My lack of knowledge about corporate finance and the part of that blog post that refers to cashouts is making me see Groupon as more of a DrKoop.com or Webvan than it may be. But nevertheless I can't see how struturing a funding deal like that benefits anyone other than the insiders who got in early enough?
It's not much different from the IPOs during the dotcom bubble: It makes the founders rich, and possibly pays off early investors, and transfers more ownership to the buyer (in the IPO case, the public is the buyer, in the private equity case, it is a VC or investment bank or conglomerate of the former).
In this case, it confirms for me that Groupon was built to flip. If it accidentally becomes a profitable company that lasts, I'll probably be as surprised as the founders (who, as you note, have already mostly cashed out; sure, they'll make more from the IPO, because I'm sure they still have some stock, but they locked in winnings already, and are mostly gambling with other peoples money from now on).
I can understand founders wanting to cash out a portion of their equity before going public. However, when you are raising money say 10 million to fund growth etc, what % is considered reasonable to pay founders before it raises red flags to investors?
If it was built to flip wouldn't they have accepted Google's offer?
I am not being sarcastic. That's how business works: If I can make you a lot of money, you need to share some of that with me, or I'll go make someone else a lot of money.
The Groupon deal is a business built to flip to the public. The structure benefits the insiders, but it benefits the VCs who cashed them out invested in the last round even more, and it will benefit the bankers. And that's why they can get away with getting rich right away: Because they're making a lot of other people rich.
I know you're a careful, deliberate and consistent writer, so this is clearly intentional.
Any particular reason why?
My mind thought "Group Buying On _____," but now that you say it's actually "Group>o<n," I guess they mean "Group Coupon."
I've had an affinity for portmanteaus ever since I was 10, when I saw "portmanteau" in Through the Looking Glass and thought Lewis Carrol was talking about me. So I tend to be irrationally defensive of them.
Hmmmm, that sounds almost exactly like Groupon. While their losses are pretty well known, they are waving their hands (accounting gimmicks) and saying "That's not a loss. Honest."
When the payout is a dividend, both the new and old investors feel that their principle is remains and they could cash-out at will.
What you have with Groupon was certainly bad PR to people like yourself and thousands of others who are tuned-in to this sort of news. But it most certainly was nothing like a Ponzi scheme.
First, it's not zero-sum. The "machine" of Groupon produces $1.x dollars in value for every $1 of capital.
Second, the new investors knew when they invested that many of the shares they were buying were being held by existing shareholders and did not come from the company's pool. They knew that to acquire the share of the company they wanted to hold, they'd have to buy-out these earlier investors and that it would of course be at a premium to their initial investment.
Finally, the early investors knew that they were being bought-out, that they were selling their shares to a 3rd party.
If Groupon investors get rich at the expense of retail investors, that's bad. If the Groupon founders get rich at the expense of retail investors and later venture investors, that's also bad. In fact it's worse, because they have more information about the business than the investors do. The closer you are to the center of the business, the more you are implicated if it turns out to be a giant pump-and-dump scheme. The founders are the rotten core of that scheme.
These ideas about the difference between management and bankers made sense when IBM or US Steel went to the public markets to raise money in the old days, but where Tech Startups are concerned I am skeptical that founders are pulling the wool over the VC's eyes.
But I suspect we're quibbling over who gets the lion's share of the tar and feathers :-)
UPDATE: But yes, I agree about the word "value."
While this used to be the exception, it is starting to become the norm. The technical term is "secondary".
Fred Wilson has been doing a great job chronicling the rise of these transactions for almost 2 years. (He calls them "DST-style" investments.)
http://www.avc.com/a_vc/2011/02/some-thoughts-on-public-and-...
http://www.avc.com/a_vc/2009/04/a-second-market-is-emerging....
I'm not as skeptical as some on Groupon's future I think they still have a vast amount of room to grow. But this lack of a focus on fundamentals is how bubbles get made.