Sell for half a billion and get nothing (2021)
fundablestartups.com
fundablestartups.com
> Every founder should learn from this disastrous scenario the importance of building a very healthy, fundable startup. A healthy, vibrant startup draws more investors during fundraising. The competition gives founders the leverage to negotiate for more founder-friendly terms. Healthy startups get better valuations, better terms, and raise funds with much less effort.
Hmm. The lesson I learn from that is to bootstrap/self-fund, rather than get investment in the first place.
No, it won’t have a 1 bil payout, but you make your own rules and you’ll get a healthy cash out from the dividends after only 1 year or so.
It also forces you to keep pivoting and finding a cash cow rather than assuming your initial plan was any good. We’re on like plan #10 now and in hindsight if we went with any of our original plans we’d still be burning money whereas current plan was profitable after just 1 month once we figured it out.
Does anything have a $1B payout for the founder? I guess there are a few companies that achieve this, but it takes only a modicum of humility to realize you're not likely to be one of the most successful founders this decade.
Add up the IRS cut, state and local, gas tax, sales tax, fees to use services already paid for with taxes and are basically required for life in the US (road tolls, document fees, vehicle registration fees, public transit fares, etc), costs for compliance with laws like hiring someone to help you file taxes or taking a day off work to renew your driver's license, higher costs for goods and services due to monopolies granted by government (drug patents where the same drug costs a quarter of what it does in the US everywhere else the world, higher than otherwise internet fees paid to entities like Comcast who are granted monopolies, hospitals that are expensive due to monopolies granted by certificates of need, etc), inflation caused by money printing to pay for foreign wars without broad popular support, housing that is more expensive due to policies that benefit homeonwers at the expense of those without assets etc, etc.
Its way more than half of your productivity that is taken, if you are productive and earn wages. Those earning capital gains are hit about half as hard, another happy little accident that benefits primarily the wealthy and powerful to add to my list above.
Oh and the best part, after paying those taxes for decades once you get sick, all of the sudden, the government and the medical industrial complex doesn't have the money to help you. You get to live in a cardboard box under a overpass.
https://www.propublica.org/article/lord-of-the-roths-how-tec...
For comparison, the SEC filing for Paypal's IPO has Thiel Capital investing a bridge loan of $100k in 1998 which was then converted into 500 thousand shares (100x higher valuation than his individual "purchase" the following month).
https://www.sec.gov/Archives/edgar/data/1103415/000091205702...
From the ProPublica article, re: why this was problematic:
> Thiel’s unusual stock purchase risked running afoul of rules designed to prevent IRAs from becoming illegal tax shelters. Investors aren’t allowed to buy assets for less than their true value through an IRA. The practice is sometimes known as “stuffing” because it gets around the strict limits imposed by Congress on how much money can be put in a Roth.
Also, aren't taxes on things like stocks, equity, etc far lesser than personal income taxes anyway?
= turnoff for investors. They only care for chances at homeruns — singles and doubles are not welcome. You’d better swing for the fences, because that’s the purpose of VC.
(This is my understanding, not my endorsement. Please correct as needed)
The question only seems to be whether this strategy still works in a higher interest rate environment. As I understand it this development mostly stems from it being more profitable to invest with a low ROI (or a low probability of a high ROI) than to keep the money in the bank.
Anyone can get S&P 500 returns with little to no risk. That’s not to say they won’t lose money but it’ll be market returns either way, will be very liquid, and readily transparent to the holder.
Given the risk involved in early stage investment the maths just don’t make sense for an investor to shoot for anything short of the moon.
tldr; Seed funding / early stage investing is closer to lottery tickets and Vegas than to your 401k.
Unless it’s buying SP500 index funds, I doubt it. Especially the last 15 years.
I know quite a few people who would have been further ahead (financially) if they had just invested in SP500 and retired.
I mean literal index funds.
Basically, give me my market returns if you’re not going to hit a homer so that I don’t need to keep shoveling cash and can spend my time and money on the remaining at bats.
Given the situation described in TFA, that's just as well.
VC wants to have a portfolio of 100 companies swinging for the fences, knowing most of them are going to zero.
Individual founders do not want to go to zero, and many would be happy hitting singles or doubles.
That is, VC wants their founders to take more risk than is expected value positive for any given founder. A lot of the legal & financial levers VC uses are to force this upon you as a founder.
Someone working on their $500 MRR form-builder app isn't building a startup, they're "just" building a regular ole business.
Personally I'd much rather build a business than a startup.
It's that singles and doubles aren't profitable for the VC fund.
The VC business model is based on promising investors high return in return for high risk. Typically the fund will take a management fee along the line of 0.5%-2% a year, sometimes frontloaded a bit to account for the higher cost of marketing and finding investment opportunities. 0.5%-2% does not get you rich unless you're a huge fund with very tight operations - it costs money to have people following up a large portfolio. For most smaller funds the management fee will tend towards the lower end, and will just keep the lights on.
Then on top of that you get carry. Carry can vary enormously based on your reputation, and your promises. Specifically, the higher the threshold before the carry kicks in (the hurdle), the more you can insist on retaining above that.
A not untypical example would be to retain 20% of any return over an amortized yearly return of ~7%-15%.
Put another way, in this case $400m of investment was made. The last round was 3 year prior, but much of the capital had been in the company much longer. The VC's in question would, with a 7% hurdle rate need a return of $490m before they'd see any money beyond the management fee if this company was typical of their portfolio and the entire $400m investment was "only" three years old (much of it would have been older).
As such, if the VC funds in question were otherwise successful, a $465m exit would have been dragging their profit down. Not as much as if it'd gone bankrupt, but this was a really bad exit for the VC's, and basically represented the VC's having written the company off as a failure and salvaging what they could before they lost more.
The investors in the VC (the limited partners in the VC fund) would have done better, but keep in mind 7% represents roughly the return of an index fund over time, so for them getting "only" $465m back after it had sat in the VC fund for years will also have represented a significant opportunity cost vs. putting the money in a safer vehicle that might have returned more.
Instagram perhaps?
Also, an IPO?
WhatsApp likely did.
Minecraft as well.
Actually, it just might. RightNow was a bootstrapped startup back in the dotcom heydays, which managed a 9 digit exit after selling to Oracle. Midjourney is a unicorn without a cent of VC funding. Zapier raised just $2m, and they only got into YC on their second try.
The old maxim of "build something people want" is crap honestly - it's more appropriately worded as "build something people will pay for".
They would still want it though, if they got the drug compound at a heavy discount, or the SaaS for free. And they'll keep telling you they want something that does exactly what those products do.
Formative experience: working at a startup, coming upon a fundamental technical problem that will prevent delivery of any of our revenue generating projects & realising that anyone who has spent a meaningful amount of time working on the software would notice the same problem. Noticing nobody else has brought it up.
Valuation (I’m told) depends on ARR. Company not really set up to generate meaningful ARR from its core business. I keep hearing “it will get better” but as far as I see, the problem is squarely at the top and some specific deputies. So, why do I keep hearing that?
It sounds like very poorly messaged religion some days.
https://www.flyertalk.com/forum/travel-technology/952359-tho...
Especially this post from Jan Koum:
i'll tell you all a funny story which has to do with flyertalk: i am actually flying to Barcelona for MWC right now using the M&M miles award ticket (i am posting this from LH455 flight)... i obviously got these tickets many months ago - i prefer to fly using miles when i can to save company money. as you know, award ticket inventory is limited and last minute changes are nearly impossible... and this is where it gets cute:
we announced the deal with Facebook on wednesday after the market closed. during the process, we realized there was a chance we might not be able to get the deal wrapped up and signed on wednesday and it could delay.
when the risk of the delay became real, i said: "if we don't get it done on wednesday, it probably wont get done. i have tickets on thursday to fly out to Barcelona which i bought with miles and they are not easily refundable or even possible to change. this has to be done by wednesday or else!!!"
...and so one of the biggest deals in tech history had to be scheduled around my M&M award ticket
They seemingly did everything right and still go screwed in the end.
My understanding is that they were badly advised by Goldman Sachs. Still, "doing the right thing" sometimes includes ignoring bad advice.
Without any statistics at all to back this comment, I bet there are a magnitures more software companies out there that have made people 100% of a million, vs 10% of a billon. You're talking such a small pool (which might seem large in HN terms) when in reality there's an incredible number of small software companies globally.
Of course not discouraging anyone from shooting for the moon.
After we signed with a vendor, the owner took us out on his boat one weekend. As we walked through the harbor he pointed out all the other boats owned by competitors and other companies in the same industry. "This is Supercom's boat, this boat is owned by the person that started Megacom, and that's Supercom's old boat and now it's owned by the Digicom guy..."
The lesson would rather be: don't raise so much at the seed stage. Google got started with a $100K grant.
FanDuel raised $400M in four years [1]
And it looks like one of the the FanDuel founders did it again [2]
This is reckless and should be a massive red flag for new joiners.
[1] https://en.wikipedia.org/wiki/FanDuel
[2] https://futurescot.com/fanduel-co-founder-secures-largest-uk...
The other viewpoint is, that typically at funded startups founders get some salary. You can view it also as an another job.
This changes the complection of the whole article! "Sell for half a billion and get nothing" is _exactly_ what you expect if you raised almost half a billion in finding.
I'm sure all the points in there are important and maybe the author's product is still useful. But it's not really an accurate picture to say that these founders got shafted by unfair terms. They just didn't build a very valuable business relative to the amount of money they spent...
I think the problem with the article is that it emphasized the absolute acquisition value and omitted the fact that the company raised $400M. Considering the amount they raised, $559M seems much more reasonable and not quite bad terms?
Their sale was a 16% increase on their investment rounds. They soaked up half a billion in investment, and then got almost no return or "value added."
Almost as dumb as that $500 million tomato farm that couldn't grow tomatoes. (had to check, AppHarvest)
The Series E itself was 2/3 of the total funding and was about 3 years before acquisition. If we assume all of the investments happened 3 years before (rather than ranging from 3 years to almost 11 years, that's a return of under 4% per year. Investors in Fan Duel would have been just about as well off to pay down their mortgage at nearly historic low mortgage rates rather than invest in risky startups.
If I invest $400M in your company and you sell it for $400M, I think we can all agree that you should get your paycheck for the time you worked at the company, but you didn't create any value from the company.
That failure to create value on the part of FanDuel isn't anyone's "fault" per-se, but it's also not something that means that an equity payday has been earned by anyone.
"Early investors filed suit in New York against FanDuel's board for breach of fiduciary duty in allegedly undervaluing FanDuel to enrich themselves." ( FanDuel Wikipedia )
There was some unusual relationships in the deal, and the valuation of the company post-purchase was dramatically larger.
Not sure if suit is public, but article:
"The new lawsuit claims that the board – which allegedly included only one independent director and six directors tied to KKR and Shamrock – priced the value of FanDuel’s stake in the merged company at about $559 million. That number, the suit alleges, was no coincidence. Under FanDuel’s operative bylaws, preferred shareholders were due to receive all of the first $559 million from any merger."[1]
[1] https://www.reuters.com/article/us-otc-fanduel/fanduel-found... ( "juicy tale?" )
Also they raised over 400M in funding. If you exit with 465M with 400 million raised in funding AND liquidation preference entitles investors to first $559M in an aquisition, of course you are going to get nothing.
The question is why they raised 400M in funding and could only exit for 465M. This tells me it was a failed business.
The bottom line is these guys were not profitable.
But the investors got very lucky to not see -100% return.
People forget that VC funds also aren't great business for the partners without carry (you get a management fee that keeps the light on, but you make your profit largely from a proportion of returns of the fund above some threshold; on top of that, in many funds you're required to lock up a significant chunk of your own cash as well, so poor returns both means you earn less and means your own investments return less), and a return like that likely would have had a seriously negative impact on their carry.
I know it can happen, and maybe it happened here. If so that's shitty, and people will have learnt a hard-earned lesson they shouldn't have to have had.
[Also in case anyone do face this argument: as a general rule don't unless you feel like a founder and your share holding gives you good reason to; e.g. even in one of the startups I got 7.5% of on joining I was paid above my previous salary - the one case mentioned above where I was "underpaid" for 6 months, I had 25% of the shares when the company was founded]
> But the investor only demands a meager $200 million return on their $400 million investment before they recognize the workers' investments.
"The investor" here are mostly VC funds that almost certainly lost money on the return they did get, as they in turn take investments on terms that leave them with a minority of the profit after clearing certain hurdles. Given the duration from the last round and the amount of the exit, it's highly unlikely that exit cleared the hurdle, and so this likely at best did nothing towards the VC fund managers profitability either. At best it will have offset even worse investments a little bit.
The investors putting money into those VC funds again, got some returns, but lower than they would have if they hadn't taken the risk in the first place and just put the money in an index fund. If you're going to account for lower salary as a loss, then the limited partners and the general partners in the VC fund also suffered a loss by not getting the return they would have if they didn't invest in this company.
That is the risk you take when you choose to make an investment - be it in cash, or labour. Don't take those risks if you're not prepared for them.
I'm all for lots more workers rights than most people on this site would have the stomach for. But this was not a successful company. This exit was a failure. There's no realistic scenario where staff would get much - if any - return from an exit on terms as bad as this one.
You accept greater job insecurity than more established companies, and lower salary than more established companies, but in return you get the opportunity to receive a larger slice of the proceeds from a "good" exit. It's like buying a lottery ticket. You don't sign on with Meta expecting a great exit, but you gamble that you might see a great exit when you sign on with Series-B-R-Us.
I'm not saying I agree with the gp here that the workers were wronged, but the widespread assumption is that startups pay less than more established companies.
And I agree completely that the gamble did not pay off for anybody here. The investors lost money, the workers lost money, the founders lost money. And that's the risk you take on when you make that kind of investment.
I've definitely declined further interviews with companies with something to the effect of "I don't have the stomach to be in an early stage startup right now".
It's a common negotiating tactic. As I said, I've only once (in 30 years) accepted less, and then I owned 25% of the company prior to the investment. Sometimes they do mean it, but far less often than people think.
> You accept greater job insecurity than more established companies
This is true, and a reason to not accept a lower salary because you are more in need of an ability to maintain or expand your cushion.
> and lower salary than more established companies,
There are certainly companies that want you to think this is just the way it is. And it depends on what you compare against. You won't get FAANG salaries at a startup, but most people don't work at FAANG's.
Some startups will not hire at non-FAANG market rates either. If you have the skills to be attractive to them, however, odds are you don't have to settle, and that includes choosing other startups. Unless you're convinced this specific startup is the next Google, odds are it's a bad bet to concentrate your risk by accepting a trade like that.
Most of the time you'd be better off getting a market-rate salary and investing the money in a way that spreads your risk.
> but in return you get the opportunity to receive a larger slice of the proceeds from a "good" exit. It's like buying a lottery ticket.
The problem is that it is exactly like buying a lottery ticket: The odds are extremely heavily against you and most such jobs do not provide enough shares to be worth it when you factor in likely dilution and things like liquidation preferences and the very, very high odds that the company will fold before any exit event.
If the company is pre-seed and you're offered 5-10%+ and a guaranteed (in writing!) salary increase after the A round maybe. If you're coming in as employee 10+ after A and you're being offered sub .1%, sure you could win the lottery, but you could also find another startup and get the lottery ticket and* the salary, and put the extra salary in an index fund and be far more likely to get a high return.
I'm not saying there aren't ever deals that are worth it, but put another way: If you accept a lower salary for shares, you're investing in the company. Have you done the calculations of risk-adjusted potential returns and done the due diligence you would if you were to put money on the table? If not, why not? It's the same thing.
Unless you're really sold on that startup in particular to the point where if you weren't hired you'd like to participate in their investment round with your own cash, it's likely not just a bad deal, but you're concentrating your risk.
> I'm not saying I agree with the gp here that the workers were wronged, but the widespread assumption is that startups pay less than more established companies.
Most tech workers also don't negotiate their salaries. I've hired dozens over several decades, and I've had less than I can count on one hand actually try to negotiate, and in each case, we went back with a higher offer. Conversely, I've never accepted a first offer. I've sometimes walked because we were too far apart, but I've never had a prospective employer decline to up their initial offer.
I've been offered substantially higher pay than the CEO by startups who did want to pay below-market but were more concerned about getting the right person.
My experience is that if you can get offers, you can get offers from startups at market rate, and it's down to whether or not you consider that investment worthwhile if it had been separated from the employment. If you struggle, and a startup offering below market is the only option, sure, don't be too proud, I wouldn't be either if times were tough.
I'm not sure why I would work for less unless I was founder, or it was a charity or other public good.
What's the point of accepting 400M to build a business if you essentially don't own any of that business (because of the 559M buyout ceiling).
Were they gambling on a buyout more than 559? I don't understand why someone building a business would accept these terms.
It sucks to see "your" (at this point it did not at any point feel like it was "mine") company selling for huge amounts and get nothing or near nothing, but it's worth people understanding that a large-sounding exit does not automatically mean it represents a success.
E.g. in this case the last round in 2015 apparently valued them at over a billion. Going from a $1bn valuation to a $465m exit is not great...
It's easy for people to think these terms were onerous, but if they could get $275m (the size of the last round) at those terms they likely could've still have found significant investment at less onerous terms if they wanted less risk. They chose to take those investments.
Taking VC cash is very often a game of deciding whether you want to gamble it all on faster growth or take less risk for less cash, but with the additional caveat that the investors you take on often will cheer for the "gamble it all" option as they have many parallel bets while you as the founder has one.
I've taken VC money several times and been part of early stage VC funded startups several times (including a VC), and I wouldn't rule out doing so again at some point, but it's important to go in understanding that the VC's incentives and yours are different, but if they are too different, then taking VC money might not be right for you, and that's fine.
For starters, in any early stage startup I'd discount by 90%+ just because it's a startup, entirely irrespective of whether I like the idea, and what investors think.
It wouldn't suprise me if the estimated value of those is negative. I.e. your wage will be lower due to "wage dumping" by gamblers. I did not find amy stats on the median or average payout.
This shall be printed in block letters in a red frame ahead of most Paul Graham essays about milk, honey and richies in startup land.
He and VCs push theirs agenda because he has hundreds of bets, while founder has one.
They play different game and are quite quiet about it.
But, yes, people ought to go into it understanding which game they're playing, and understanding that your odds are different. Not least because it might make a difference in how you judge advice from your investors.
(There's also only one decision I regret us making due to investors being too willing to take risks; in retrospect I was firmly proven right but whether the board vote going the other way would have made a financial difference in the long run I can't say)
Now, as I said, the start-up cannot meet its capex obligations and the current funding round is looking grim. It is definitely going to be a down round and it ain't going to be pretty should a term sheet get thrust under our collective noses. To get the developers motivated to stick around a little longer, "generous" equity packages are on offer, with a request to convert over-due back pay and future payments too, into equity .
When I sought transparency - "Can I see the cap table?" - "Can I see the terms of the investors?" - "Can I see anything?" - the answer was invariably "no." Essentially, they're asking me to make a nominal investment of over $200K in the company, accepting common stock in lieu of pay without any insight into the financials or the terms provided to other investors.
It's worth noting that I had previously given the start-up a sweetheart deal, significantly discounting my usual rate and offering generous payment terms, in the spirit of support and belief in the project. This makes the current scenario even more disheartening. Compound that with what has become an overall toxic environment that I have euphemistically called "challenging" when asked to sum it up, and the future isn't bright enough to wear shades.
Now this isn't exactly my first rodeo. I've seen the beautiful side of start-ups and liquidity events. And I've seen the dreadfully ugly side too. Hard lessons learned. And the ugly side shows up way more than the pretty one.
I swear, some entrepreneurs must think I stepped off the boat yesterday.
These questions should become so normalized that founders don’t bat an eye at it. If I am an early employee, we are partners. Wanting to know my percentage and the company’s liabilities before I sign is not unreasonable. I also want to hear you talk convincingly about your plans for future investment.
That is, If you say "No, I don't want equity", they still owe your back pay, there are multiple ways to get it, AND if either "back pay" or "equity" is to have value, they must have more funding. Which means, out of that funding can immediately come your back pay.
So if you take the equity, or insist on pay, both are the same in the end.
In fact, by not showing you what you need to know? They're forcing you to go after any investment they get for backpay.
I've always found, in every single case, if someone doesn't want to show me something? It's because they know they're scamming you. Or selling false goods.
No one with a sensible, reasonable deal ever desires to hide what the deal is.
In fact, you should most insist and see what the founders are getting too. And the older investors. But either way, you are 100% owed salary, without dilution, and in most jurisdictions employee wages are class A, come first, before anyone gets cash -- investor or not.
Is this the case in your region?
Only after the taxman came over. And in most places the banks are preferred too.
In my case you are only first in line if you have a court order for them to pay (give them notice to pay, repeat three times, go to court). Otherwise you are above the shareholders only but it's not that hard to work around that so I have been told.
Well, no. As you write yourself, if you insist on pay, and they cannot get funded and have to wind down, you're first in the line. You may not get a large percentage of what's owed, but you'll get something. And if they can get funded, you almost certainly can get everything owed.
If you take equity and they cannot get funded, you get nothing. If they can get funded, the way they avoid showing the terms, it's extremely likely there are the kind of shenanigans TFA describes and you'll get nothing.
Really, the only scenario where taking the equity makes sense is if you believe the company will do well and the funding terms will be be favorable or at least balanced. And it sure doesn't look like that.
>> the start-up cannot meet its capex obligations and the current funding round is looking grim.
>> It is definitely going to be a down round and it ain't going to be pretty
they may also want to hide specifics if things are going great since then the employee may negotiate hard knowing how much they can get more
In Canada my understanding is that, if a company files for bankruptcy and you’re owed back pay, certainly the first recourse is getting said back pay from whatever assets the company has. But if that stone is bled dry, and employees are still screwed, the government steps in and pays their back pay (up to ~$8.5K). Not a thing in the US?
If it is a thing, the commenter would be smart to hold out for back pay. If they instead accept (almost certainly worthless) stock instead of back pay, they can likely no longer make claims like this if the company goes bankrupt.
Look to your left.
And whatever it is you do, don't blink. Don't. Ever. Blink.
Incoherent snippets of dialogue seen on a DVD turns out to be half of a conversation being had with a specific viewer in the future, a transcript of which goes back in time.
Had a one hour casual chat with a start-up game studio in early February, and the offer came through in email on Friday for significantly more money and an interesting problem.
Had a one hour on-site casual chat with an established robotics company today, that stretched out in to about five hours of casually meeting the team, grabbing coffee with the CEO and CTO and a verbal offer at the end of the day. It is for more money than my current position, but it isn't significantly more money.
I have some thinking to do over the next couple of days. Plus a few more casual chats with companies lined up. Not sure if I should pump the brakes until Game Developers Conference though and see if there is anything there that's interesting. Work tends to fall out of the trees at that place if you shake the trunk hard enough.
Correct.
> As "slightly more money" sounds like "lots more" when the current place isn't making payroll
Also correct.
I am also evaluating the offers in terms of what I think I should be paid to make me satisfied with the compensation on offer.
Or can be bullied into accepting, even if you aren’t clueless. I do know people like that. Conflict is more painful than loss.
If companies get caught doing things like this, they can be fined for tens of thousands of dollars “per offence” - which is something like the number of missed pay packets across all employees, the whole time this has been going on.
(I’m fuzzy on the details - a friend was an advisor to a startup which paid their employees in crypto. He looked into it - and made them pay everyone in dollars as a condition of having anything to do with the company.)
Most likely you already know the answer.
In a fantasy scenario, you could take the stock they’re offering and demand to have a more senior stake and a 5x liquidation preference.
The full cap table will show how much each individual investor owns, and there are valid reasons to want to keep that private.
The cap table contains names of individuals. Most founders I know were reluctant to share the exact details. At the same time it's impossible to value option or equity grants without knowing valuation estimates, shares outstanding, round sizes, and liquidation preferences. Those get shared more readily.
No way would I put $200K into a startup that’s facing a down round, especially not as an employee.
I assume its either opex (operating expenses) or they need to buy $big_thing to get to the next stage of growth.
Sounds like they should fire that primary stakeholder, claw back his equity, hire someone who knows what the hell they're doing, and hope to god the employees don't walk or sue the hell out of them - both of which they probably should do.
But, can you clarify? You say they should know you weren't born yesterday, but your post also implies you're working with these people.
What's the missing detail?
What are you getting out of this that makes the other red flags "worth ignoring"? What keeps you showing up?
1) I think 1x is very fair and meant to protect investors from bad company behavior. If you didn't have 1x preference, this would be an easy way for an unscrupulous founder to cash out: raise $X for 20% of the company, no liquidation preference. The next day, sell the company and its assets ($X in cash) for, say, 0.9x. If there's no liquidation preference, the VC gets back 0.18x and the founder gets 0.72x, even though all that the founder did was sell the VC's cash at a discount the day after getting it.
2) >1x liquidation preferences are sometimes the founder's fault and sometimes the VC's fault. Sometimes it's an investor exploiting a position of leverage just to be more extractive. That sucks. But other times it's a founder intentionally exchanging worse terms for a higher/vanity valuation.
For example, let's say a founder raised a round at $500m, then the company didn't do as well as hoped, and now realistically the company is worth $250m. The founder wants to raise more to try to regain momentum.
A VC comes and says "ok, company is worth $250m, how about I put in $50m at a $250m valuation?"
Founder says "you know, I really don't want a down round. I think it would hurt morale, upset previous investors, be bad press, etc. What would it take for you to invest at a $500m+ valuation like last time?"
VC thinks and says "ok, how about $500m valuation, 3x liquidation preference?"
The founder can now pick between a $250m and a 1x pref, or $500m and a 3x pref. Many will pick #1, but many others will pick #2.
It's a rational VC offer -- if the company is worth $250m but wants to raise at $500m, then a liquidation preference can bridge that gap. The solution is kind of elegant, IMHO. But it can also lead to situations like the one described in the article above where a company has a good exit that gets swallowed up by the liquidation preference.
3) generally both sides have good lawyers (esp. at later stages of funding), so the liquidation preference decision is likely made knowingly.
Related to #3, if you're fundraising, please work with a good lawyer. There are a few firms that handle most tech startup financings, and they will have a much better understanding of terms and term benchmarks than everyone else. Gunderson, Goodwin, Cooley, Wilson Sonsini, and Latham Watkins are the firms I tend to see over and over.
As a founder, I'd always though that >1x was predatory with no excuses, but your #2 really clarified that an appropriate situation.
But I guess VCs generally have the leverage and wouldn't want such terms.
Bleed Off: set up a participating preferred with 1x liq pref and bleed off between investors A-Zx MOIC. In practice the preferred investors would participate by taking their 1x off the top, then sharing pro rata in proceeds. As the investors implied MOIC reaches the bleed off MOIC range, their participating preference would bleed off or be reduced ratably in the bleed off range until the participating portion approaches 0 (and eventually investor converts to common).
Kick Out: set up as a participating preferred with a 1x liq pref and a Ax kick out. In practice, investors would take their 1x then participate pro rata up until they Ax their capital. After Ax, the investor would collect no additional proceeds unless they convert to common.
I've seen both used, but the latter probably more appropriately works for instances in which there is a bid ask spread and founders want to solve for valuation (with the belief that they'll blow through the preference anyway and it won't matter) and investors want to shift the returns curves to higher probability (lower) equity values.
I suspect these founders find some way to extract as much as possible from their company after raising funds.
Without naming names, I've seen a startup go boom (raise huge money and be valued at 3x that huge money), then all the senior leadership disappear: moved out of state, only show up for pre-recorded town halls (that used to be live), no longer a part of engineering meetings, cancelling department meetings, etc.
That went on for a couple years until the founder minimized their position in the company.
I don't understand how that could happen unless that founder extracted what they wanted and were just riding the ride rather than marching towards IPO.
For liquidation preference >= 1x, why even call it equity instead of debt?
The point of equity is that you own a part of it, and you get a proportional share. The point of debt is that the money owed to you is preferred over other owners (i.e. equity owners). It seems to me that liquidation preferences allow investors to take the best of both worlds.
2) You missed the 3rd case, sometimes the business is simply a bad one (like the example in TFA), or all the oxygen is getting sucked out by the new shepherd dog, eg right now with AI. The business can die right then and there, or the founder can take the equity on the only terms they can get. Given that any decent founder is drunk on their own kool-aid, and believes their fortunes will change in just 1 quarter or even 1 year, they just need to ride it out, it often seems like a good idea, and what's the difference? Die now or die later. At least take a shot at it.
IOW it's not all villains on one side and incompetent heroes on the other.
The real downside is that now you're working for the VCs. You kind of were the entire time -- that's built-in -- but it's more pointed now. If you make it to IPO none if it matters ...
As the theme of TFA's website goes, build a "fundable" startup. Easier said then done, of course. Like so many of such self-help in the startup world, the entire site is a bit of a lie, selling false hope. They even position FanDuel as some VC abusive situation (thus selling themself as the savior), by talking only about the huge amount of money, "half a billion" dollars. No mention at all of how much FanDuel raised ...
But founders/employees want them too! With all the crazy founder-friendly deals of 2021, I never heard of one in the US without a liquidation preference.
Why? Liquidation preferences allow the VC bought securities to be treated as "preferred" and reduce the common stock price in the 409a valuation report, allowing early employees to get options at low prices.
If VC's invested in common stock the strike prices would be much higher, making it less lucrative to be an early employee.
In parts of Europe there is different tax treatment for options and employees generally don't own as many shares due to it... and some of those companies don't have liquidation preferences. I believe Klarna (Sweden) doesn't have preferred shares, meaning the huge swing in valuation they had over the past few years is not as bad as it seems.
TBH the whole 409a thing is a charade & we probably need to clean up how we do accounting & taxes but until we do, preferred shares are here to stay.
but crypto organizations have added another wrench for more than half a decade, leaving the other startups aside, they are startups paying one amount, and skipping the options and paying their employees RSUs of their liquid crypto tokens, competing directly with FAANGs on compensation as employees can sell those tokens just as - or even more easily - than they can sell shares in a brokerage account
I'm saying it as if its news because the crowd here relies on people they respect saying the same thing to believe it in the absence of public and common knowledge, and that likely hasn't happened in the topic of anything crypto/web3 industry here
this is true but this is largely due to an unworkable tax treatment of giving out illiquid shares to employees that rely on employment for money, and the longstanding tax regime would seek to tax employees that have higher value shares even if they can't get cash to pay for it.
so this has left private companies in an uncompetitive situation with options as the poor workaround, analogous to chemotherapy where it hurts everyone in the absence of a better treatment, but you might come out ahead
It's a bummer - startups do a lot of really cool stuff, but I'm at a point in my career where I can no longer really gamble that the options will pay out. I need the stability and mortgage paying power of actual comp.
At the time, the company I was at seemed to be going downhill quickly, and they began mass layoffs for the first time shortly after I left.
What happened since then? Well, the startup options have very likely gone to zero. And my previous company’s stock price, which had been dropping quickly over the course of my last year there, made a hard U-turn right after I left and has been skyrocketing ever since (my family likes to joke that I caused the change of course at both companies).
Was it really a bad decision though? It’s sort of hard to tell. At my previous company, my manager had put together a promotion packet, but this likely would have been cancelled with the layoffs, and there’s a chance I could have been laid off as well (as far as I can tell it was random). And then there’s the fact that for whatever weird reason, compensation for internal promos at this company heavily lagged that of external hires at the same level for many years.
So at least up until now, I think I am even with or maybe slightly ahead of the counterfactual situation where I didn’t join a startup. Plus I have had new experiences, greater scope, and different types of challenges than I had previously, and I think it’s valuable to have a variety of novel experiences over a lifetime.
Obviously, from this point forward my future (financial) outlook would be better off if I had stayed, but it’s hard to write off my decision to try something new. Other former coworkers also left to join startups, a few of which are likely to go public soon, so it’s not as if going from FANG to a startup always works out unfavorably, and if you join a startup that seems to be doing well at a later stage, the downside risk doesn’t seem that high actually.
“For a pocketful of mumbles such are promises” Paul Simon.
Seen too many promises forgotten/diluted to really trust anything other than cash.
I feel like a lot of people (founders included) buy into the idea that the VCs should be able to walk in and screw everyone out of their equity because they hold all the cards. If you work for founders that believe this, you will definitely get screwed, partially because the founders will believe screwing you is just part of the game.
You take 10 people who worked for a public BigTech company that gave cash + RSUs and 10 people who got the same in “equity” in 10 different private companies, who do you think will be ahead in 10 years? 10 years is the average amount of time it takes for the few companies that make it to have an exit event.
Those are very likely to have multiple liquidity events before they even go public, and are known to pay more than FAANG. You're trading some liquidity and some security for a higher upside.
Those are the companies that have the best luck luring away FAANG engineers with higher comp (if things go well).
When you work for a public company, you know exactly when your RSUs are going to vest, they appear in your brokerage account and you can (and should) sell the same day and diversify.
Also, historical returns don’t take into account that we now live in a time of high interest rates and the public markets have caught on to the Ponzi schemes of non profitable tech companies IPOing
I was the employee around #300 at Atlassian, the founders didn’t dilute the employees, and my options netted $3m (minus the taxes) after working there for 3 years and waiting 6 years.
Scott Farquhar and Mike Cannon-Brookes were hell-bent on being honest, fair and giving back. There are good people out there.
Also $currrent_company which I wont reveal. Run as well as Wisetech in terms of growth focus. Got some options. Learnt lesson. HODLing these fuckers to zero or "very interesting" levels lol!
We'd also need a new technology as big as the PC and the Internet to open up lanes for new entrants. As it is the incumbents have locked up most of the market so that's where the money is.
* Ask questions to founders if they raise on participating preferred (the worst). Don't take a job if they do or if they won't answer
* Find a place with early exercise of options
* Find a place with a healthy company culture. (I believe this correlates)
Note the past tense. The way startups operated a decade ago is quite different to the way they operate now. The tricks to get the most from employees without giving away much equity are more widely known now. I have no doubt that there are still some moral and ethical startups about, but I also think there are many, many more who give out stock with absolutely no intention of it becoming valuable in the future these days.
I run a (still small, 1.5M ARR) tech startup and we treat our employees fairly. Low / clean investment table, early exercise for employees that make early employee risk effectively 0, upfront about how to deal with options, alongside market salaries.
But maybe I am not the norm and it's more common for people to get screwed over. However, I have several friends at startups that have similar recent stories with their options.
Participating preferred = investor invests 50M on 1x participating preferred and company sells for 100M. The investor makes 50M + their % share of the company. Common stock makes % share of 50M.
They participate in the % sales ON TOP OF their preferred stocks liquidation preference (money in = money out before common stock value is considered)
Now here's where it gets nasty. 2x participating preferred = investor invests 50M and company sells for 100M. Investor makes 100M and common stock makes $0. Or if the company sold for 150M, investor makes 100M and participates in the % stock value from 50M.
It's a bit confusing, but the short is participating preferred is the absolute worst terms for common stock holders (founders included.)
Bad terms are raised due to bad founders (not knowing better) but more likely bad company health. (That can include trying to raise 50M series A as we saw in past 2 years.)
A healthy company with good founders (or lawyers) should be able to avoid issues.
"Run where? When I talk to my fellow early stage east coast founders, the majority aren’t beating away founder friendly term sheets. Even seed stage companies with revenue and traction raising relatively small amounts are giving away board seats and agreeing to multiple preferences because they have nowhere else to go. For founders, these deals can be make or break. For investors they can hold out and the only downside is slightly lower yield. So there is asymmetry in needs which means founders have little leverage."
https://medium.com/@andrewkemendo/first-time-founders-and-th...
The last I saw it was just as bad and frankly getting worse for founders, as investors pulled back when the Fed moved on interest rates.
Basically everyone just stopped taking risk except for the giant institutional funds and even then, as of last year were most just doubling down on existing.
I heard similar actually last month at an event I was at - funds are sitting on dry powder and not doing cap calls.
At the smaller scale, though it just means that returns that were above and beyond distribution expectations so, for example, what the fund returns separate from the LP distribution, and then separate from distributions to partners is you know basically that net margin for the fund overall so that they would use as seeds for another fund or something like that. So effectively they are just not opening other fund lines, because none of the investments or markets that are coming up, match a risk profile for the amount of interest you can get back in other methods now.
So, a $100M VC fund is really a commitment by the LPs to wire $100M over the course of ~5-8 years.
LPs do all sorts of different things to manage the money they've committed but not yet invested.
I think the local market was outcompeted and absorbed outside of a few niches.
However, because there is just no high risk in the area, it just doesn’t happen. It’s literally just a physical access to rich people location thing which is crazy to me that it’s still the case but it seems to actually just be as simple as that.
Away from the east coast? If funding on good terms is important to your business, go somewhere you can get funding on good terms.
But the founders do have some leverage. If there is no incentive to do the deal they can just… not cause the deal to happen (different from blocking it, just not working on it).
This is the same reasons you see big pay packets for the execs when a company is doing poorly or is bankrupt: otherwise they could just go do something else (get a different job). The poor guy on the assembly line may not have the same option.
feel free to change my view, for anyone passing by
As a broad generalization: investors in Northern California are more afraid of missing out on the upside than losing some in the downside. The further east you go the more risk averse they get, until by the time you get to Europe the terms tend to be quite abusive because the investors are so worried about losing their money.
But the reason you raise is because you can turn each dollar into 1+ dollars of enterprise value.
If you raise and don't spend... You've accomplished nothing except throwing some money at lawyers.
It raises the ceiling but also the floor.
Be careful of getting buried.
Make sure they give you and all employees a nice big sign on bonus and salary. They can deduct that from the proposed acquisition price.
Is it ethical? I say yes, you should get paid more than $0 for your hard work to be handed over. Should the investors get a payout too? Yes, but they shouldn't be getting 100% of it, ever.
they “have a guy” for this stuff and it’s completely random luck if something beneficial financially occurs to them
employees are simultaneously inept and believing the founder about anything, while also having a lack of transparency even if they aren’t inept
> The reality was the founders couldn’t stop the deal because they also granted the same two lead investors drag along rights. This drag along right forced the other shareholders to accept the decisions made by these two investors.
So they signed a funding contract that gave two investors the right to take all the money in a certain situation and force the company to go along with it. That seems pretty insane. I think the lesson is the same as any other contract. Know what you're signing, and beware. I thought this story was going to be about some people getting screwed over somehow. This is a story about people agreeing to something that they should not have agreed to, and had to suffer the consequences.
Having layers working for them and using the knowledge asymmetry between them and working people is how institutional money screws people.
https://news.ycombinator.com/item?id=17485246
(July 8, 2018)
Shamrock Capital Advisers and Kohlberg Kravis Roberts are the two mentioned investors, I believe.
If I read crunchbase correctly FanDuel got $350M in funding by 2015, and sold for $465M 9 years later, for 33% ROI, or about 3%/yr. Founders don't deserve anything just for managing to hold on to investor capital and not lose it. Investing money at below market rates is not an achievement. Founders and employees weren't robbed.
Also, OP is just a bad ad.
The claim that the valuation was artificially deflated due to conflict of interest seems stronger than the concern about liquidation preferences. FanDuel's 10x valuation growth from 2015-2020 backs up the charge of deflation.
https://www.wsj.com/articles/fanduel-founders-former-employe...
IDK FanDuel structure (not in article), but they only raised ~ 400M. Yet the investors got every dime up to 550+M.
It might be a reasonable reflection of your pre-money worth (i.e. near zero) or it might not be.
1x non participating is a fine way to offset some risk.
Anything more than that is greed.
We're talking a $1G company financing $333M and getting nothing.
I did read the article. I even went back a looked again. I see no mention of interest rate for the FanDuel deal.
"company financing $333M"
So if you're saying they financed this amount, there's no way they're subject to 100% interest if the investors get up to approximately $550M. Not to mention this investment timeframe covers years. I don't have the timeframe. What was the actual rate of return? I'm guessing low to mid single digits. Why would an investor put money into something so high risk for so little money when they could just put it in safer assets with higher return?
It sounds like you're angry they got nothing because you're only looking at it from the founder perspective. They agreed to the terms.
- Investors got a meager return
- Company and employees got nothing from the sale
- Consumers got a gambling addiction
Economist-A offered his friend, Economist-B, $20 to shit his pants. Then the deal was reciprocated, with Economist-B offering Economist-A $20 if he shat his pants. At the end, Economist-B turns to his friend and says, "does it feel like we both just shat our pants for nothing?," to which Economist-A replied, "no, we created $40 of value."
If you raised $415k to start a restaurant, ran it for a few years at a loss, then sold it for $465k, you wouldn't expect to pocket anything. Adding a few zeroes and calling it a tech company wouldn't change that.
I don't think the story really necessitates liquidation preferences.
Do that with a venture backed business, they will force you to raise a series A and shoot for a 200M+ outcome. If you dont increase revenue, they want you to fail/go to zero trying to shoot for the moon. You might spend the next 5 years at a 200k salary, while you could have reached financial security at FAANG. Also, many companies have less respect for founders than you would expect. Its not the career boost people think it will be. You are building a different skill set thats not as useful inside a high paying tech company, aside from engineering. Which even then, is very different at a startup.
1. The CEO made terrible decisions in regards to how much and who they raised from. They got in over their hands as the company grew and the entire founding team got fired.
2. The CEO immediately after, who took over an unprofitable business that wasn't growing and was in bad shape after the merger with DraftKings got called off, took a deal that was the best he could do at the time. That CEO was a non-founding CFO before taking over, and was basically put in the C-Suite by KKR as a term of their investment in the business.
3. That deal to PaddyPowerBetfair, now Flutter, was completed about a year before PASPA was repealed and sports betting was legalized in the US. Had #2 happened a year later, or if #2 had happened with that information in mind, the deal terms would have been insanely different and way more valuable.
It's very easy in retrospect to say that the original CEO should have taken different terms, or that the following CEO should have taken a better deal. That's all hindsight.
All that said, I have zero sympathy for the original CEO and founders. I feel loads of sympathy for the employees, but again, if they stayed on after the deal, they're now sitting on an absolute gusher of cash.
Edit: I mean specifically something like this article that was linked in another comment on this thread, https://medium.com/@andrewkemendo/first-time-founders-and-th... Just to help ground what you suggest in your comment to something concrete.
The founders wasted investor money on a non profitable enterprise. Employees got paid for doing non profitable work for investors. No one screwed anyone,they just flopped at their business and got rescued by a buyer.
(They took millions, and surely must have engaged an excellent lawyer and sought advice, right? So they knew, or should have known.)
I agree that this can suck, but at the same time... would anyone be sad for the investors if they lost it all too? At least the founders and employees likely received some form of salary.
If anything, it is the employees that are out. The founders negotiated these terms, knew of what they committed to. The employees took options, likely without full optics into all of this.
edit: other parts of this say the CEO agreed to the terms, after the founders were pushed out. Still, what I say stands. The employees are the ones losing here, everyone else had optics into what the deal was.
Something to always think of when an employee and being offered terms. Insistence to know the funding arrangement seems key. Even perhaps the contractual option to be able to get your shares out, cashed, as part of any new funding deal seems prudent.
> In this case, the minority shareholders are FanDuel's original founders, Nigel and Lesley Eccles, Tom Griffiths, Rob Jones, and Chris Stafford. None of the original co-founders still work at FanDuel, and it doesn't look like their original efforts will be rewarded — according to the deal documents, they're not going to make any money at all off of the company's sale. Of course, it's not clear what the financial terms were surrounding their departures from the company, and they could have negotiated a pay package [1]
Getting precisely zero is not terribly likely if the founders are still with the company, since they would typically be considered key to the value of the company (at least for a time).
There is/was apparently also a lawsuit about this deal. [2]
1: https://www.businessinsider.com/fanduel-founders-likely-to-l...
2: https://www.wsj.com/articles/fanduel-founders-former-employe...
You have all the dilution & liquidity issues before you even get into this liquidation preference and drag along rights stuff. 99% of kids out of college going to work on The Next Big Thing do not understand any of this.
This is even more true when it comes to future investments. Founders talk to each other. And articles, such as this one, get the word out. So - next time you're choosing a VC for your promising startup, will you go with the one that forced the last company into a sale that left them with nothing - or will you go with one with a more founder friendly track record?
[0] https://www.crunchbase.com/organization/fanduel/company_fina...
I fear such abuse of such just feeds a narcissistic species that focuses mainly on executive headshots and snazzy websites.
Too many startup websites scream, “look, we have a website, $$$ millions, and an executive board — we’re all grown up now!” without actually having much clue. Medium sized business are more self confident and don’t bother.
The small business founder that starts as employee #1 and grows organically is an entirely different animal and fully deserves the title.
The bootstrapping/small money path is so much more like actually starting a business, but it's a lot harder. On top of the investment, you get a lot of free publicity and some legitimate street cred from having gotten VC investment.
These days, I see more crackpots getting VC funding than not, though.
We build energy plants with investor money as an example. They don’t invest in us, but into the projects we run, so it’s a little bit different than having someone invest in us (but I’ll get to that). We don’t solely build a power plant with investor money though, we build it with a mix of investor money, loans and our own money, and that last bit just got a whole lot larger (meaning we can do much larger projects) with private equity investing into us directly. So now instead of doing a tiny mom-and-pops sort of solar plant, we can build some of the largest solar plants in the world. The payout on the other side isn’t linear either, there is much, much, more money in a single large plant than in a hundred tiny plants. Especially when you sell the product a few years after its completion.
In the current world, maybe it would’ve been better to not take private equity on board, but at the time it was done, nobody knew Putin would invade, that the global supply lines and manufacturing power would never recover from covid, or, that interest rates would go above 15% in countries where they were below 1%. Everyone knew the low interest rates wouldn’t stay, but we sure didn’t expect them to go so far above 8%.
Anyway, even if the world hadn’t gone to shit, our company would still have been 10-20 people and not in the hundreds if we hadn’t acquired the massive amount of funds. Since while our founders are rather rich, they aren’t that rich, and this would’ve limited the company growth to such a significant degree that even two years of economic turmoil has us at a level we would’ve likely never reached. It’s not all gloom and doom either, people still need power after all.
So you’re both right and wrong, founders sort of become employees, but not really. How much they lean toward the employee “title” typically depends on their deals.
If anyone's interested...https://docsend.com/view/dtrtu8y7eczki9dz
If the company is not public ask for a "cap table", if the answer isn't "it's in your inbox"... Then your response is: If you don not have a cap table then the shares are more or less toilet paper. You are going to take them but they are worth nothing in this deal, say "more cash please", and as salary.
These liquidation things are happening when the company does badly. The founders (and the investors) were probably hoping to do a lot better than what they settled for. Half a billion dollar is great, but not so great if you thought you were going for 10bn...
Without knowing the amount of the investment that the two investors made, the multiplier and the participation, and how the company was actually doing, all argument is moot. Who knows how much the investors put on the table in the first place. They took a risk, tried to have their ass covered should things turn bad, everybody agreed. Then shit happened and these guys managed to sell the thing before losing it all.
Also, the founders probably got paid pretty decently in all their founding rounds, so I don't feel too sorry for them...
This might be the one case where I personally would accept the business failing is a better outcome.
Situations evolve. You hope you get the contracts right, but you also hope you have trust to work with people as they do.
For the employees who get stock options though, it's a despicable move that should get you blacklisted. If you fuck over early employees like that, I will avoid you for life, and tell everyone else to do so too.
I’d like to challenge this notion. Risk comes from one factor and one factor only: how much skin do you have in the game?
Skin isn’t money. Skin is how much are you in for. How much would this hurt if you lost.
The ultra rich, when investing, have actually very little skin in the game. A million here, a million there. What’s the difference? They’ll still be impossibly wealthy even if everything goes tits up.
Those folks should not make the big bucks in a deal. They haven’t risked anything, even some notion that they “risked” investing their money in this vs that: they picked the winner in this case.
It’s fanciful thinking I know, but I see it as _the primary_ problem with either capitalism, or ultra wealth. The system favors people with the most money, and the people with the most money control the system.
Like you said - the difference is a million here, a million there.
>They’ll still be impossibly wealthy even if everything goes tits up.
They will millions less impossibly wealthy
>Those folks should not make the big bucks in a deal.
Why? Why is it wrong for them to make the big bucks in a mutually beneficial deal?
>They haven’t risked anything
They literally risked millions
>but I see it as _the primary_ problem with either capitalism, or ultra wealth
I don't completely understand what exactly the problem is
>and the people with the most money control the system.
This is literally one of the strengths of capitalism over any other system: even people with the most money don't have control over the system.
Surely it can’t be the founder taking home a healthy salary from day 1 despite the company being far away from any revenue at all that is taking the risk in your book?
You can say liquidation preference should be forbidden, but that's a slippery slope. Many founders accept a liquidation for larger valuation, and many deals would not happen without it. I'm not sure why we would draw the moral line here since the risk of founding and joining startups exists either way.
Liquidation preference was included in 20% of all Series B-E Silicon Valley venture financings in Q3 last year.
When a company is not doing well and there are no other investors who will finance the next stage of the company, investors have the leverage and can include a liq pref and drag along to force other shareholders to sell.
https://assets.fenwick.com/banner-images/Silicon-Valley-Vent...
For the drag I was just referencing the original article in this thread. Both liq pref and drag are such onerous terms that the only way investors can get them is when the company has lost their leverage by not having other interested investors.
As to these folks - I pass no judgement here, could be they just didn’t read the fine print or this was the best possible outcome. Hire a good lawyer next time.
What a crock of shit. I understand that employees might be considered "lower risk" because they get a paycheck. But if you're going offer them shares as an incentive then those should be full shares, Same as the others. They are probably led to believe that is the case unless they dig a little deeper themselves. So read that stuff!
If the story was what the headline leads you to believe and you 10x'd someone's investment and they did you over, why wouldn't you see red and scuttle your product?