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Comment by StavrosK | Hacker News Reader

Wait, how did the founder manage to get it for $1? I didn't think that was a thing that could happen?

It didn't completely happen. Only some of the investors sold their shares back for $1. But in general, quite a few investors seem to be willing to get rid of their shares (cheaply), once it turns out that the business won't scale, and the founders want to continue running it as a lifestyle business.

From the article:

> I am following up our conversation a few months ago. KP would like to sell our ownership back to Gumroad for $1. Can we discuss this week?

> Mike had left KPCB to start a new company, and KPCB didn’t want the operational headache of appointing a new board member. Plus, it helped their taxes.

> One investor joined them. We’ve bought back a couple more, since then. I keep the rest of the investors up-to-date with a brief email every few months.

VC's don't mind losing money if they can control when they lose it. They can use losses (selling shares back for $1) during the same year that they have big gains (maybe they won big on Uber that year) and they can offset capital gains taxes which will sometimes justify a loss they took on another investment.

In the case of the Gumroad guy, this is exactly what he did/ He basically let VCs choose when they took their losses once they realized Gumroad wasn't going to be the next Facebook. They used the losses to offset some huge wins they got on other investments. The VC walks away happy because he exchanged otherwise useless stock to increase his returns on something else he sold that he did really good on. The owner of Gumroad walks away happy because he gets his company back. Win-win for everyone.

So they are treating companies like lottery tickets with some residual value (offsetting taxes)?

Yes - that's the business VCs are in.

In order to claim a capital loss on your taxes, you have to sell. No point in holding something that's going nowhere.

Mind, for a VC. A VC needs at least 100x on their investment. You don't realistically get that unless you invest very very early or you exit to a strategic acquirer, and most acquisitions aren't by strategic acquirers.

That stake was likely worth hundreds of thousands if not millions of dollars, but to KPCB it wasn't worth the hassle to find someone willing to pay that. They know they make a loss on most of their investments.

There's a small cottage industry of purchasers who will buy heavily depressed for chump change. It can be strategic to help offset other gains in a tax year.

The purchaser collects a service fee and a lottery ticket for the random "XYZ Inc sold patent to IBM for $10 million during company liquidation."

Can you explain more please? I dont understand. If I buy a thing that was once worth 100 million dollars for 10 million dollars, I havent lost anything yet because it would need to go down even further from 10, right?

The seller's main utility in selling is to realize the losses for tax purposes.

The buyer isn't buying for tax offsets. They're buying at deep discounts because they're often the only bidder and the hope that they occasionally find themselves taking on some asset for which the sellers have vastly underestimated the value (such as some obscure patent).

It's not unusual at all for businesses in the same situation. (A good business at a small scale, not profitable to scale larger)

Delicious was bought back from Yahoo, in fact that happened a few times with companies that Yahoo bought and spun off again.

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