Rovio's $42M Investment In 2011 Actually Went To Its Owners | Hacker News Reader

Rovio's $42M Investment In 2011 Actually Went To Its Owners

arcticstartup.com

61 pointsbond13 comments

Why are people bothered when founders of hot companies take money off the table during a financing? They own a load of personal stock and then they sell it. Why does this so often cause pushback and discomfort?

I could understand if it were a down round or if the available capital was limited but these stories almost always centre around companies (AirBnB, Rovio) doing very well and raising an unconstrained financing round.

The only remaining reason I can think of is the concern that once cashed out, founders will cease to work as hard but there's little evidence of that and plenty of founders who were rich to begin with.

Is there something I'm missing or is this just frugal guilt?

It signals distrust in the company. People equate it with pump-and-dump schemes, grabbing the money before value creation and running.

In strictly rational terms, it almost always makes sense. Even late funding round startups are risky -- when you have that kind of risk, the sanest thing you can do is to diversify early and often. Losing half of your potential future payout is nothing if you can exchange it for guaranteed middle-class lifestyle (or the funding for your next startup...).

And that cash-out-early logic is assuming that each subsequent dollar has the same utility which doesn't. I can't remember the exact figure but I think that economists drop capital utility by a factor of 10 for each zero. The first million has ten times more utility than the tenth which means that it makes terrific sense to cash out.

Compound that with the fact that the utility of cash is, like the value of health an integral over time and you have more reason still to cash out early. Every if the utility were the same, five extra years of your life with the end-cash is five extra years of utility.

I get your point about pump and dump and if it was a no-name hustler ringing up a round for a just-arrived company I'd understand that but none of these companies ever are. I feel there's something deeper driving the reaction - it seems more resentful than rational.

I agree with your statement as it perceives to larger companies, but for start-ups, if I were an investor, I would actually want founders to "cash-out" at least a little.

Assuming I've done my due diligence on the dedication of the team, the last thing I want is for a founder to be focused on personal finances. Otherwise, they might be too focused on immediate monetization instead of growth.

It could also be a simple matter of investing in the founders. Give them "Enough money to take money off the table", in the words of that "The surprising truth about what motivates us" video. If you've been working hard for eight years, and it's going to be another five before the "liquidity event", I would guess it can be nice to be able to take any financial issues off the table permanently - and it's probably a also good thing for family support that your founders can afford to go on a holiday every once in a while without having to count every penny.

It could go the other way.

If the founder has all their wealth tied up in the company, they might be more likely to manipulate to sell the company early to make themselves a multi-millionaire.

If you give them a bit of an exit, they then have more motivation to try and build the really really large company.

> Why are people bothered when founders of hot companies take money off the table during a financing? They own a load of personal stock and then they sell it. Why does this so often cause pushback and discomfort?

I'm not sure they are, the article seemed more bothered with it being originally termed (by the company) as an investment round when it was a few owners moving shares around.

There is no problem paying founders - they usually take a significant reduced compensation to start. This may be looked down upon because if they wait until later investment rounds, then their payout is that much more increased, such as Mark Zuckerberg. However, when founders trade so much, it is a signal that they do not believe in the growth in the company. It also means that they can now walk away. An true investment is when the money is used to help grow the business - but Rovio looks like it was actually a sale.

Agree with your point but from this story it seems as though the founders sold some of their shares to the VC firms. I doubt anyone has a problem with this but typically, when we hear about 'investment', there's the expectation that the investors are taking part in a new share offering and the money is going into the bank for future growth. That doesn't appear to be the case here.

This

Money from buying shares in a company usually have two objectives:

1 - Investing in the company (as in hiring more people, etc)

2 - Going to a previous owner of shares

Rovio doesn't seem they need much money in the first option, so naturally it's the second option

Digg is one notable example of a founder taking money of the table and the investment falling apart. Kevin Rose took quite a lot of money off the table and it could be argued that's when the Digg lost it's visionary leader. Kevin seemed to shift his focus away from building a successful company towards investing and advising other companies. I think it's hard to argue he did the wrong thing on a personal level, but for the company it was devastating. I think allowing a founder to take SOME (enough to not worry about personal finances) money off the table is reasonable for an entrepreneur that's reached some level of success. But it's an entirely different story to allow a venture-backed founder to take a sizable amount of cash off the table, enough to greatly reduce any incentive to build a company worthy of a successful exit or an IPO.

Digg also hired a bunch of useless people with the VC cash and ended up not being able to get anything done. I don't think it was Rose's bank account that lead to the downfall.

I don´t think OP is bothered that the founders cashed out. Saying that company Foo got a $40M investment usually means the company got that much extra capital. If most of the money is just going to buy existing shares, then it´s misleading to hide that.

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