5-10 million on a liquidity event is a life changing event. For most series a and beyond VCs, that's chump change and they will push to put it all on black and let it ride.
Buy this lottery ticket and you'll know if it's a winner in 6 years.
???
Just ask for cash!
I'm not going to exercise my options in that situation and you'd be crazy to pay taxes on this year after year.
Remember: to a first approximation virtually all startup equity from all startups is illiquid.
Not trying to sound smart but wouldn't a market with only one buyer mean they will pay the least possible amount?
I'm not trying to trash talk buffer. Just wanted to see if there's another angle to this.
We issue equity internally, not options. We hold right of first refusal and have independent appraisals of value of the business done, so when you leave, we have the right to purchase the equity back at the last appraised value of the company. Additionally, we also pay dividends (impacted by equity) and profit sharing (not impacted by equity but rather a percentage of salary) to our employees.
These things are what "lifestyle businesses" do, or what basically everyone outside of SV and indoctrinated MBA programs call... businesses.
Yes, this is exactly what we do with our equity and our employees.
It is ridiculous around Hacker News that this idea has been completely lost and almost everyone focuses on RSUs and unicorn valuations and longshots, rather than simply... I don't know, making a business that very calmly makes a few million dollars per year with double digit growth rather than insanity.
https://docs.google.com/spreadsheets/d/1l3bXAv8JE5RB9siMq36-...
Personally, I think the salaries are more than reasonable. A senior engineer with a $175k compensation seems fair enough.
It sounds like he just wants to turn it into a lifestyle business. Which is cool, they just need to be upfront about bonuses or profit sharing, and ditch equity.
Quick edit: I just re-read my previous comment and realized "cash only" wasn't the correct phrase to use. I meant it to include the other stuff I mentioned here (give employee some amount of cash) not just base salary.
The Buffer post is extraordinarily clear (almost numbingly so) about the mechanics of their Series A and why they needed to buy their way out of it. They had two structural problems:
(1) the terms of their A round included a strong incentive to liquidate the whole company early, in the form of a perpetual 9% annual interest payment due to the A round investors after 5 years.
(2) the terms of their A round forbade them from extending liquidity to other shareholders, including employee equity holders, without the approval of the A-round lead investor.
Unsurprisingly, Buffer's A-round investors needed to be talked into accepting the buyout, which they took at a substantial premium to their investment in the company.
I do not think the logic you're employing to value these shares is sound. Early exits are usually bad for employees (the lower the exit valuation, the less money is likely to trickle down to employees). Profitability gives Buffer lots of options to maximize returns to long-term shareholders, which is what employees are. To my eyes, Buffer's employee equity is more valuable given this information, not less.
They initially sold equity of the business, only incurring capital gains tax in their personal name. Now they buy back shares and destroy those shares, so their stake increases again. They bought back shares with taxed capital within the company, but without incurring dividend taxes.
Honestly, I'd sign with my blood if I could get my business to make £5M a year in profit and own nothing to VCs or banks.
VCs eventually need to post cash-on-cash returns to their LPs if they want to raise their next fund. It doesn't matter if they think the company can do another 10x or another 100x, eventually they just need to exit their positions and mark the book. Now granted maybe it's a sign that they don't think the business will do 10x in the next year, but that doesn't have much to do with the scale on which the business will ultimately succeed.
To me it sounds like he's trying to establish Buffer as a business, and not a startup. Let's make that distinction, and drop the "lifestyle" part.
And don't think for a second that your investors won't do whatever the heck they please once they have controlling interest, up to and including kicking you out of your own company if it serves them better.
Here is how I figured that. He had 45% of a company that was valued at $80 million in the buyback. That's $36 million. He paid back $3.3 million. That reduces the value of the company by $3.3 million and leaves his value untouched. So he now has 36/(80-3.3) = 0.46936... of the company, for around 47% < 50%.
kicking you out of their company
I have seen companies in the same position described by Joel in this post where they fired the CEO, installed a "seasoned team" to get the numbers up, and then sold the carcass to BigCorp as an acquihire bailout.
So with that experience of one of the other ways this story could play out, I found Joel's story one of "success" in terms of sticking with the plan as opposed to selling out. I certainly respect that and wish him continued success.
Terms:
> Series A class of shares included a protective provision which meant that Buffer was unable to offer liquidity for other shareholders
> a return of 9 percent annual interest on their investment at any point
So... the founders raised a series A mostly to give themselves liquidity, at the expense of a high interest loan that also threw their early investors under the bus? Well, they definitely achieved their vision of putting together an atypical round.
Given their lack of interest in going down the VC-startup path (high growth at all costs, keep raising, aim for IPO, etc), it's unclear what their motivations were to raise a VC round in the first place.
And yes, everyone makes mistakes, but author shows great character in making things right later on.
The normal story of what happens when a company takes an investment planning for hypergrowth and that doesn't pan out is that the company "pivots" to some usually-less-promising hypergrowth opportunity and repeats until it dies. The outcome here seems far better for investors, which is presumably why they took advantage of it.
However, kudos to the founders for fixing this mistake later on. While their intentions at Series A were questionable (raising to pay themselves), they made things right later on, though they did pay the price of a co-founder and CTO departure. Everyone makes mistakes, but true character can be seen when you deal with them.
> Our seed investors had been supporting the company for almost six years, and several were starting to ask when they may get a return
> The Series A class of shares included a protective provision which meant that Buffer was unable to offer liquidity for other shareholders (seed or common) without approval from a majority of the Series A.
If you're steadily adding 100 customers/month you might think thats great because of the accumulating nature of subscription revenue - but actually that's a death sentence.
Your churn will grow as your customer base grows.
If you've got a 5% monthly churn rate then at 1000 customers you'll lose 50 customers/month. At 2000 customers you'll be losing 100 customers/month - and all of a sudden your 100 new customers a month will net out to zero. After that point you'll start losing customers.
From a quick look at Buffer's baremetrics board that's what happened here.
You either have to have net negative dollar churn (which is very very hard if you're selling to SMEs) or you have to have an exponential growth rate that means you can escape the churn effect and that almost always require external capital to fuel the growth.
Actually, in this scenario the number of users will asymptotically grow towards growth/churn = 100/0.05 = 2000 in perpetuity. So it's not a "death sentence" but will lead to growth stagnation.
Plenty of SaaS businesses (both bootstrapped and VC financed) end up flatlining. How sustainable this is depends on what space you're in, generally if you're revenue flat you become much more vulnerable to external factors (competitors coming into market, CAC increasing, recession, etc).
The biggest cost for most SAAS business is salaries. If times get tough, letting people go is always an option, and if a company makes a 30% margin - which $1.5M and 500K profit is almost exactly - that means the non-salary costs likely need to grow by a few thousand percent before there is a profit pinch.
I'd take $500K profit and control over loss making and hope. But that's just my personal risk profile.
You're now losing 60 customers/month. In three months you'll be down 10% on revenue and your costs will likely be the same.
This isn't a VC funded vs bootstrapped issue, it's a fundamental dynamic of the subscription mode - I've seen plenty of VC funded startups struggle with the same challenges.
Living on the edge where your best efforts only net out churn is hard. Everything becomes harder from recruiting to sales. It's super demotivational to a sales and marketing team when their best effort essentially nets out to zero.
- Be happy with cash piling up in the bank, and redistribute it to employee/investors/founders.
- Lower the churn.
- Increase your ARPU.
- Use the profits to create anew product/offering that generates new growth.
If it doesn't have that, then taking buffer's money doesn't move the needle much.
1.5x is sometimes "good enough" but it won't keep a VC afloat if all of its investments go like that. Even 2x means that you only get to invest twice and fail once. And forget about profits or a living wage.
Buffer seems like a fairly successful startup relative to the average. A roughly 8% return per annum is not a good return for a VC given that many of their investments in a given round will go to zero.
There may be reasons for this going the way it did, but I doubt VCs would be all that happy with this.
This is certainly better than losing the investment completely but I can't imagine the investors being too thrilled about this outcome.
Is that not a helpful result?
It's diversification; people investing in these funds are generally NOT looking for similar returns to the public market.
The game is that VCs will adjust, then founders. Then VCs. Then founders ad nauseam forever. This is just one small piece of a giant play being performed by many in different ways every day.
Only very myopic VCs would think this way globally. If every business did this, it would be terrible. But each business is its own opportunity/set of circumstances, and forcing everyone to 10X+ is as equally stupid as cashing out $1MM on a four year term sheet on $2.5MM invested.
You must evaluate each opportunity individually to maximize profit and growth. The intentions can always be to shoot for hypergrowth, but if the probability drops below the profitability point, you shouldn't be forcing the issue. Terrible investors do this, and it happens fairly regularly, though it's slowing down as founders become a bit more intelligent with their options.
Might this be a (converse version of a) No True Scotsman fallacy?
Elsewhere in the thread, a comment [1] referenced an article [2] that details the return imperatives that VCs face. In particular, it details how small returns "don't move the needle".
OTOH, the article asserts that only 5% of VCs (misleading, if a percentage of number of firms instead of AUM) succeed in meeting this imperative, so I wonder how the other 95% still attract enough LP money.
[1] https://news.ycombinator.com/item?id=17872045
[2] https://news.ycombinator.com/item?id=17874278 https://techcrunch.com/2017/06/01/the-meeting-that-showed-me...
You never want small returns. But when you can choose a small return over basically a near-zero chance of losing all your money, it isn't that difficult of a choice - or it shouldn't be.
Given their economics, VCs have a very strong incentive (or an imperative, according to that article) for "forcing everyone to 10X+" (and I would argue it's more like 20x+), no matter how small the likelihood of that outcome. Without at least one outsized exit, they're a failure.
Put another way, their LPs aren't paying them to, in any way, play it safe. Near-zero chance isn't the same as zero.
So, yes, the choice for a typical VC isn't difficult. It's just the opposite of what you're proposing.
Anything which involves rent is by far not risk free. Very cycle driven, heavy on litigation and management has to be perfect to make returns.
Also I said “almost risk free”. :)
In 2014 their ARR was $4.6M so investors probably expected their revenue to follow the $4.6M -> $13.8M -> $41.4M -> $82.8M -> $165.6M trajectory. Buffer's current ARR is $15M, which although is pretty good, is not enough for it to work well with the VC model.
the math is pretty crazy... even $50m and $100m exits would doom a fund.
All this to say, I appreciate the goals of Joel in building a strong culture and strongly support this, but the product itself isn't that great to use as a customer, which is probably why growth isn't what VCs want. And I'm just hypothesizing that a hard look at the tech stack could maybe help.
I respect the commitment of Joel to all remote and transparency, he's an inspiration. Personally I think that high growth can be compatible with all remote and transparency. For example both us at GitLab and InVision are all remote with high growth rates.
In what way did "remote culture" specifically negatively affect productivity? How was this measured against the more traditional way of working? Or was this just a perception/bias issue, like "oh hmm the team is remote, so I guess that can be blamed on slow growth"
Returning anything to investors should be seen as a positive. If you disagree, go give someone 6+ figures and have them lose it. You're opinion will change rather quick.
1. It's my money, not money someone has given to me to invest
2. It's a pretty significant part of my net worth. If I was worth $100 million and gave someone $100k and they spent it all without any return, I doubt I'd lose much sleep over it. If I do that now it would be very hard to get over.
I'm not really disagreeing with you here, but the emotions at play are different I think.
The wording suggests that this was a decision he regrets / a feature of the agreement he didn't think was important at the time. Is that the case? Would it have been less onerous with a lower rate? In general, I'm curious if / how they would have redone this decision.
ie. before there were 10M shares outstanding which represents all the shares owned by employees founders investors etc, now (as an example, these are not real numbers) there are 8M shares outstanding because the Series A investors no longer have shares those shares are taken off the market by the cash.
https://buffer.baremetrics.com/
As an anecdote, we are happy paying customers and have been for some time.
Businesses are great and I don't think most people are trying to talk down about them. But VCs are trying to build an asset they can sell. Because when you sell an company that has a high rate of projected growth you get all that money now as opposed to waiting 20 years. There are plenty of investments that pay out solid returns for 20+ years. VC type funds are attractive in no small part because they pay out in a shorter period of time.
It really has little to do with building a business outside of the fact that the asset happens to be a company.
The article says Buffer is doing $4.6M in annual revenue.
But Buffers own dashboard says they are doing ~$15m