Startups Spend with Abandon, Flush with Capital

It works like this, you own 10% of the equity in a company that raises a round of funds which price that company at $1B. You are worth $100M right? Wrong. Your wealth hasn't changed until you convert that equity into cash and them something unrelated to the company. Further you probably can't sell it (the board won't let you). What I have watched happen though is that people think of themselves as being "worth" $100M and start spending like they have that sort of money in a checking account somewhere. And lots of people are more than willing to help them spend! And then things don't go quite as planned, the market changes, a competitor gets bought, the S-1 gets pulled at the last minute, what ever, and the company is sold at a firesale for not even the liquidation preference of the preferred shares. And our poor founder is living the $100M lifestyle with nothing in the bank. What follows is predictable, depression, bankruptcy, divorce, in some cases suicide.

It was, for me, the worst part of the dot com explosion. Watching people I knew and respected self destruct.

ZIRP will end. The stock market will not continue to be an easy source of double-digit annual returns forever.

The question is always timing, but anybody who is following the Fed and looking at the action in the market can tell you that we're closer to the end of the current environment than we are to the beginning. That doesn't necessarily mean a meltdown is coming (it's of course a real possibility), but even modest changes that inflict minimal pain overall could have significant implications for the startup scene.

For all of the genuinely smart, successful people in the Bay Area, I'm constantly amazed at how few people here seem to be looking at how the broader environment has made the most recent boom possible. Mention ZIRP and the majority of people will ask "What do they do?" thinking ZIRP refers to a hot new startup.

> More worrisome, Mr. Moeller says, are startups with small teams looking for massive spaces and locking themselves in to long leases. Startups are signing five- to seven-year leases on spaces that used to require two, and more landlords are pushing for 10-year leases on new construction. Those could become a burden if financing tightens.

Generally speaking, the landlords are far savvier than the entrepreneurs they're leasing to. They're not pushing 10 year leases to help tenants lock in a good deal.

> Mr. Altman says he met a few months ago with an entrepreneur who drove up in a new Porsche sport-utility vehicle. The man’s startup had completed a $10 million early round of financing the previous week. Mr. Altman says he looked at him sternly, asking him, “What message do you think you’re sending to the rest of the company?”

The message the entrepreneur is sending to his employees is irrelevant. If there's anything of importance in this anecdote, it's what such behavior says about the mindset of some of the founders investors are lavishing with millions of dollars of investment.

Reward employees with good amount of equity, so that everybody long term interests are aligned in success of the company.

I don't see most startup giving meaningful equity, so they have to compensate with all of these perks and high salaries.

I see four main issues that the money is being used for

1. Location

2. Business Scaling

3. Work-Place Incentives

4. Founders Optimistic Self Valuation

These issues are all necessary to a high degree but what viable options are there that give startups a competitive environment to offer and work with?

Still can’t get through the paywall.