Battle In The Boardroom: Why Groupon Probably Paid Off Its Early Employees | Hacker News Reader

Battle In The Boardroom: Why Groupon Probably Paid Off Its Early Employees

dshipper.posterous.com

60 pointsdshipper22 comments

What I'd really like to know is what the G round investors were thinking: did they not expect Groupon to use that round to pay off early investors and employees, or was that part of the plan?

I'm assuming that they knew that Groupon would use the money to keep its original employees around for another year, pump revenue. The payoff at the end for the investors and the employees is a huge IPO.

"The payoff at the end for the investors and the employees is a huge IPO."

That can be true for investors, but employees typically have to wait years to be able to cash out their shares.

If Groupon in the long term is the bomb the S1 indicates, an IPO is not a great deal for employees (unless they already got theirs in the G round, of course).

why do you say years? wouldn't all the earliest employees be partially vested right now, and vesting more each month? and as long as the share price stays bubbly through the end of the lockup period they can cash out at/close to the top.

Every deal is different, but it's not unusual for vesting to take four years.

But it would be unusual for none of it to vest for four years. Typically a four year vesting means a 1 year cliff where nothing vests, at the end of which 25% vests. Then the rest vests at a rate of 1/36 each month.

The G round investors are buying their way into the IPO.

They believe that the IPO will be huge regardless of Groupon's health, and there's a lot of money to be made on it, so they're purchasing -- from the early investors -- access to pre-IPO stock.

Ok, so they were in on the plan as @dhh's article suggests, but why did they put up so much (nearly a billion)?

That level only makes it harder for them to realize a high return.

30%-50% on $1bn is a really high return. The bigger the stakes, the lower the multiples. (That's why people use leverage.)

That's true, but leverage works both ways: if the IPO flops, it's a huge hole in their portfolios.

It'll be interesting to see what effect all this public criticism of the S1 filing does to the opening day price.

I'm guessing this public criticism is pretty much limited to tech savvy audiences so far. I haven't seen Groupon get this criticized on cnn, money.com or ft yet, so the wider public is probably still thinking this is a great deal.

If that's true, it lends more weight to the charge that the whole thing is a Ponzi scheme (later investors paying off early investors).

That's not the definition of a Ponzi Scheme. A Ponzi scheme is a confidence scam that requires deception. This is a bubble.

The investors in the last round knew that the money was being used to cash out the early shareholders. No one is claiming fraud.

Yes, but the G round investors still have a personal stake in ensuring the public are deceived into buying those IPO shares so they themselves can turn a profit. Deceiving is deceiving either way you cut it.

How can they be "deceived", when the entire internet is talking about it? Nobody is hiding anything; they filed an S1, just like every other public company.

Yes, but Groupon is deliberately excluding certain expenses, such as online marketing, from their CSOI in order to inflate their profitability. Excluding this figure seems quite deceiving since their figures imply they don't rely heavily on online marketing when, in fact, they do. They even contradict themselves in their filing by stating, "We spent $179.9 million on online marketing initiatives relating to subscriber acquisition for the first quarter of 2011 and expect to continue to expend significant amounts to acquire additional subscribers." Well if they are expected to continue to expend "significant" amounts to acquire subscribers, why are they excluding those costs in the CSOI?

If you can make this argument, so can potential investors. It isn't a secret.

Isn't a secret...to some. If Groupon knew all potential investors would come to these same conclusions, why inflate the CSOI figures in the first place? They may believe that their marketing costs may not stay high once they've locked users into their e-mail list, but there is a growing influx of companies diluting the concentration of their daily deals such as LivingSocial, GiltCity, BuyWithMe, and countless other clones. Even Google Offers and Facebook Deals are entering the market with a huge network at their disposal. With this growing competition, Groupon is going to need to continue spending more on marketing well into the future in order to replace lost sales and a deteriorating retention rate. Their marketing costs are going to continue to be significant and, until they prove otherwise, they should report them as such.

If the investors have had the uses of their investment disclosed to them then it's hardly a Ponzi scheme. Wether the investment is sound is a different question.

Drilling into his specifics, one issue is that they didn't actually keep the team together (and may well not have wanted to, given the comp package the new COO at least got), the COO and CTO both left in March. http://money.cnn.com/2011/06/03/technology/groupon_ipo_quirk...

Groupon raised the 1 billion in January which means that both the COO and CTO stayed long enough to cash in on the Series G round and then left.

Does that indicate that they thought the company's value was peaking?

More importantly, are we actually at the point where blogs in which a guy is admittedly just making things up about Groupon makes it to the front page?

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