Sprinklr Acquires GetSatisfaction, Founders Get Nothing
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With that kind of money raised, the founders didn't get "nothing". They got a salary, probably a decent one, for however long they were running the thing. Which is more than many startup founders get out of businesses that fail. If they don't have personal debt, or didn't lose relationships or friendships, they came out ahead of many startup founders who started a business that failed.
They raised more money than the business was worth. I don't blame them for doing so; many people have done it, and no amount of seeing other people make that mistake will necessarily prepare a founder to turn down several million dollars of extra runway to try for the big exit. But, it sounds like there is simply less money on the table than there are people wanting that money (and that have contractual rights to it).
Given the interests of GetSatisfaction were always misaligned with the interests of their customers (i.e. the business model was effectively a shakedown, in the same vein as Yelp), it shouldn't be surprising that eventually their dreams didn't align with the reality of how many people wanted to pay for it. No matter how good the product is, if you have to extort people to buy it, you're not building a sustainable business.
I'm all for ranting about VCs being assholes, because sometimes they are. But, as far as I can tell, that's not the case here. Founders made some bad calls, probably some other people did, too. The business failed. It happens. If I were them, I'd take this as a valuable lesson...and probably wouldn't burn bridges with the people who invested in me in the past, because history indicates they'll be the same people to invest in me in the future (a failed business is not a death sentence in the valley, and many investors have invested in the same team for multiple businesses).
http://www.nytimes.com/2005/01/26/technology/26iht-dotcom.ht...
http://venturebeat.com/2005/12/09/epinions-settlement-a-blac...
Though I'm not sure it's the case here, I'm of the epinion that occasionally, you need to sue to getsatisfaction.
More seriously, I remember bringing up Get Satisfaction at a VC meeting and the VC said "Don't talk to me about Get Satisfaction." I guess now we see why.
Every huckster thinks he can pull off the big pump-n-dump. Most don't.
> the business model was effectively a shakedown,
Sure sounds like it. Protection rackets only work if you can beat people up and burn their stuff, and GetSatisfaction failed to do either. Too bad, so sad.
And when you push back on them about this the response is you get are generally:
"This is a standard term" eg: everybody else is doing it. Well, tough. I'm actually reading before signing.
"If we don't have this method of double dipping [one of the four different ways they are doing so], then you could take the company and sell it for the money we put into it and that would be a bad deal for us." You mean your share of the company in such a situation isn't equal to the amount of money you put in? First off, I don't believe you because this valuation is kind of a joke and you've spent weeks telling us scary stories to try and keep it down, and secondly, your inability to get the equity you want for your money is your problem, not mine. That is like saying you think you're getting a bad deal so you want to cheat me to get a better deal? So let me get this straight, I took real risk and built up sweat equity, but you want my shares to be discounted effectively because you don't trust me? Ok, how about we discount your shares because I don't trust you? (I don't trust anyone who doesn't trust me. Usually they're projecting their own intentions.) Also, all you're doing-- at best-- is putting money in. Money can be acquired from any number of places and methods. The expertise we gained while building the company is irreplaceable and the knowledge of our own product and the risk we took getting it to here is far more valuable than your money. So, we have a split of the shares that accounts for that. The shares you get account for all of that.
"trust us". Nope, if you don't trust me, don't do a deal with me.
Don't even get me started on founders vesting their shares. You build a company, you have sweat equity, but the VC wants to reset the vesting? Why ? You can't vote unvested shares. They will give you a song and dance about "what if a founder leaves?" Well, we covered that in our articles of incorporation because we're not idiots, but they will ignore that and insist that "all founders must vest all their shares". (this is more common on early VC deals.) That's straight up taking paid for (with equity) and earn shares and turning them into a class of potential shares. Nope Nope Nope. Give founders part of the option pool as an incentive, fine. But reseting is just setting you up to be sucker punched when they want to replace a founder (because they don't like how things are going and need a scapegoat, no matter that it's the worst thing for the business at that point. But Tada! All your shares you already earned are now vesting again! Look at that! Even thought the other founders don't want you out, you don't have enough votes!
I think that the culture of "startups" over the past decade has become a bit cargo cult where there's a specific plane you build to get the money to rain from the sky.
This is: Go to accelerator, do VC deal, take the VC money and buy growth, use that to do another VC deal, rinse and repeat until you either stumble onto a working business (Uber, AirBnB) or you go bust (get Satisfaction)
The problem with this is that the cost of those VC deals are not in the founders interests. Far too often they hit base hits and build viable fast growing companies and then get taken out and don't get adequately compensated (and all the non-founder employees really get screwed.)
The other problems with this is once you take money from a VC you're locked into trying, and repeatedly betting the company, on being the next Uber. Being 37 Signals is not sufficient. Being Github (before the A18Z investment) is not sufficient.... even though both of those are obviously great fast growing companies that would make their founders and employees a lot of money at a liquidation event. And such event is far less likely under VCs because they want a $1B valuation (in fact their fund NEEDS a $1B valuation to cover all the losers)... whereas a $50M, $100M, $250M or $500M valuation (with no dilution from taking VC money) even though it's drastically smaller would result in the founders and early employees getting rich, and even the later employees getting a nice bonus.
Take angel money on good, clean, simple terms. If you need that to get going, go for it.
I think the age of the VCs is past. They just haven't realized it yet.
Ok, whenever I say things that are critical of VCs I get a lot of responses that are sorta knee jerk defenses of VCs. I've been working for startups and founding startups for over 25 years. I've seen it back when it was much worse and it cost a lot more to do a company. I've ridden this industry from BEFORE the dotcom bubble started to inflate. I'm speaking form experience here. Even when the VCs are "good" - in the top %10 of the VCs I've had direct experience with-- the deal isn't good for the founders in the end. They paid too much for their money.
You want VC money. Ok, why? Because that's your dream? Your dream should be to build a company.
Your plan should be to build a compelling product or service that really makes people go crazy with desire to throw money at you for it. I'm talking about CUSTOMERS.
All the time you spend dealign with VCs takes away from that and the deals aren't good.
You need money? Ok, go on Angel.co, get backed by a syndicate. Find Angels in your community. Charge for your product from day one. If github can do it, you can do it. Plow your profits into growth and product development. Take as little money as you can to get top product market fit. VC money is wasted before that point anyway. Even angel money should just be used to keep the lights on until you get to product market fit. Once you haver that, you have revenue, maybe take some more angel money to jumpstart marketing, but plow your operational profits int growing the business.
Don't delude yourself into thinking your pokemon website is a billion dollar business. It isn't.
Don't even waste time chasing VCs. By definition that are bad at picking and they will try to force you to bet it all only our pokemon wiki being a billion dollar business.
GS may have made a bunch of mistakes, but I'm using decades of experience here to reach my conclusions.
If you go thru YC or TechStars (but not any other accelerator) then maybe you might have a real business that could be a billion dollar business, but even then why not raise angel money instead of VC money? And I mean angel money on terms like the YC deferred-valuation deal that replaces convertible notes. (can't remember the name at the moment.)
Don't do any deal with liquidation preferences or any other kind of shenanigans. (And don't wave your hands about why VCs need LP in front of me. Your math doesn't add up, it can't add up.)
The model will never change until VCs realize they are dinosaurs. Or let VCs fund late stage deals, I'm sure their terms are not so terrible (unless the company is dying.)
But VCs for startups are obsolete.
drops mike
One problem that arises with the bootstrap-off-revenue model (assuming of course you are lucky enough to find product/market fit quickly, before you run through your seed money) is that you become vulnerable to company B that was willing to take crappy VC $$$ and is now able to kick your ass on price, right down to the freemium, eyeballs-are-value goose-egg giveaway.
Free markets are always prone to a race to the bottom. Just because you insist on reading the fine print and haggling over the downside scenarios, doesn't mean the 23 yr old recent grad no expenses (family fallback) guy won't take that deal. He damn well will.
serious 1st world problems, eh?
In short, if you are building a company you need to built it based on some "secret sauce". That could be your team. That could be your patent. That could be just customer base. That could be your unique understand of the market. But money is never "secret sauce".
And please do not take me wrong here: raising investment is very important to make your company big. But first thing first.
If that's physically possible, if price is the differentiator, you probably don't need to be in the business anyway. (Now, I'm not saying that you're wrong, in most cases, but....)
As an average Joe angel (not blessed with any inherited wealth), I personally think it's fair ask to ask founders to vest a "majority" of their shares. IMHO, if angels take 10% for a company in its infancy and leave founders with 90% vested equity, there is simply too much risk if one of the founders decides to leave! Especially so when the business itself hasn't really been properly built.
As someone who started the first travel site on the web (GetThere) and built it to 600 employees, an IPO and later sale to Sabre, and who debated this with my co-founders and myself, there is a most definitely a happy medium (we started with 18 months of vesting on a 48 month plan).
If founders start 100% vested then the pre-money will simply be a different calculation, and founders will earn additional shares to continue to provide incentive post-funding. Don't delude yourself that somehow your equity will provide sufficient incentive for you to continue to perform. This might be somewhat true in startups with one founder, but it's considerably less true when there are 2 or 3. And it's also protection for you as a founder. Why let one of your co-founders be able to cut out early on and get the same deal you did when you still have to put in the time in order for the opportunity to truly prove its potential. It's important for the founders to continue to vest-- and also, when things take longer than 4 years, as they did for us, more shares are appropriate for founders that remain essential to the business.
There is definitely a need for a response cheat sheet to the most typical term sheet bullshit and while I get not all deals are equal, there are accordingly only so many stages of startup where the range of responses are necessary.
I'm really interested in what you're saying but I can't understand what you mean in this paragraph. I'm not sure what part is your position and what part is meant as sarcasm. Can anyone spell it out for me? Thanks :)
They're saying that VCs use that approach as an additional means to control the company in case things aren't going the way they want.
The parent's position is that the founder shouldn't have to vest their shares like that, because they built the company and their shares should be regarded as fully vested since the founders put in sweat equity to start it all (essentially saying that the shares are fully paid up from the process of starting the business, and that vesting the shares takes those shares back from the founder, sort of like taking away that sweat equity effort).
Asking founders to re-vest nullifies the effort they have put until now and makes it unattractive for founders to seek VC money.
Generally whoever has the greater need makes the bigger compromises...
But I appreciate their commitment to focusing on one thing.
Do you mean safes? (Simple Agreement for Future Equity)
Well, you should always consider the alternative cost. I don't know the founders but I can assume that if they would have work somewhere else they had much higher salary/ benefits etc
I think you'd be surprised. The A-round term sheets I've had come my way over the years specified a salary for founders bigger than any I've ever received working for other companies. It was more of a suggestion than a requirement of the deal, I think, but it gave some clues about the salaries the investors would be comfortable with the founders being paid. It was always generous. Not "C-level at Google" high, but certainly better than "low or mid-level developer at almost any company in the US, including good ones".
By the time you are raising millions of dollars, you are drawing a decent salary. Maybe you could make more somewhere else, but I believe it's more likely you'd make less.
The lesson is not to raise VC money for a business where it does not make sense.
> Taking VC is like getting the world’s worst boss: Shitload of opinions, undue level of influence, never actually shows up for work.
I wonder how quickly the landscape would change if billionaires from various other fields started investing arms to fund tech. Considering the trend in club football where billionaires who have nothing to do with football started investing in football clubs all over Europe. The way they went about running the whole business changed the face of club football forever. Disruptive is mildly putting it as European football's premier footablling body (UEFA) has tried to regulate the flow of cash and has imposed strict investment guidelines ever since, to cope with it. Sort of.
I wanted to say “this is how pets.com got funded” but actually it turns out pets.com was started by the CEO who led Berkeley Systems, the flying toaster people, into an acquisition where she got laid off; and she was funded by Hummer Winblad and Amazon. And so while Julie Wainwright may not have exactly been Brin and Page getting funded by Andy Bechtolsheim, she certainly had experience managing technology companies, and her VCs certainly knew what they were getting into. And other ridiculous stories from the same time, like FireDrop/Zaplet (business plan: send DHTML by email) had similarly impeccable pedigrees (funded: US$90M by Kleiner, Joe Kraus, Bill Joy, Esther Dyson, et al.)
So, how much worse would it get, really? Hundreds of billions of dollars a year of investment capital desperately chasing any Ivy League graduate who knows how to tie a tie and promises to hire an army of monkey programmers just as soon as they get funded?
The emergence of liquid secondary markets for companies not big enough to IPO would be the founders' dream; suddenly the long term sustainability of the business would matter as much as numbers of potential acquirers and potential for aggressive growth.
"Quick clarification: Many, many of the investors &
employees didn't see any money, not just the founders.
That's what I meant by fire sale."
To be fair, it was a total firesale. In the
years since we all got politely pushed out, the
business had completely tanked.
Also:
Usually they at least throw the founders some
hush money, but we didn't even get that! So
I promise you'll hear more about it soon.
And rightfully so. They were a pest, just like the spam-site by that Calamaris guy from Netscape around the same time.
Lesson learned: If you depend on search traffic then don't be obnoxious. Otherwise nobody will speak up for you when Google snaps your neck.
Hey Google, why is Quora (expert-sexchange 2.0) still polluting my search results anyway?
Atwood and Spolsky get a lifetime of karma for stack overflow
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Like this.In the 2.5 years I was there, the only communities we launched were ones we were paid to launch.
They made a gamble and they lost.
https://signalvnoise.com/posts/1650-get-satisfaction-or-else
When startups don't sell for above their valuations, the investors are going to get their money back first (and in varying cases more, depending on liquidation preferences).
Pulled GetSatisfaction's tables from PitchBook, take a look at their B round: http://i.imgur.com/zUzDrFp.png
Post valuation at over $50M - no data yet on the amount of the acquisition, but if it was equal to that or less (or if the liquidation preferences for the A/B rounds were greater than 1X) it's pretty clear the founders wouldn't have gotten anything from the acquisition. But as someone else pointed out, it IS likely they got a salary from those early rounds of investors, which, is better than most startup founders see.
The thing I was surprised by is that the preferred stock had a 6% dividend. Is that common nowadays?
Back around 30 years ago when I was at startups, the preferred didn't get any dividends. It existed to allow the VCs to stay ahead of founders/employees in case of IPO, liquidation, etc. Not to collect a dividend along the way.
https://twitter.com/monstro/status/585808886508040192
This is interesting, because according to the screenshot from PitchBook elsewhere in the thread, OATV and First Round both participated in the Series B, which was the last equity round.
If that's accurate, in order for OATV and First Round to get nothing, whoever did that debt financing in 2014 would have had to have gotten 100% of the proceeds, with none left to trickle down to the Series B.
We don't have the details, of course, but taking on debt and then selling for less than the amount needed to cover the debt a year later certainly sounds like a party foul. If your company's in such a precarious position, normally you can't even get debt financing.
Based on the equity rounds, the founder has nothing to kvetch about - they raised and the company didn't get to where it needed to be. But if I were investigating this, I'd dig into the terms of and decision to take that final debt round. Could be nothing, but there's a lot that could've happened there that'd make a founder tetchy.
I used to ignore finance and bureaucracy, but the industry has changed a lot. The popular quote 'just passionately build something' is nothing but a trap. Although something like YC doesn't fit this profile, one will eventually find himself in a hostile situation.
It looks like Get Satisfaction raised $20mm. Why that much? Did all that money contribute towards success? Or was a good chunk of that money not utilized well? Why did the company tank? Were they not acquiring enough customers? Was their business model unsound? What forced the fire sale?
I don't think founders are supposed to get a big payout for a failure, but we need more info before agreeing with this sob story of founders who didn't get a dime.
The issue is that the founders were pushed out. Lane indicates that business tanked ever since they left, which is what presumably led to a fire sale.
It's one thing if the business tanks when founders are in-charge. You can blame them for failure and say it's fair that they din't get a dime. But why did the VCs take over the reigns? It's criminal to take over from founders and then run the business into the ground, like it seems to have happened here.
Of course, that Series B happened looooooong back. There was no Series C in the following year or two years after that, which might be why investors got jittery. The timing matters - did the founders get pushed out after a decent amount of time after the Series B? Or was it right after the investment? That would tell whether the VC had some reasonable cause to get desperate or they were just trying to "screw" the founders.
Also, being a technical founder doesn't mean you don't have common sense. Yes, GS's founders got nothing, but really it's the employees that saw the largest loss... They signed up to see the company really take off, and it didn't.
But at the end, if your company doesn't make enough money and requires raising amount of money you just don't know how to waste you shouldn't expect a big payday. Being technical isn't an excuse.
https://www.crunchbase.com/organization/satisfaction/funding...
And here's a handy explanation of "participating preferred" which is one way early sharholders can end up with nothing:
http://www.feld.com/archives/2004/08/to-participate-or-not-p...
Read your term sheets carefully, this isn't uncommon nor something to be surprised about.
Edit: Actually $1200/month according to the pricing page, nevermind. That's insane, and way above competitors like ZenDesk.
Granted, they are slightly different products; I was just grabbing the nearest competitor I could think of. (They're in the same space, though, and competing directly for the community/knowledge base part of their products.)
How many customers at $1200/mo per shot do you need to feed 9 employees?
I for one would love to see the intricacies of investor influence. This sounds like it was a total fluster cluck.
Does the extra "l" bother anyone else?
The one scenario I've seen where founders who have left the company still get a "consulting" fee during a liquidation, is where they held enough common shares to cause issues during a lawsuit over minority shareholder rights - but typically the employees/founders still with the company being acquired have enough shares to not make it an issue - and, as I noted earlier, it's almost always the case that founders still with a company being acquired get some type of bonus, even if it's a retention fee.
In terms of that last raise it is sometimes "nothing" (ie close the doors) or one more shot at making it. So from the founder's perspective the 'close the doors' option has them getting nothing, and keeping it alive long enough to sell it may or may not give them a return.
https://signalvnoise.com/posts/1650-get-satisfaction-or-else
1) Debt holders
2) Most senior shareholders and their liquidation preference
3) Less senior shareholders and their liquidation preference
...
99) Common stock holders
This is actually to align the founder incentives in shooting for a big exit. Insert any other order of preferences, and the founders have a stronger incentive to flip the company as quickly as possible in order to create a payday for themselves, screwing investors in the process (which also happens to be a very irrational proposal for investors, which is why you rarely see a round on those terms).
Investor puts in $1m for 20%.
Founders quick flip for $30m. The investor just made six times his money, and earned a payout fully aligned with the founders. Absolutely nobody got screwed.
The reason investors like liquidation preferences, is so they can improve their odds of getting their money back at least (and yielding the first dollars of return). They aren't aligning their interests with the founders in this case, they're putting their interests in front of the founders, just as debt does. Liquidation preferences are a way of saying: my equity is more important than your equity; you need my money, so I'm going to make sure my money is treated with more importance than your equity.
Liquidation preferences exist solely to protect investors from their own poor choices at the expense of the founders / earlier shareholders.
In that scenario, without liquidation preferences, the interests of the founders and investors aren't aligned--the founders profit while the investors lose money.
100) Employees
The alternative is for the company to tank and the founders - who tanked the company - walk away with your money. That is completely wrong.
Founders don't accept deals for money which are bad for them if they don't need it. You need money, you get the terms.
Same goes if you lose a house by default and then go and ask for money for another house. The subsequent mortgage is going to be at terms significantly less desirable than you may have got on your first try.
Failing companies create no winners.
They got something before. They are paying for that now.
Why? They founded a company which tanked. They made poor decisions along the way which led to said taking. They did it on someone else's dime. No one made money here, so why shouldn't the investors get some of the investment back?
It's a tradeoff. And sometimes it can work to your benefit. E.g. if you and your potential investor disagrees about the level of risk and/or about the potential size of an exit, you can try to negotiate a multiple liquidation preference in return for less shares.
Without liquidation preferences, the founders could earn a profit even if the investors lost money.
(Plus the founders and employees earn salaries, often paid from the invested funds.)
Unfortunately, the only way to afford that luxury is to not actually need the money, but be in high demand for investors to keep pinging you, and relent at some point with "alright, we don't need money, but if y'all agree to X valuation with common stock, we'll take your money".