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Could someone explain to me why someone who stands to turn $1,000,000 into $4,000,000,000 would ever find it wise to cash out a measly $300,000,000 out?

Perhaps someone remembers how many paper millionaires got their houses repo'd the last time the market got very exuberant in Silicon Valley.

I get a sense that people want Groupon to lose, largely for the reasons that crabs like to pull down any crab attempting to leave the bucket. Groupon was the hottest game in town, based not on whimsy but on demonstrable revenue growth to hundreds of millions of dollars (!) in a brief period of time.

Everybody wanted in on that deal. If a condition of that was that founders/employees/etc walked away rich regardless of what happened to the company, oh well, capitalism happens to investors, too. "You make us all rich then you get rich, or you end up in the poor house" is not a law of nature or moral arrangement we should aspire to, it is a market condition caused in one time and place by the market favoring people with lots of money instead of with growing companies. With regards to Groupon, the market swung in the other direction.

Everyone knows that if a VC invests several hundred million into a company and that company blows up, the VC still walks away rich, right?

Everyone knows that if a VC invests several hundred million into a company and that company blows up, the VC still walks away rich, right?

No, really: you all know this, right? It's absolutely true. Not because they were already rich. No, because the usual arrangement is, they get paid either way.

How? Via liquidation? Or scraping operational money? VCs also double down. If it blows up at the wrong time, they lose, right?

VCs invest the money of limited partners, who are typically wealthy families or institutional investors like universities or pension funds. The compensation structure of a VC looks something like this: we make 20% of returns and 2% of the committed fund size every year as a management fee.

If a VC pours $100 million into a company and, four years later, it blows up, the VC has moved about $110 million from the investor's pockets into a) $100 million into the company and b) $10 million into their own pockets. (Less their operating expenses, which are not nearly on that level. Often times their operating expenses get paid out of that $100 million, too -- e.g. VCs charging the company they invest in for the legal expenses associated with doing the investment.)

Diversification. It's usually imprudent to have 90%+ of your net worth invested in a single three-year-old company, if you have people willing to buy the shares from you.

Especially if you know something they don't.

Well, yes. He could have two good reasons instead of one. But that's not how people normally evaluate this kind of situation.

"Why were you going 20 miles per hour over the speed limit?"

"As you can see, my wife just went into labor and I'm driving her to the hospital."

"Good point. Also, you might be escaping from a bank you just robbed."

I mean, S-1's are notorious for how much detail they go into, in terms of all the ways things can go wrong. Groupon's "Risk Factors" section is 13,000 words long. I presume that everyone who thinks they're hiding something has read it. When you read it, what did you notice was missing?

"Because of his existing wealth, he said, the Groupon IPO windfall won't bring big changes to his life."

If he's already wealthy - why would he care about diversification?

I read that to imply it was after he sold the $300M, not before - the article claims he already cashed that $300M out. Thus, the extra net worth he would have gotten beyond the $4B would have been meaningless, whereas the $300M got him to the point where the IPO is meaningless. Based upon this, cashing out $300M would be extremely logical. But maybe my reading is incorrect.

If you believe in modern financial theory, diversification is the closest thing to free money available. It would be weird and excessive for him not to diversify.

(Someone with Internet access, posting to YC, is probably going to have a lifetime income in the top 1% of the world's population. So keep in mind that most people could ask a similar question of you.)

Modern financial theory does not take into account the insider's information.

If based on his inside knowledge he believes he can make 100%+ in a year, it would be silly to diversify that investment into other stocks with less than 10% yearly return.

On the other hand if his inside knowledge is telling him that company is going to file for bankruptcy protection in the next couple of years - it makes sense to sell all his holdings ASAP.

It does. There's a whole lot of research into how insider information propagates, and what the ideal portfolio strategy is given such information.

But it's like any other edge. It can still make sense to diversify. That's empirically true; even Boesky put most of his money into stuff he didn't have an insider edge in.

In this case, it all depends on what kind of edge Lefkofsky has, what kind of liquidity discount he's willing to deal with, whether he and his investors have different time preferences, etc.

It would be truly odd if the rise of the fastest-growing business in history and the rise of the first fairly liquid pre-IPO market and a massive increase in the US money supply didn't lead to this kind of change in investor and founder behavior.

>Could someone explain to me why someone who stands to turn $1,000,000 into $4,000,000,000 would ever find it wise to cash out a measly $300,000,000 out?

Perhaps he's just hedging his bet.

while that may be an interesting point, If they did not have any faith in the company working, they probably would have done what every company strives for nowadays, be bought out by google.

Your comment is spot on except your hyperbolic and unnecessary attack on social security.

Groupon figured out a way to sell a dollar for $.50, and they use money from new investor's to pay the old-- just like a ponzi scheme.

Also what does Groupon have? A few thousand merchants, a few million email addresses, no patent portfolio, no moat so to speak-- and the fact they need 8000 employees mostly dedicated to sales means they can't scale well--ever.

Most likely Groupon has 6 months to a year before the money evaporates. If not then they end up like Avon or Snap-On tools at best.