I sold Baremetrics
baremetrics.comI've always loved the transparency and frank writings by Baremetrics.
> As part of the structure of the deal, Xenon guaranteed I’d take home $3.7m, regardless of what came up during due diligence
Interesting, I wonder how this is structured - surely there are items that can come up during due diligence that are deal-breakers for Xenon, and surely due-diligence is performed before the contract is closed?
> But they were incredibly gracious and both agreed to write off their investment. General Catalyst’s (who had the lion’s share of that $800k) response showed just how classy they are: “We recognize the work that’s gone into the past 7 years and it sounds like this is a great landing spot for the team. We’re grateful for the opportunity to have supported you along the way.”
I have no idea how they managed to get the investors to walk with nothing, when the founders walked away with so much.
I do due diligence for a living.
> Interesting, I wonder how this is structured - surely there are items that can come up during due diligence that are deal-breakers for Xenon, and surely due-diligence is performed before the contract is closed?
The company was inherently transparent with everything. A big part of DD is QoE and there wasn't much to audit there. This was a deal term that reduced any walkaway risk.
> I have no idea how they managed to get the investors to walk with nothing, when the founders walked away with so much.
Deal flow and it's not worth their time. Be nice to successfully exited founders and they'll speak your praises for eternity. General Catalyst wants $1B exits. If the founder leads to dealflow that brings that in, the $800k will be an easy ROI.
Re General Catalyst: precisely what you said and the brand building they just did. Just ctrl+f in this article to see people's reaction to General Catalyst. This will indirectly help them with even more dealflow.
yeah, this exactly
Now if (theoretically) some founder reading this thread ever has to choose between General Catalyst and another VC, they will ALMOST ALWAYS choose General Catalyst
Over time it will lead to General Catalyst finding a non zero number of 10X or 100X companies because of that
Can you re-use the due-diligence of the previous failed acquisition?
Not a lawyer or an expert, but I did go through due-diligence once.
One of the hard parts of the process, from the point of view of the company, is gathering all required documents/materials. I'm guessing a bunch of that work can be "reused", assuming they kept all the documents organized, which they would've for due-dilligence.
This situation has come up before. The answer is that it depends.
Let's say I do a diligence on behalf of PE Firm A (and the deal falls through) and PE Firm B wants to use that diligence because they're looking to buy the company now. Legally/contractually I cannot let that PE Firm B see the diligence report I created, however I have seen situations where PE Firm B would purchase the report from PE Firm A, or the target would purchase it and give it to PE Firm B.
Through the investors' eyes, "the proceeds from the sale wouldn't even pay for our time and legal fees in reviewing and signing the transaction documents." That's basically it.
Having been through a xenon acquisition, their strategy is entirely based upon arbitrage of vcs’ total lack of interest in non-unicorns.
any other thoughts on how it went with them? was the price fair? were they quick and faithful?
And they probably have "write it off" as a very well lubricated standard procedure costing them as little as possible.
Edit: this is very snarky and not intended. I know the CEO of a failed GC company and his experience seemed neutral to positive; they’ve also bid on something where I knew the founder and generally came across very well also. Trying to discuss the fact pattern and underlying principles, not the specific people involved.
——
This thread comes off as very tone deaf.
As a small minority shareholder the fees to receive a $800k wire round to zero. Plus it’s not $800k, it’s $800k plus whatever the preferred instrument yields on top.
This CEO seems super slimy and the story doesn’t add up. Much more likely he’s lying for some reason or other.
I don't think anyone's arguing about the wire fees, it's about the tens of thousands of dollars of lawyer time/fees required to hammer out a bespoke contract for what the $800k represents, the terms under which it is changing hands, etc etc.
It would be different if you were an angel and that represented more 1% of your total portfolio, but it's just not the case when it's these big VCs.
They still have to sign the transaction documents. The only difference in the paperwork is a 0 next to their name instead of $800,000. And I guess the onerous work of cashing a check.
Good faith decisions go a long way, if they believe in the founder that 800k becomes an investment to be front-of-line for his next company. The economics make sense insofar as that sum isn’t going to move the fund’s returns a whole lot.
> Good faith decisions go a long way, if they believe in the founder that 800k becomes an investment to be front-of-line for his next company.
Or its the cost of a lesson to stay away.
He did plan to retire so I don't think he would have needed them. It's more of a see you never type of situation.
if you read between the lines he is definitely going to start something again. some people cannot just sit on their hands.
If you read the actual lines, he said he's moving away from software and into the arts
Read again, it says "for a while". Also, he doesn't want to have to do it out of financial necessity.
A 4 million dollar exit is a failure for investors. They don't care about returns of a few hundred thousand dollars.
Apparently the investment was all or mostly through a SAFE. https://en.m.wikipedia.org/wiki/Simple_agreement_for_future_...
I only know what's on that Wikipedia page, but it doesn't look like it's as simple as the investor owning a stake, rather there are events that have to be triggered first which were perhaps very unlikely to be triggered.
An exit would most likely be a trigger on a SAFE. But then it comes down to what the cap was, and how much the VC would get on their return.
I'm wondering if the math worked out that the firm would end up with less than half their investment, it's in their best interest to have a write-off and the founder benefits and potentially comes back to them with a new business later, instead of squeezing the founder for a few dollars.
Yes, an acquisition would be a trigger. Typicaly there's 1x preference so $800k is paid back to the investors before the pie is split up. The cap for Baremetrics was $10m.
They would end up with more than the initial $800k if they wanted it.
Which implies, given the sudden rushed combination of “I’m bad at management” and “please no diligence” and “let’s go fast, 6 weeks”, that he’s lying about some or all of the story. The buyer won’t say anything, the seller won’t say anything, this blog posts remains as the record whether it’s 100% true or 75% true.
Let’s take a specific example. General Catalysts 2001 fund is projected to generate a 11.9% annual return per the public disclosure from Calpers. (1, sort for the name). That same fund is shown as a 7.1% net IRR by the state of New Jersey. (2)
The PR is soooo good, per some of the comments in this thread, General Catalyst is totally fine eating a bottom quartile return in a risky asset class (VC), which if you believed was their general behavior would prevent them from fundraising (therefore existing) going forward? Please.
Maybe the fact pattern is as stated, but it seems fishy at best.
https://www.calpers.ca.gov/page/investments/asset-classes/pr...
https://www.state.nj.us/treasury/doinvest/pdf/AlternativeInv...
> I have no idea how they managed to get the investors to walk with nothing, when the founders walked away with so much.
If you're not going to make any money and the amount you'll lose won't piss of your LPs then the goodwill from an entrepreneur you like working with is worth more than the cash.
Perhaps they simply had enough confidence in the information readily available at the LOI stage. Baremetrics went through a diligence process not long ago so I’m sure that was a lot already prepared.
Keep in mind it’s a relatively small purchase price.
Really interesting to get a window in on a deal like this when normally details (like this confusing investor behavior) would usually be totally opaque to anyone looking in.
It must be tough though to bear your soul like this and take the heat he's no doubt been getting (including here).
This warmed my heart.
>>>General Catalyst’s (who had the lion’s share of that $800k) response showed just how classy they are: “We recognize the work that’s gone into the past 7 years and it sounds like this is a great landing spot for the team. We’re grateful for the opportunity to have supported you along the way.”
Yeah, same here. That was such a class act. I really hope that they get some serendipity like deal flow from that good will.
Maybe I'm just the Grinch but some rich dudes giving $800k to one rich dude doesn't warm my heart. Especially as someone who's gotten (relatively) screwed twice now when owners sold out.
It also goes to the heart of how messed up our economic system can be. I can be mollified by saying that he worked hard and earned his ~$4 million by building a business. But I can't internally justify the VCs gifting him $800k for AFAICT nothing. I'm going to have to work for the next 4-5 years for that but he gets it basically on the whim of some person at a VC.
It's hard to understand, when taken at face value. But, when you add a little context, VCs can do much worse. They can refuse to sell (through approval rights) and let company die on a the vine. They can force out existing leadership and bring in new leadership. They can force an acquisition. They can kill a company in a million different ways.
For a fund to realize that the company can live on, even if it's not the 10-100x they were hoping for, shows class. Listen, it's not curing cancer - but, it shows a level of maturity and understand that we should praise and not take for granted.
The way that fund economics work, they can write off a lot of small bets. However, the way that partnerships work, there are big egos at play. It's a dirty game, but when people do the right thing, it's worth praising.
I agree, and honestly, I think we can take it further than that.
Because if we set the bar at curing cancer (not that that's what you were doing my friend), then nothing is meaningful. I get that that's a more pragmatic/logical perspective but I believe that change starts small. So it's key to be very vocal about great things they we perceive as small because that can create ripple effects.
I worry when we bash people that do good things with some variation of "Good, But Not Good Enough!" [1] Because, it doesn't inspire people to do even better. In fact, it creates the opposite behavior "why should I even bother at all, can't win with these people."
>VCs can do much worse.
It's, more or less, impossible for them to do worse than $0.
I get that there's some scenarios where they're not going to make money but the business can be viable as a lifestyle type business. But someone is buying this one for $4 million cash. So this isn't giving someone a company worth 0. This is handing out 800k+ in cash.
> It's, more or less, impossible for them to do worse than $0.
Of course they can. They can do $0 _and_ fuck someone else's life over out of spite, vindictiveness, or company policy.
I'm with all the other poster saying what General Catalyst, while almost certainly at least party for self interested reasons, deserve praise and respect for doing this. I know with certainly that there's a bunch of people reading here who'll now move a General Catalyst offer/termsheet right up the top of their pile sometime in the next few years. I hope this works out well for both General Catalyst and for future startups and founders who work with them.
Yes, I fall into that category
I've had multiple offers to buy and invest. And always do your due diligence. One turned out to be a shell company - which means a bigger company secretly trying to low ball acquire my company
In some cases it's VCs or celebrities and you do your due diligence
*
At the end it comes down to one simple thing
If the VC feels this founder and his team worked very hard and not taking that $800,000 (or $800K + x) means those people will get a bit more (and for the company people it means a lot while for VC it means nothing
Then VC doing it is a genuinely good thing
Now consider what it means to someone considering General Catalyst
At best - they are great guys
At worst - they are smart
It also means for sure that they are not
parsimonious spiteful shortsighted vindictive penny wise and pound foolish
So now any founder taking investment from General Catalyst knows that there is a good chance that
General Catalyst are honest and reasonable They will not sabotage an exit to try and maximize their cut at the expense of founders
*
Is this deriving too much from a simple act?
Perhaps
However, in an industry where VCs are usually known for kicking out founders, this is a welcome change
hear, hear
They can do a lot worse than $0, reputation is enormously important. If you have a reputation for screwing over founders, then the next super hot startup that can raise from anyone they want is that much more likely to raise from a competing fund instead. And the power law distribution in startup returns makes it such that being able to invest in those few huge successes is all that matters at the end of the day for these funds.
There is a lot of money chasing those, and this is one great way to stand out from the crowd.
> If you have a reputation for screwing over founders
Why do people keep saying this? The dude sold a company for $4 million dollars. Asking for the $800k back that you invested isn't screwing him over.
How is it screwing over founders?
They put in $ for 20%, you put in sweat for 80%. Why again is them not getting 20% the right solution? Unless the agreements said “hey look, sub 5x were okay with you getting it all”.
The business didn’t work. Arguably since only management is involved with running the business, it’s managements fault it didn’t work...why do the investors get 0 and the management team get bailed out? It’s not like they took zero salaries / weren’t compensated...
The world doesn’t work if you sign stuff and then later decide to not honor it just because you can torpedo the guy or girl on the other side of the table.
The ceo also doesn’t seem to have paid the staff either, based on his self disclosure. Not sure exactly how jamming a VC and not giving them at least what they put in back isn’t honorable.
The issue is that their fund business model looks at a 20% roi over 5 years as a loss. If they do that 50% of the time, they don't raise another fund. There is nothing wrong with getting what you are entitled to. But, it's worth praising when someone forgoes what they are entitled to, when the situation really isn't a win - win. The VC took an immaterial loss, by choosing for give up an immaterial gain, so that something material can happen for the founder and their team.
>The VC took an immaterial loss, by choosing for give up an immaterial gain, so that something material can happen for the founder and their team.
But that's not what happened. The business was sold for $4 million. The only difference the VCs actions made was that the founder walked away with 3.7 million instead of 2.9.
There were two things worth pointing out - the acquisition price was lower b/c the founder wanted to walk away and
>>>As part of the structure of the deal, Xenon guaranteed I’d take home $3.7m, regardless of what came up during due diligence. This was important because many times, after months of due diligence, things invariably come up that reduce the purchase price: working capital requirements, unpaid PTO, unrecognized revenue, and a thousand other things. And I wasn’t interested in dealing with that.
I wanted stability and I wanted that $3.7m outcome to hit our family’s financial goals.
Given those terms, I believe the author when he says that this was the best offer he could get that met his terms. If that is true, had the investors insisted on their cut, he founder wouldn't have hit his family financial goal, and would not have sold.
Why are you so bitter dude, the guy worked his ass off and got his exit. Celebrate it and look to see how you can replicate it instead of coming off as jealous.
What a VC does with their money is their choice, a 800k return isn't worth their time and energy if they can spend that time and energy on a billion dollar company within their portfolio.
Because it's scraping the bottom of the barrel. There's not really a sensible reason for the investors to try and claw back their investment every time a company fails, because the business model is based on homeruns.
>It's, more or less, impossible for them to do worse than $0.
Alas, that is not at all true. I once sat through a presentation by a VC on how bad things can go, and they can possibly go much, much further south than $0. Lawsuits, crimes, and total time suck for years are some of the things that can go negative.
Far from that being true, it's not even difficult to end up net negative.> It's, more or less, impossible for them to do worse than $0.Lawyer and employees cost money and directing them towards a small investment will only distract them from doing more important work. In other words, this could've ended with them losing even more money. Also lets not ignore the reputation they gain from this post and people talking about their generosity.
It wasn't $800k for nothing.
Every VC investment is a speculative bet on the future success of the company.
If Baremetrics sold for $800 million, they would have made 1000x their money.
If it was their only investment, then it would be a major fail but VC business model works by making 100 bets. Few bets deliver 1000x return but many of them are 100% loss.
The VC knew what they were doing and their $800k got them exactly what they paid for: an option to make a lot of money in case of a big future success.
>an option to make a lot of money in case of a big future success.
That's why they gave Baremetrics $800k 5 years ago. Why they are giving the founder $800k today is far less clear.
They invested $800K in Baremetrics.
> Why they are giving the founder $800k today is far less clear.
They aren't. They are just writing off their initial investment.
They lose $800K (which is less than that because it can be offset for tax purposes), not $1.6M.
There was only ever one $800k "given". You're making it sound like "today" they went all in on $1.6mil in total. That isn't what happened.
If they had a 20% stake, it would be 200x. Not 1000
ummmm ....
If company grows 1,000 times, their stake also grows 1,000 times
The company wasn't valued at 800k.
I read the post but didn’t understand why they had to walk. Why did they not get their $800k back?
The didn't have to walk. Those chose not to, as $800k isn't worth the time/money for them (see others' post on the size of their funds).
Supporting the founder (and earning goodwill for it) is probably worth a lot more.
I assume the deal he negotiated with the buyer meant he got money and they didn't, and thus that was the only thing on offer.
I doubt the buyer cared one way or another whether the previous investors got their $800k back or not.
I'm guessing it's more that the buyer was only prepared to go to 4mil, and the _seller_ had run their numbers and came to the conclusion "4mil minus that $800k isn't enough to secure my families future, and I'd need to walk away from the deal unless they agree to forgive that $800k" so he asked them, and they agreed.
> We’re also a company that has purposefully operated right around breakeven for years.
And here is the problem. Take VC money and now you are forced to run company at breakeven point.
This company would be perfectly fine operating with half the staff and generating for the CEO half a million in profits per year - every year.
He could have met his family financial goals long ago and still keep the company.
This is what folks at 37signals figured out years ago and good on them. Do not take VC money unless you are already a millionaire and aiming for the moon.
Thankfully lifestyle-business focused "VCs" are a thing: https://tinyseed.com, https://earnestcapital.com, https://indie.vc
I wish we could move past using the term "lifestyle-business", it's basically a slur in my mind.
Sift Finance & Vista Equity Partners as well
This Vista (1)? With the 100 point post acquisition operating plan and intelligence tests? Maybe lifestyle means different things...
“ Billionaire’s Secret Buyout Formula: 110 Instructions and an Intelligence Test
Robert Smith’s private-equity firm revamps software companies by following detailed protocols; ‘their process is like a factory’”
https://www.wsj.com/articles/billionaires-secret-buyout-form...
Agreed in general. But, in this specific instance, his outcome is probably comparable to what it would have been had he optimized for profits. Given your 500K/yr estimation, he's selling for 8x earnings - not the best, not the worst.
I've taken the profit optimization route for my own business, and often wonder how much money I'm leaving on the table by not hiring a larger team and chasing (profitable) growth.
Also, "not the best, not the worst" combined with "securing my families financial future" and "doing the right thing by my team/employees" and "relieving myself of a management and company ownership role I don't enjoy" sound like a totally better outcome _for him_, than spending another ~7 years managing something he's bored with and not starting new things.
For a lot of other people, a half mil a year profit from a successful small company they'll own pretty much in perpetuity might be what they'd choose. I can see why he didn't. (I'd almost certainly have made the same choice myself.)
I suspect in most cases you would have quickly hit a growth ceiling with that larger team. Fantastically fast growing companies have generally growth pulled out of them by the market. Yes, there are things you could probably do to grow faster, but those things are the spontaneous insights that occur in the shower.
ha no. do the math on it and you'll see that a sale is far more profitable for equity holders than cashflowing profits for the same nominal amount. I.e. distributing $3.7M in profits yields you personally a lot less than having your equity purchased for $3.7M.
You're comparing apples and oranges - 500K/year of profits first needs to get taxed. Then distributed to shareholders pro-rata, then taxed again at the personal level. Also, you're assuming he could have made 500K year in profit from the very beginning.
Pass through entities wouldn't be subjected to the double taxation.
Yeah but you pay a higher tax rate and get no benefits of QSBS. Generally there is a lot more opportunity for tax optimization on sales than on income.
> higher tax rate
Isn't this only if the distributions are immediate? Forgive me, not an expert in LLC v. corp structures but I have an LLC so I'm curious to hear your expanded thoughts. Thanks in advance.
Income tax rates are usually higher than capital gain tax rates.
> "This is what folks at 37signals figured out years ago and good on them. Do not take VC money unless you are already a millionaire and aiming for the moon. reply"
But 37signals/Basecamp DID take investment money.
They took money from Jeff Bezos investment company named Bezos Expeditions - back in 2006 (14 years ago).
https://signalvnoise.com/archives2/bezos_expeditions_invests...
Everyone's talking about how the founder got lucky that his investors let go of their $800K liquid preference.
My guess is that this wasn't all luck.
The VC's in this case knew how transparent this founder was being in reporting his startup journey. They knew that this decision would get publicity.
With this knowledge, the VC firm probably made a calculated decision to forego their liquid pref in return for the good will generated by the founder's transparent PR.
It's cool to see the founder being financially rewarded for his transparency.
If letting go the $800k was purely PR, then that's some expensive PR. Who reads these blogs, a couple thousand people maybe?
If they do this 10 times, they will establish a well-known reputation for being founder friendly. This would cost $8M.
They are investing $1B over all their funds.
Will the impact a founder-friendly reputation has on deal flow and close rate increase their fund's ROI by 0.8%? Almost certainly.
Yeah close rate is a good alternative way to look at it. GC can always have Josh as a founder reference to chat with a founder on the fence - at current market they could probably turn over in one deal (i.e. opp to invest in another business they wouldn't have won otherwise, at the same amount as Baremetrics). Great move for everyone!
There's a _huge_ difference in the PR value for General Catalyst of a couple of million random New York Times readers compared to a couple of thousand HackerNews readers.
This is _brilliantly_ targeted PR. (To the extent that I suspect part of the deal with General Catalyst was that he blog about it and do his best to get it on the front page here...)
10k+ people will read the post, probably more. HN alone can send that much traffic (I speak from personal experience). And it's more about who than how many.
Long term thinking.
I can't think of a better advertisement for these VC's. Calculated or not, it is a great move
yep and good chance these two VCs are the first check in his next business in 24 months.
Very interesting to see the benefit of transparency materializing into real touchable cash.
Jonathan Siegel is mentioned in the article (his company acquired Baremetrics). I dealt with Jonathan in the past, and I could only say good things about him - not just his business acumen, but his integrity and generosity.
Years ago Jonathan was in a position where we needed to buy back his shares in a company in which he invested early. He could have asked for a much higher price, and instead he graciously agreed to a different outcome - he understood the situation and did the right thing.
Glad to see that General Catalyst did the same in relation to Baremetrics, writing off their investment. These things don't go unnoticed. Sometimes reputation is way more important than a few more bucks for your LPs.
Likewise re. Jonathan - we sold filepicker.io (now Filestack) to Jonathan and Xenon Ventures in 2014 and it was a very positive experience. For companies with solid revenues but not venture-scale growth looking for a clean exit, I would highly recommend reaching out to Jonathan and team. Happy to make an introduction if helpful.
Just wanted to say, I used filepicker.io years and years ago on a project and it was wonderful. Thanks for developing something that was easy to use and intuitive, especially when I was still learning the ropes.
I've had a similar experience with Jonathan. He's one of the most founder-friendly people in the VC industry.
+1. Jonathan is great to work with if you are in a similar position as Baremetrics.
At the time I write this comment, half my screen is full of people calling Josh not so nice things.
Folks, this is a founder who's openly sharing the kinds of things we usually keep hidden. I doubt there's been a startup exit in the last decade where a healthy skeptical HN'er couldn't find some wrongs being done, if the details had been available. It's extremely hard to get everything right, from every perspective. The only difference here is that the details are actually available.
Please go easy. We want more posts like these, not fewer.
I have sold a business as well, and I have to admit I am very surprised by this response, too. Not only does Josh divulge information that most founders are legally forbidden from ever revealing, he also was always extremely open about the journey of the business, even facilitating the [Open Startups](https://baremetrics.com/open-startups) page, where Baremetrics itself is listed.
What surprises me most is the lack of understanding of founder risk. Most negative comments are related to employees not walking away from this exit. It feels to me that many here seem to conflate the inner workings of heavily VC-backed businesses with a slowly and sustainably growing company like Baremetrics. I see a lot of assumptions all over the comments.
I appreciate the discussion, though. It's nice to see people sticking up for employees. But a sub-10-people SaaS that's ALMOST self-funded is not the same as a prospective unicorn.
I feel the same way, especially in regards to everyone opining on the investors taking a markdown. For context, it was General Catalyst and Bessemer.
- General Catalyst: $2.5B+ in Assets Under Management
- Bessemer: $4B in Assets Under Management
DISCLAIMER: If you take venture capital, you should obviously always do it as a responsible fiduciary of both the company and the capital.
With that said, I'm positive both of those firms will be fine. They're looking for 100x returns, a $400k write-down from a seed investment is nothing. If anything, it's worth doing that on the off-chance Josh goes on to create the next Uber or Salesforce and they want to invest again. SV runs on relationships.
I don't want to make any moral judgements against people making business decisions, in particular this founder for making the best deal possible. Good for him.
However, no matter how much money General Catalyst or Bessemer made last year, I would not want to invest with them going forward. I get that this is only money on the margins, and they get a benefit from a write off. Still, how hard would they have had to fight to get some of their money back? It sends a disturbing signal to me to write the whole thing off.
Someone will reply: "But they made $10b last year! You don't understand the business." And I am sure I don't. But the world is full of people who made a lot of money or were in the process of making a lot of money and then get careless.
Or reply: "It's part of the model! If they don't get 10x-100x they just want to write it off as fast as possible. That's what there investors want." Sure, but if you are careless people will take advantage of you. Also, I just don't buy that all institutional investors that back VCs are that savvy. A lot of them are just following a trend and over funding an asset class.
Tell me I am wrong. I am no expert.
You don't win 100x-ers by squeezing founders over tiny exits.
VC funds have a duty to their LP base to maximize returns, but I would argue the good will generated by moves like this are what protect their ability to get into "hot" companies and thus protect those returns. Pursuing your strategy would likely harm the fund's reputation and their ability to return LP capital in the future.
Also - a point of nuance. VCs are not in the habit of writing off everything, that would be a false takeaway from this article. If the amount invested was bigger or the exit was more like 2x or 3x for the VCs, your points of criticism would be more valid.
"squeezing founders over tiny exits."
They are not 'squeezing' remotely.
Otherwise, there would be not such thing as 1x participating in the deal in the first place.
Getting your $800K back while the founder gets $3M is not 'squeezing' it's literally just a transaction.
Also - a founder negotiating a price outside the valuation of the shares is getting very close to illegal (Conrad Black went to jail for this).
I think the founder was actually lucky that the funds simply didn't care.
Reading between the lines, this deal wouldn't happen if investors didn't agree to write off their investment.
So their choice was between nothing today or nothing later.
Tax-wise it was probably better to write it off now than carry a zombie investment into the future.
Like you said: their investment was a transaction and they made rational choice.
It's the emotional "we can't loose money" or "how dare the founder sell without us getting a cut" that would be a worse choice.
Either way he's definitely ended his entrepreneurial career. Nobody is going to put a dime into a guy who does that - the risk that he'd do something much grander when the stakes are much higher is obviously there.
He should have sold the company, honoured the terms of his agreement.
People are downvoting you, mostly because you are making a big deal out of a very simple situation. As one commenter said above, they would either get nothing, or nothing, and the VC firm, through the publicity they are getting now, will very likely profit from this sign of good will.
It's squeezing if it impacts your dealflow, which is something VC firms compete for. This 4MM acquisition is a soft landing, not a blowout. Bessemer and GC want a bite at the apple in other deals, where founders and management will be influenced by their behavior in this deal.
It's one thing to maximize your returns in a successful exit. But for Baremetrics' investors, the returns on this investment might as well be $0; the model is that the winners pay for the losers by generating outsized returns. The ultimate returns that these funds will generate for their LPs are defined by the 10+x's, not by the Baremetrics'.
re: 1x participating
Straw man argument. 1x participating are standard terms. I'm not sure why any investor would forego using standard terms, even at the early stage, to their detriment.
re: "squeezing"
You're perfectly free to have that opinion. Clearly both firms with extensive investment experience did not feel that way.
re: "illegality"
I have no idea what parallel you're making here, or what "negotiating a price outside the valuation fo the shares" means. Financing documents typically make it very clear what rights each party has upon a financing event and/or exit event. Whether each party chooses to exercise that right is up to them. There is absolutely no reason to believe Josh did anything illegal here.
>>> '1x participating' are the likely standard terms, meaning the investors should be getting their 1x out of this deal at least.
There's no 'straw man'.
>>> Asking for the 1x back on a sale is not 'squeezing' - it's literally in the contract, a normative part of these transactions. It happens all the time.
"Clearly both firms with extensive investment experience did not feel that way." - no, that they didn't 'go after the money' doesn't imply they would be 'squeezing' if they did. What it implies is that in all likelihood, it probably just wasn't worth the hassle.
The investors got robbed, but at least they can write it off. Asking for money from someone who is essentially refusing to give it back to you is not 'squeezing' by any definition.
>>> "Illegality" - in the article Josh mentioned that he had some kind of deal with the acquirer whereby 'not matter what, he would get his $3.7M'. If the acquirer is agreeing to terms with one 'insider shareholder' to the detriment of the others, that's fraud, and it's illegal.
Josh has a fiduciary responsibility to represent in good faith on behalf of all of the shareholders. Clearly in this situation, he came out with a nice exit, while his investors got $0. It also seems pretty clear that Josh and the acquirer were going to make sure that Josh was 'taken care of as part of the deal'.
Conrad Black went to jail because he was selling off assets of the company, but also getting a large 'consulting fee' from the acquiring entity to him personally. The shareholders felt that was defrauding them of what would otherwise be valuation/money they should receive.
In this companies transaction, it seems pretty clear that the investors were probably into it for $800K (participating) and then 15% or whatever they owned - but they got nothing.
He benefited while the other shareholders did not - this looks like it might illegal - but it probably would only be considered so if someone took them to court over it, which obviously they wont.
It's a fine line between 'negotiating hard' and simply saying 'I have your money, you're not going to get it, so that's that'.
I don't think OP's points would - VC really is about getting into 100x deals, and the "cost" multistage funds would take on to do that is quite high.
See Sequoia walking away AFTER giving $21M funding b/c of a conflict of interest with Stripe - https://techcrunch.com/2020/03/09/sequoia-is-giving-away-21-...
If you make a million dollars an hour, how much time is justified in trying to capture a few hundred thousand dollars when you have limited resources? Oh, you also have to step on the face of a future golden boy to reach it on the shelf. You also have to divert your legal team of several $1000+/hr staff from million & billion dollar cases to this for a month or two. You then have to tell your investors that actually allow you to live that you made a really smart decision and returned them $50 instead of $500MM.
To any normal person or small business, that's a lot of money to be captured and ignoring it is mind boggling, but again for them it's not worth the time and effort. The relationship or good will is worth a lot more, not to mention whatever write off stuff they get and the opportunity cost of their team. There is nothing careless about this.
If you wouldn't work with a VC because they aren't a penny pincher then man you are really going to be in for a reaaaalll treat!
Don't forget the $500/hr crisis management firm when the story hits TechCrunch. "Billion dollar VC firm destroys founder's 7-year path to acquisition".
This is going to sound snarky, but isn't: assuming you're within the normal parameters of an HN commenter --- even a very successful one --- neither General Catalyst nor Bessemer wants your money.
Top tier VC firms aren't like Vanguard. They are choosy about their LPs --- that's why they're called LPs and not "investors". They have an investing thesis, and they go sell it to university endowments and pension funds.
Those endowments and pension funds, in turn, have their own investment goals, and they are not as simple as a first-principles analysis on HN would suggest; in many cases, VC LPs are putting money into that asset class knowing that it's going to underperform other asset classes.
So it's a little cringey reading comments about how people here would choose not to invest with Bessemer based on how they handled a liquidation preference. They really don't care what you think here; you and the partners at Bessemer aren't even working from the same premises.
(A good, though very dated, source on this is the old Kaufmann report on VC as an asset class).
lol wtf, most people are talking about founders pitching for investment.
If they have standard term sheets from GC or Softbank, likely the founder will go with GC
No one is talking about GC's investors....
I don't know what comments you're referring to, but my comment refers to the one it replies to.
I thought the VC was generous here. But there's some benefit to being generous.
How many future founders will read that blog?
If you were a founder, would it influence your choice of investor, to know if things don't work out, they will be magnanimous, rather than squeeze?
Exactly this.
It isn't worth it for either of those funds to play hardball over $400k when hundreds of founders will read that, and will ultimately decide if they want the fund on their cap table for the next Uber/Lyft/Data Dog/Airbnb/etc.
I said it before, but it's worth repeating - SV runs on relationships.
I doubt they knew he would make a blog post with this many details. But still, good will can get around through word of mouth.
Baremetrics and Josh are known for their hyper transparent blog posts. They even publicly share all their revenue metrics. It’s highly likely the firms knew Josh would write a blog post about the exact exit terms.
He mentions his VCs have always been available and engaged, so I think it's reasonable that they knew he would be open and public about the deal; he always has in the past.
You are wrong. But its not the business that you don't understand, its people.
The age-old adage, "There's two kinds of people in the world..." applies to an enormous amount of traits, but here's one where its exceptionally true:
The kind of people who become VCs and have billions of dollars of AUM (assets under management) understand time-value of money calculations, and they understand them almost intuitively. $800,000 sounds like an enormous sum for most people, because for 99% of Americans, $800,000 is life-changing money. It pays off your entire mortgage, or most of it. It sends all your kids to college. It pays for their private schooling.
For the venture capital firm, $800,000 represents a minor clerical error.
Even discounting the goodwill that this displays, engaging the machinery to recoup this $800,000 investment will incur significant financial costs, but more importantly, it incurs opportunity costs. Sometimes its better to just flush the money down the toilet and move on.
"engaging the machinery to recoup this $800,000 investment will incur significant financial costs, " ?
How? They write 1x participation into most contracts, and that's the normative expectation. It's not a 'legal battle' is literally a normal transaction between parties.
$1M is not 'nothing' to a firm with $500M under management - that $500M is not their money, it's other people's money.
If they are getting a %10 return for their LPs at $50M a year, and they are keeping 20% of the upside, which is $10M. So the $1M loss comes out of the fund, not their pockets, but still, $10M/year gross revenue doesn't 'feel' like a huge company now does it? A lot of these VC's are just 'rich' not 'rich rich' like mega-exist founders, just for some perspective.
I think it's a mistake to assume that the VC had the choice between this deal with our 800k recouped, or the same deal without it.
The real choice was likely this deal where we let the 800k go, or future uncertainty.
This isn't "rich people don't care about 800k". This is more like "400k write down makes sense at this time".
> The real choice was likely this deal where we let the 800k go, or future uncertainty
And not just "future uncertainty", but "the future of a company that's spent 7 years trying and doesn't look any closer to launching the rocketship, who's founder is onto his second attempt to sell out, and clearly is out of enthusiasm and ideas".
There was no 3x or even 2x future here for them, certainly no 100x - there was just another 2, 5, or 10 years of slow flameout with a 0x - or a quick and tidy 0x with a significant PR goodwill upside.
No, the 'spin' of the founder puts on this makes no sense - by your very own logic.
>>>> If there was 'no future good outcome' for the company then in what way is the founder's 'threat' to 'not sell' credible in any way? <<<<<
Why would he 'march on for 5 more years with little hope of exit' (by your very own projection?)
He's threatening to 'not sell' and therefore probably end up with $0?
That's an empty threat - and it's also acting agains the best interest of shareholders, which is his legal duty.
The situation is obvious:
They have an offer for $4M, it's probably their only way out, it's a nice 'few million' for the founder, the investors get their 1x participating + a tiny bit.
That's it.
It's not uncommon.
What kind of person would even think to sell a company 'on the premise that the other investors get nothing'?
He basically told the investors to bugger off and that's that.
'There is no significant goodwill' for the investors.
There is however some 'bad PR' for the founder unfortunately.
It's plain as day.
> He basically told the investors to bugger off and that's that.
No, He asked, they agreed. There’s clearly something they both know that we don’t, and the outcome that happened happened. I guess it’s just as easy and valid for you to interpret it as being a bad thing, as it is for me to interpret it as a good thing. Only the VCs really know, I guess.
Just another data point. While I would probably never pursue VC funds, their move resonated with me and now I have the names General Catalyst and Bessemer seared into my brain (not to mention sharing the story to my friends and other people with startups). $800k for that kind of advertising is decidedly not a bad move.
It is a common mistake in tech circles for people to believe that they are smarter than the people making decisions like this. Besides the obvious part about protecting their reputation as being easy to work with, there are always details behind the scenes in decisions like this that make them make more sense. You don’t know their tax position, what relationships/deals that being less friendly here might have endangered, etc.
Investors have given them $2.5 billion for a reason. One of those, undoubtedly, is that they are not stupid. Suffice it to say that they believe that this decision is worth at least $800k to them in the future, or they wouldn’t have done it.
If you are ever in a position to become a LP with General Catalyst, then perhaps you can ask them for their rationale and decide for yourself if they are trustworthy based on all the facts. Until then, making judgments based upon not even close to all the facts is just useless speculation. Your conclusion - that they are just stupid or terrible fiduciaries - is almost definitely wrong. You are no expert, but they are.
In this situation I think General Catalyst and Bessemer got more than 800k worth of good-will by not blocking this deal that they knew wouldn't get them the results they were originally looking for.
If a single founder decides to accept their money based on this action, and then has a VC-style outcome, they've made a good decision.
Ideally all investors want their returns. In this case, it’s a drop in the bucket for their portfolio and they are incentivized for investing in seed rounds (with the hopes of it being an Uber or a Salesforce). It’s quite common. Trend investing is happening too, FOMO, all of that, but their goal is to take $400k seed and turn it into a $40m exit. If you diversify enough it will happen, not if.
Four parts: 1) the bulk of returns are the few best performing investments, 2) there are material fixed costs in carrying an investment (partner attention, conflict management, admin overhead), 3) it's a way to get proprietary insight into a new space, and 4) there's value in founder relationships (deal referrals, recruiting). Large funds write small checks to get an early view into promising companies that are too early for bigger investments. They are aware that many won't out but they believe they are better served getting in early & divesting most vs waiting and having less information or access.
Also, it just occurs to me - I wonder if Josh and Baremetrics have _already_ helped these the VC firms our with enough deal referrals, contact, networking, and deal closing ammunition (and I suspect not, but given this is SV, data on other startups that was not publicly available but that Baremetrics was collecting?) - that made it an easy choice for them to say "Sure! We're totally happy with everything you've done for us overt the last 7 years already. Thanks man!"
There's the time-opportunity cost - they can't afford to be perfectionists and squeeze 100% of what they potentially could from a situation, which is arguably undue stress as well - and will cause further externalized losses in what their other focuses are.
It has to do with supporting the winners that are actually going to return money to your investors. They are refusing to fall prey to sunk cost fallacy, which is a good thing.
I run a bootstrapped SAAS. I really and truly understand where Josh is coming from. I have fully sympathy for him and whatever actions he took for his best interest after a gruelling 7 years. I am really grateful that he has shared the numbers so openly. Josh, you don't know me but please go and do whatever the F you want to do and don't listen to what others say. You deserve it!! It is disappointing to see comments like "what did employees get" ? Employees get salary and as long as they are happy working for the company and company takes care of their well being, they are not entitled to any additional founder benefits. Not all companies are unicorn where "early" employees get a big piece of the pie.
I agree, I'd like to see more posts like these. While I'm impressed by the unicorn startup stories, I want to also hear from those that did/could not take that path, which is a majority of the startups. One of the most impressive things is that Josh did all of this with a level of transparency few founders would be willing to.
Of course, some posters here are talking about employees getting a raw deal, but it was there for all to see that the company had decided long back to prioritize profit more than growth. Any employee that would have expected a unicorn like exit would have known it wouldn't be the case and would have left long ago. Blaming Josh for that doesn't feel right to me.
Relevant tweet from the author:
I see this "HN is toxic" sentiment on tech twitter a lot, particularly from tech folks on twitter with a lot of followers and fans. My own experience on HN has been that folks may be more cynical than average, and sometimes lacking empathy, but I've found most arguments are at least made based on reality, facts and good faith. Those that aren't usually get downvoted and/or flagged pretty quickly. Meanwhile twitter threads are frequently full of trolling, memes and reaction gifs. Where does this "HN is toxic" mindset come from?
You hit the nail on the head: the cynicism. Cynicism isn’t a morally neutral stance. Assuming everyone else is arguing in bad faith and in favor of their crude short-term political/economic interests. Asserting that all property is theft and that the system is rigged. Dismissing those who disagree as gullible or stupid or (themselves) cynically trying to manipulate people. There is so much of it here and it comes from every angle. It is disgusting. That people who are here tend to self-identify as high-IQ does not help.
> Asserting that all property is theft and that the system is rigged.
There is definitely a discussion to be had about property, smarter people than us have had it for at least 150 years (even more, if you include the discussion between Locke and Filmer), don't see anything that cynic about it. I'd go on to say that even Cynicism itself was a really interesting philosophical school [1]. I do agree that that there are some people on this website who still take the IQ thing seriously, but even there, I think that the majority regards it as bogus.
Right, the comment you are responding to appears to be conflating anarchism with cynicism (which is, ironically, a rather cynical take on anarchism).
No, I was referring to a line of thinking very common among folks I’ve met who grew up in post-USSR Russia vis a vis the worldview of many of the people I know who grew up in the USSR before.
The former tend to think everyone is corrupt and that if people have success or wealth or anything, it’s because those people swindled someone out of it or were connected to the right people.
Those who grew up in the USSR tend to have a more meritocratic worldview, where hard work and intelligence and studying for exams will result in a better life.
Maybe the people I know [strike]are[/strike] aren’t representative of those times and places. No matter, you can find justification for either worldview in nearly any situation, whether it’s 1970s USSR or ‘90s Russia or ‘50s America or Trump’s America. Reality is nuanced and filled with thoughtful insights that oppose each other and yet are equally true. The loudest people on HN are not people trying to square that circle.
HN had the audacity to do something other than shower the subject with unapologetic praise. An actual discussion occurred rather than a congratulatory twitter echo chamber.
I'm actually a really disappointed in Josh's response. I thought that his open stance on what he'd been doing would mean he'd being open to people criticising what he'd done. He doesn't need to agree with that criticism, but dismissing the whole site as toxic based on that disagreement just feels flippant.
From what I've seen and participated in, the discussion mostly centered around whether this was a good deal for everyone involved and whether or not a greater proportion of a company's success should be attributed to it's employees. At least in my eyes very little of it focused on Josh personally.
> I thought that his open stance on what he'd been doing would mean he'd being open to people criticising what he'd done
His goal in publishing this information seems to be to foster a community of transparency. To that end, his actions appear entirely consistent.
Put another way, what additional information do you want him to convey? His goal is to accurately and openly convey information, and he's basically laid it all out on the table.
You're free to have an opinion on whether his actions were right or wrong, but don't expect him to engage with your criticism when that takes a lot of time and effort (and is not part of his goal).
> His goal in publishing this information seems to be to foster a community of transparency. To that end, his actions appear entirely consistent.
I think his goal was to help people. The goal of many people in HN comments is to ‘be right’. It’s a cultural thing. What we prioritize, how the community started etc.
I think HN has ‘trying to be helpful’ forces in the long run. There are ideas, content, links to new information that are helpful. But it’s not the priority compared to what many people think is decent. If you look at other online communities that’ll be pretty self-evident.
But again I think the key to HN is it has no direct interest in being helpful. Only as secondary effects. There’s nothing wrong with that - just as there’s nothing wrong with an incubator with a certain philosophy or writing essays that you think are insightful. In the long run, they help. But they don’t prioritize human decency or kindness and there are a lot of false negatives (startups missed in YC, entitlement and biases in some essays, dismissal of what isn’t clearly the right comment, etc).
It’s a cruder world that way. Take for example the culture of ‘X, Y, and Z read drafts of this’ that everyone has emulated. I used to admire that. Team building and acknowledgments! But it’s also encourages a culture of not being open and trying out new ideas. Living in fear of new ideas that will be rejected etc.
And that is something Josh had the balls to reject. There’s no hiding behind his Harvard / MIT connections. There’s just honesty and transparency. HN and YC people could learn a lot from that bravery.
> You're free to have an opinion on whether his actions were right or wrong, but don't expect him to engage with your criticism when that takes a lot of time and effort (and is not part of his goal).
I don't expect him to engage at all. I do think he should be able to handle dissenting opinions without merely dismissing the whole site as toxic on twitter.
> without merely dismissing the whole site as toxic on twitter.
You are aware that he's not, not by a long shot, the first to have that opinion? There's _way_ more than an element of truth in it.
Maybe I just have a high bar for what qualifies as toxic, but most of the thread seemed to be a reasonable discussion of what had happened.
Obviously some people have made some incorrect assumptions at varying points, but I haven't seen anything that would remotely qualify as toxic.
The HN community is full of incredibly intelligent but often young tech-centric people. I used to be part of the latter, but the reality is they lack a huge amount of context and experience. Being a talented developer-employee, even an early employee is jut not the same as being the founder / maker / starter. I sincerely doubt any of these people spent every single day of the past seven years worrying about the fate of their entire company; if you did, you're an incredible employee but you should have been running your own gig.
On HN every action by anyone is seen as some evil plan.
Apple wants to alert users to genuine / non-genuine batteries (to mention latest downvote blast). That is evidence of how evil apple is (not even considering how many folks were getting screwed by all the trash batteries going into iphones pretending to be real).
Zoom is so evil for X/Y/Z reason - except zoom is actually easy to use which is what most non HN folks care about - so their "evil" is just optimizing for different goals in some cases.
The negativity and the myopic focus on personal need / preferences really highlights sometimes how just out of touch with the rest of the broader world HN can be.
Toxic has become a synonym of "I don't like that"
I think it's extremely valuable as a lesson for prospective early employees.
My own personal takeaway is crystal clear: if you want to benefit from the sale of something, you need to be the owner!
Much like a gardener or builder who doesn't get paid out when the house gets sold, unless you have a LOT of equity as an early employee, you will not be getting founder-type payouts (and rightly so as you took little to no risk)
Companies don't have to be run that way. When we sold Cygnus the receptionist was able to pay off her mortgage and other debt. She was a 65 year old divorced woman and now she could afford to retire (she stayed with the company though).
Of course we were a traditional SV startup -- people are different these days.
Well I think the fact that you're a nice person who made sure the secretary was taken care of is great!
But I wouldn't start generally inferring that it makes sense to take secretary jobs at startups on the chance the founders decide to pay off my mortgage.. Baremetrics is a more typical case, I would think.
the math is still incredibly lopsided. Your secretary can pay off her mortgage or buy a new car; the founders get FU money. This is just how it works; hate the game not the player.
> Much like a gardener or builder who doesn't get paid out when the house gets sold
We may also interrogate this arrangement.
Same thing happens with GitLab somewhat regularly. I don't know of any company that operates with that level of transparency and somehow a select set of folks can't seem to control themselves when supplied with a reason to air their grievance.
GitLab is a poster child of why companies don't publish any details.
Deleted the production database and customer data? You could apologize and move on. There should have been backups to restore from but clearly there weren't.
The gitlab way: Go in great details about how there is no automated backup and the last one that was done manually 3 months ago doesn't work... and how there was no testing/staging environment to try the change before production... and how any intern could delete it the same way by accident on their first day.
There's a reason companies don't publish gory details and internal discussion. At best there's nothing to gain from it and at worst it's highlighting incompetence and wrongdoing.
On the other hand, most of us knows there's a very real risk that things are duct taped together all over the place in companies whose services we depend on, but we don't know what the actual risks are.
That's terrifying.
In some ways it's terrifying to be able to see those risks too. But then we need to remind ourselves that those risks are there in companies that don't dare to tell us as well.
I think it's a good approach, it:
1) Works as a club for developers to get the time they need to improve processes and code. "Do you want to be responsible for the HN article about the incident this will cause?" would give most managers pause.
3) Gives customers the confidence that you'll let them know when issues that might affect their experience or data are occurring.
4) Proves to customers that you can fix these issues when they come up.
5) Makes people wonder what's going on in your competitors that they're not hearing.
On the other hand you don't get to pretend the sun shines out your ass, but that's disingenuous and most people will see through it anyway, you only trick the people that also want to go along with you.
That's definitely the pragmatic view and the obvious downsides are largely why this approach is so rare.
Much like TFA I think there are things to be learned from that level of transparency and hope the experiments continue.
Ctrl-F for 'Salary' and you will understand what really happened. How many years did Josh work for $0 or just below market salary, take no money out of the company, in fact likely dump significant quantities of his own money into the company... all the while his employees enjoyed getting paid a agreed upon amount every pay period?
$4mm after tax (hopefully Josh is getting the QSBS tax break) for a decade of extremely high risk high effort contribution to our economy is not a good risk-adjusted return, but it's at least a decent exit at the end of the day.
They're also mostly from a very SV bubble point of view. A lot of posts point to the employees not getting very much from the sale. But there are lots of places in the world where employees of small businesses are not granted large equity stake, and work for a salary like most employees everywhere else. This is especially true for a steady profit driven company that's not aiming for hypergrowth (another very SV centric view of startups).
We don't know how much the employees are paid, for all we know they could be paid the prevailing wage for their location.
As a founder who's faced his fair share of public criticism, I used to share this sentiment.
However, over the years, I've learned that facing critics and doing impactful work goes hand in hand.
Put another way, if you don't have critics, you're likely not doing anything very impactful.
In my experience, the key to maintaining equanimity in the face of harsh criticism is to:
1) Have a strongly held mission and set of core values. Commit to this mission/core values regardless of what anyone says.
2) Recognize that it's sort of funny how pretty much any action can and will be twisted and criticized by critics online. There was an article a few months back about Bezos dedicating $10B to fighting climate change, and the entire comment section was negative. Lol!
Everyone is weirdly mean to you when you sell. I sold to fb in 2018 (height of cambridge analytica.) Even ppl who are now my bffs were mean on HN. (they didn't know me at the time.)
Can you please be specific about what "not so nice" things you are/were seeing? I'm not seeing any inappropriate criticisms beyond what I would normally expect.
Half screen? I see a comment or two. I think it's normal/human thing to have discussions in comments like this one. Especially, when it's an exit related topic that gets shared on startup/VC related forum-site like this one?
Prefer just "good job" comments, or what?
I agree. I read all the comments in this thread and this time and the negativity isn't there. It just doesn't exist. I don't know if those comments were removed, but I just suspect they never existed.
I was incredibly confused to read "Investors are writing off their $800,000 investment". Sure, $800K isn't huge money for a fund, but it still seems... odd... to be so nonchalant about it?
Then I checked General Catalyst, they manage multiple funds in the $500M - $1B range[1]. In that context the $800K really is a rounding error, around 0.1% of a single fund's size.
It never ceases to amaze me how money stops being money past a certain amount (which would be life-changing for most people), and just becomes numbers to move around.
[1] https://www.crunchbase.com/organization/general-catalyst-par...
I imagine there must be a bit more to the story.
It's not common for investors to write off $800k out of good will (doesn't seem like something in the best interest of their LPs).
Edit:
> It’s a really exciting day here at Baremetrics! I’m stoked to announce that General Catalyst has invested $500,000 in Baremetrics, as part of a new fund they’ve created for businesses on Stripe.
Turns out there is more to the story.
Baremetrics got their cash from a fund specifically intended to promote companies integrating with Stripe. In other words, the goal of the fund was to promote Stripe moreso than to generate returns for LPs
So they invest in a company and then they invest in a bunch of companies to raise the turn-over of the first company. Seems legit.
Ahh good find, and according to CrunchBase that Stripe fund was $10M total.
That makes a bit more sense now.
Interesting - I truly expected Stripe to buy Baremetrics.
It's not that they had an option to collect that $800k in some way - I'd presume that their share in the company was objectively worth much less after all these years, and the only difference that some hardball squeezing might make would be that they get a chance to write off, say, just $500k instead of $800k but more likely just block the deal so that nobody gets anything.
I really appreciate the lack of “our incredible journey” platitudes in here.
It was a wild ride, but all journeys come to an end. Our customers and employees are our most valuable asset.
Why? Building a company is a journey.
I'm referring to the trite overused cliches that often fill these sorts of blog posts.
https://www.gyford.com/phil/writing/2013/02/27/our-incredibl...
See also the recent example of https://www.slingbox.com/discontinued, which makes this funny pair of claims:
Q: Why is Slingbox being discontinued?
A: We’ve had to make room for new innovative products so that we can continue to serve our customers in the best way possible.
Q: Will Slingbox be releasing any new products?
A: No.
> But they were incredibly gracious and both agreed to write off their investment.
So the investors just accepted to lose $800k while the founder was getting $3.7M?
Can someone explain the logic here?
> So the investors just accepted to lose $800k
$500k came from a fund General Catalyst set up specifically to encourage startups to build new businesses that integrate with Stripe. [0]
The goal for the money was to enrich the Stripe ecosystem. Not generating returns for investors.
If the money came from a regular fund without the Stripe affiliation, General Catalyst 100% would not have accepted the $800k loss.
[0] https://www.prnewswire.com/news-releases/general-catalyst-in...
> If the money came from a regular fund without the Stripe affiliation, General Catalyst 100% would not have accepted the $800k loss.
Doubt it. $800k is not a lot of money in the investment ecosystem.
This is what I came here to find. Thanks!
They are investment funds that manage billions of dollars. They invested 800k hoping to make 80-800M out of it.
It's pretty obvious the business didn't pan out as well as intended. It's not really worth their time anymore.
Still. They could have caused troubles and tried to recoup their $800k out of the $4M. They were nice not to.
The money will be written as a loss and go through some accounting/tax trick to minimize the effective loss.
In what way would it have been trouble? Surely they legally own that bit of the company?
Something doesn't make sense. $800k is not a small enough amount for any responsible investment fund to walk away from.
I wonder if maybe it was actually worth way less. I think he said they walked away from their $800k investment, but maybe that was at a much higher valuation. If it was only worth $80k I can see them not bothering.
800k actually is small enough to give away when you're dealing at that scale. The lawyers fees and other fees wouldn't even be worth that much from a sale.
The bigger reason is reputation. If Techcrunch posted an article saying, founder screwed out of acquisition by billion dollar VC, it wouldn't work out so well for the next founder considering that VC.
But he would have still walked away with almost $3m, how would that be screwing him?
Why would they just want their original investment back? They'd demand 5 or 10x the original amount (as VCs) which completely wipes out the acquisition.
Because some money is better than no money? VCs don't really get to demand a certain amount. Investment doesn't work like that.
That is incorrect, VCs absolutely have preferential shares with liquidation preferences which can be multiples of their returns. Some money is not really better than no money if their reputation comes out as nickel and diming their founders, and future founders don't want to take their money, and if the VC misses out on a big exit as a result, now the VC has lost potentially much more than getting the 800k back.
The positive PR/social value of walking away from it is worth vastly more than the money. You're talking a tiny percentage of the fund value – if having a reputation for a willingness to do the "founder friendly" thing helps you get into competitive rounds in the future, it's absolutely worth it.
$800K is not worth the effort of collection, welcome to the world of venture capitalism.
So if they sold for $4M, and the investors got $0, and the founder pocketed $3.7M ... where did the other $0.3M go?
If it went to the existing employees (they have 7 of them on the About Us page), that's ~$42k per employee.
He said it in an another comment; to employees.
Wow, such a great read. I love people who are so open and honest. btw, how does tax work in the US for acquisitions? is the money he's getting is taxed the same as income?
He'll likely pay no federal taxes.
If the business is >1 year old, it's treated as capital gains. Since the company is >5 years old, he can likely take advantage of the Qualified Small Business Exemption up to $10m and pay no federal taxes.
https://www.investopedia.com/terms/q/qsbs-qualified-small-bu...
Thanks for the info. That's pretty amazing.
To be specific, since it might help someone and it’s important to get the technicals right, dig into the IRS portion of the federal code, section 1202, or QSBS. Note, doesn’t apply to LLCs ... so you eat double taxation if cash flow positive but it’s less burdensome now with the Trump tax rule.
Decent link here: https://www.svb.com/blogs/svb-private-bank/understanding-qua...
I believe, but can’t find, that you need to trade cash for the shares to qualify, so if your basis isn’t zero, it might require writing a check into the entity to cleanly qualify.... moral of the story here is pay someone to help you on this :)
it's only amazing because he spent so long making so little
Thanks for actually giving real numbers here. I hate startups that spin fire-sale acquisitions into something more substantial than they are.
So I am super happy to see some real transparency with real numbers and a real talk about the earn out.
The part about the investors getting nothing while the founder gets millions is really interesting. How does something like that even happen?
This is just an idea, but I suspect taking the tax benefit of writing the investment off in Year 1, compared to blocking the sale and getting a 1x return (maybe) in 2-3 years (or more), actually has a negligible effect on the fund's IRR.
General Catalyst latest fund was $2.3B and BVP’s was $1.85B.
I’m unsure which exact BVP and GC funds Baremetrics raised from, but that $800K likely doesn’t matter to either of their returns with funds of that size. Even at $100M, it probably doesn’t matter to a fund. VCs expect over half of their investments to outright fail.
What’s much more important to the VCs is the good will they just built with that founder. Most founders will give back door reference checks to other founders about investors. Josh is likely to say good things about BVP and GC now. Also, they got that mention in his blog post too. It’s likely they knew Josh would write a post like this and chose to just write it off for the “we’re founder friendly” story vs. looking founder unfriendly.
As a founder, I don’t think there’s anything wrong with what happened here for the investors given their fund sizes. They’re professionals investing other people’s money and expect this type of thing to happen. In fact, most VCs likely expect you to fail. If these were angel investors putting in their own money, I’d have a different opinion.
Agreed. Why on earth would investors agree to not getting their money back?
Did they get anything? It doesn’t sound like it.
What are we missing here?
Two things come to mind.
1. At the end of the day, investors are people too. They may care that the team ends up whole.
2. 800k is non-trivial money, but it’s a small percentage of, say, a $100MM VC seed fund. The economics of VC are that some investments will net zero return. While they could have tried to claim back something here, letting go with grace gives them a lot of goodwill to be first to invest in the founder’s next project (assuming there is one).
> letting go with grace gives them a lot of goodwill to be first to invest in the founder’s next project
Also a halo effect with other people who are reading this.
But I'm guessing there were some animated discussions about this.
Plus, per https://news.ycombinator.com/item?id=25045874
> We've had carryover losses for years, so from a tax perspective, there was no hit on either side.
"A small but reasonable exit is life-changing for me, and a nulled-out investment is expected for you in most of your investments."
Some investors are gonna be ruthless sharks. Others are not.
It might make them more attractive to the next generation of founders, especially if it is widely communicated as here.
Advertising money well spent?
I was shocked by this too. The only thing that makes sense is that it's a form of advertising/branding for them. Baremetrics is a startup whose main audience is other startups and the posts like this have a good reach.
Other startups looking into them will see this. And breaking even might be about the same as taking the thing as a loss in the grand scheme of the VC model to them. I do wonder if other lower profile companies would have gotten the same deal.
tax loss harvesting
I interviewed for Baremetrics a while ago and a major reason for this was because I am a fan of Josh and its openness culture. Ended up not following through the process as I got a job offer in the mean time.
I enjoyed even my first impressions at the interview process and I'm happy Josh got a nice payout, congrats!
I do hope Baremetrics transparency continues in some fomr as its a big inspiration.
Congratulations on the sale and thanks for sharing. Very interesting for someone who's probably a few years behind you.
$3.7 million sounds like a lot of money, but he could have earned more than that over 7 years if he just took a mid-level job at a FAMANG company.
EDIT: saw that the founder lives in Birmingham, Alabama. So yes, $3.7 million IS a lot of money.
It averages out to $420k/yr. There's this sentiment on HN that "all you have to do" is get a job at a big tech company and you'll make a million dollars a year. It's idiotic, and not true. Yes, there are people who make $500k+ writing code in a cubicle for 40 hours a week. They are the vast, vast, vast minority compared to the people a) making $100-200k doing the same thing; b) making that $500k+ doing everything but writing code.
Unless you're doing infrastructure stuff at Netflix, ad work at FB or Google, or some high level stuff at Microsoft you're not making half a million a year, and you're not doing it at a mid-level anything, anywhere.
As a Belgian, I can't help but look at these numbers in disbelief. 100-200k/annum for churning out code 40 hours a week? Where do I sign up for this? I'm the best paid employee I know, work insane hours, and I'm not even in that bracket.
Addendum: it's very rare to make more than twice the average wage in Belgium as an employee. It's a different matter if you're self employed.
As a Belgian myself: self-employment is the key here. It's not that hard to pull in 100-200K annually in the current belgian tech space, I've done it consistently for the past 5 years, with lots of periods where I did not work full time.
In the US at least, as a contractor, you have to make a lot more in gross pay to come out equivalent to what you'd earn at a lower salary somewhere else. You have to cover:
* Health Insurance
* No paid time off: Want 4 weeks off a year? That's a 7.6% reduction in pay.
* You have to pay both the employee & employer side of payroll taxes
* You're not eligible for unemployment, so you need to save more money to cover that possibility
* No retirement fund so you don't get any matching funds and have to really be on top of what your long term needs are and take that off the top of your income.
As an example, I have a normal salary full-time job, but I also have a hobby business on the side. The money I make from that given the tax bracket I'm in, federal, state, payroll taxes, means my "take home" pay from is taxed around 43%. And that's without needing to take anything extra out of it for paid time off, health insurance, or retirement, all of which are well covered by my salaried position.
Any advice on how to get there? I'm a contractor after having worked full time for a few years. Working with a very few long term clients, just me.
Is your daily rate very high, are you delegating work to other people, or what is it?
I'm working in Belgium as well and really wondering what space you were working now because 100K-200K net is way above developer wages here.
Did you have to specialize in some kind of technology or sector? Or is it simply because self-employment means paying less taxes?
Same here in the UK.
I know a couple of guys in the UK who are essentially just coding all day, in full time jobs, making £100k a year.
BUt it's very rare IMO, I'm not even on 50% of that.
In the UK you could make good money but the trick is to be a consultant and bill your employer through your Limited company.
At one place where I worked with a permanent contract, the consultants were billing at 800-1200 gbp per day depending on seniority. There was agency cut of course but overall they made real well. this is when working at the same office at the same hours right next to me, just like an employee.
I haven’t been in the UK since a while so I hear that now things changed so you can no longer pretend to run a company when being essentially an employee.
I haven’t been in the UK since a while so I hear that now things changed so you can no longer pretend to run a company when being essentially an employee.
That's actually been the case for about 20 years now. The relevant term is "IR35".
Hmm, I have been driving relatively fast lately. must be the relativistic speeds that 20 years is not the same for both of us!
Anyway, apparently the changes are postponed to April 2021 at stationery frame of reference: https://www.taylorhopkinson.com/ir35/
Those are merely administrative changes. The law and tax rules themselves will still be much the same as they have been since 2000 or so.
The reason this is big news anyway is that for the first time, large clients will themselves become responsible for determining whether an engagement falls under IR35 or not, and may also become liable to the government for the shortfall if the determination made is incorrect. Until that point, it's the freelancer/contractor operating through an intermediary who is on the hook (except for various government contracts, where the analogous change came in a while back).
In a surprise to no-one who has ever worked in the independent sector, this has made lots of big businesses that were formerly quite regular users of the flexible workforce much more sceptical, and many big names appear to have outright shut down this way of working for now.
At some point, presumably our government will realise that it has to pay for its spending spree during the coronavirus and that getting the economy back on its feet is going to need that flexible workforce, so with a bit of luck they'll come to their senses and finally do something about IR35, though I'm not holding my breath.
It depends on the industry.
I'm graduating this year, and many of my friends (and myself) are going to work for FANG+ and finance companies and hitting that figure.
In London?
Yep.
Interesting. What area of tech are you all being hired to do?
Hedge funds, prop shops, etc. Few of us are joining Jump/Two Sigma/Citadel/D E Shaw. Comp tends to be 80k salary and 40-50k bonus.
London salaries:
L5 (senior engineer) Facebook [1] Google [2]
Facebook L6 (lead engineer) [3]
[1] https://www.levels.fyi/company/Facebook/salaries/Software-En...
[2] https://www.levels.fyi/company/Google/salaries/Software-Engi...
[3] https://www.levels.fyi/company/Facebook/salaries/Software-En...
I am always deeply suspicious of the figures on that site. Right now, I'm looking at a L4 at Google, in London, listing $367K total comp at 0 years of experience.
Figures for my company are spot on, so I assume that they are correct for other ones as well. Usually base salary for a given level is set (you can see that majority of entries have very similar base salary if you remove outliers). Bonus is usually preset as % of base salary and therefore will be same/similar for most people. What could make difference are RSUs. If you are coming from another FAANG or startup and leaving behind lot of unvested stock, you might get that matched. Or if you have other offers they will prefer to increase RSUs rather than base salary. Every year you then get refresher RSUs which are quite significant (as big as your base salary but spread over 4 years).
You need to move to Silicon Valley for that, but cost of living and lose of other benefits of living in Belgium might outweight the higher paid. You can try Switzerland if you want 6 digits salary in Europe.
Be aware that tech salaries in the US are roughly twice what you get in Europe (and most other parts of the world). So don't be too shocked.
https://stackoverflow.blog/2019/10/16/coding-salaries-in-201...
Google in Switzerland my friend.
Or generally contract work in Switzerland.
This year for a brief, beautiful moment(two months) I was making 750CHF daily before taxes.
Regular, experienced employees can count on 100k+ before taxes.
As a freelancer in Paris, I've been invoicing 625€ daily in 2018 and 2019, and 700€ in 2020, doing Big Data / Scala development with a sprinkle of devops, for the same customer. I think I could get 800-900€ if I find a customer that pays better and focus on the Big Data / GCP sectors. Just need to find a contract through word of mouth, and not through a recruiter that takes a 100-150€ margin...
You get less as a salaried employee in France though...
Become a contractor, you'll be in the 100 to 200k/year. (ok yes, that's before taxes)
>Where do I sign up for this?
In California
>it's very rare to make more than twice the average wage in Belgium as an employee
Yep, software engineer compensation is crap in the EU, while the cost of living is almost as high as in Silicon Valley. Solution? Apply for H1B at a FAANG. Fuck the EU.
>Fuck the EU.
Yeah? Well that's just, like, your opinion, man.
In my experience, most engineers, even those fresh out of college, land at above 300k within a few years at Google/FB. You do not need to be a rockstar, and you don't need to work more than 40 hours/week for that (though that can depend on team, I've never encountered one that regularly asks for more than that).
If you're talking finances, Google/Facebook will pay you more, with less risk, and better work life balance than pretty much all startups. There are entirely justifiable reasons to prefer a startup, but you should take a second look at your calculations if you think finances come out favorable on the startup side.
Not necessarily true. I was a mid level product engineer at a recently IPOd company (joined 2 years pre IPO). My base salary was $200k, and the stock and bonus more than doubled that.
There was a little bit of “pick the rocket ship” gamble - I had an Uber offer that probably would have been ended more like $250k/year, but it’s not unreasonable to get half a mill joining a late stage pre-IPO startup, and base salary is high enough you do it with little risk.
Hell, I know some mid-level post-IPO folks at Square making $700k due to it 10xing in share price.
I don't work in FAANG, but I know someone who works at a 1 tier lower big company. He is a mid level engineer. After 1 year at the company - Salary + Monthly vesting comes in at somewhere between 400-450K depending on how the stock performs, and he certainly has room to grow.
I was told FAANG-ers make even more than him, so yeah I tend to believe these numbers.
To make those figures doing "ad work" at FB or Google you probably have to come in as a VP or higher, which already comes towards the end of a very long career arc.
Not necessarily. Bear in mind Facebook's compensation is heavily performance orientated, the bonuses can rack up. You can easily clear $500k at Facebook as a senior engineer, especially if you're getting high evaluations.
Fair enough, I'm talking about the non software engineering side of ad tech.
This is untrue. A Level 6 Engineer or Manager and higher makes $500k+
VPs likely make millions.
Not sure how accurate glassdoor is, but:
https://www.glassdoor.com/Salary/Facebook-Vice-President-Sal...
Highly inaccurate. Even if you look at the data provided there, it’s 2 data points with an insane spread.
Check out levels.fyi for something more accurate. You’ll see L6 engineers make $500K+.
So even more pessimistic than my already prone-to-pessimism self thought!
Google L5 is $331K a year according to Levels.fyi Eleven years. L6 is half a mil a year. L3 is new grad. L5 is not superhuman. It’s not mid level but it’s not Staff Engineer either, “just” competent and known to be capable of working with minimal direction. FAANG really do pay very, very well.
So true. I could have also hated my life for those 7 years. I make a terrible employee. :)
That assumes he took no salary or dividends for 7 years, which seems highly unlikely given their ARR.
Right. I've been paying myself $100-150k a year for most of that.
dimva also has his sums very wrong, 3.7 mill over 7 years is over 500k per year, you won't get that at any FAANG for a mid-level position.
GOOG has 3x'd in the past 7 years, FB has 10x'd, AMZN has 10x'd, etc. The initial stock grants would be worth a lot more, plus all the refreshers. My friends who are decent software engineers with a few years of experience are getting offers in the >$500k range right now.
And I'm assuming that he would have been promoted at some point. I am comparing what someone with his skills could have earned at a FAMANG, not what an average software developer would earn (they wouldn't even be able to get a job there tbqh).
> My friends who are decent software engineers with a few years of experience are getting offers in the >$500k range right now. ... not what an average software developer would earn...
Which is it? "Decent" developers being courted with $500k+ offers or "average" developers can't get jobs?
That's no different than me buying GOOG/FB/AMZN stock at the time of the grant, it's nothing more than betting on the stock market.
might not be a fair comparison if you consider taxes on salary+rsu vs. being taxed on capital gains.
I imagine he paid himself a salary during that time, and 3.7/7 would be >$500k/y which is >mid level at a FANG+ company.
This reminds me of a recently decried point the British government made encouraging people in the arts to consider technical jobs: https://www.theguardian.com/politics/2020/oct/12/ballet-danc...
Josh seems to be extremely entrepreneurial and independent (https://joshpigford.com/projects) and maybe being a part of a trillion dollar machine isn't worth the $ to him. He succeeded doing what he wanted to do and that's fantastic.
Admittedly, people's attitudes to work differ immensely and being able to live the entrepreneurial life is a privilege, but from my POV, you only live once, so $3.7m made from several years of doing things your own way would handily beat even $10m made from several years of employment (and neither are guaranteed).
$500k is staff/principal level compensation at FAANG companies. No way mid-level engineers make as much.
> This (No time-based or performance-based earnout) was the greatest limiting factor on acquistion price.
For those who have gone through an acquisition, how much more Josh could have netted if he accepted to stay 2-4 years?
Depends on a lot of factors, but probably not much more.
The company could have potentially netted more overall, but I’d say Josh’s take would remain about the same. If nothing else, he’d take on a lot of risk... the potential package could seem higher, but a lot can go wrong over 2-4 years (both personally and with the acquiring company).
Really cool to see the details of the sale presented in the first paragraph. I wish more companies would be similarly transparent, even for running metrics about ARR etc.
Can someone please explain why the investors were not able to recoup their initial investment of 800K$ when the company sold for 4 million? Thanks in advance.
It kind of sounds like Josh had a number in mind, which would allow him "financial independence", and that number was 3.7M.
If the investors insisted on recouping that 800k, leaving Josh with ~3M, it sounds like it wouldn't have hit his number, he wouldn't have sold, and.... the investors would be in the exact same place. Effectively, it sounds like they just chose to not block the sale for something that, in the end, would have made no difference to them (but would have prevented the founder from leaving).
Josh ended up better, the employees ended up better, and the investors _really_ didn't end up in a worse place (in actuality, they probably now get to write this off as a loss and not worry about it anymore, so maybe a bit of a pro?).
The founder had the guts to tell the investors that there’s a deal on the table, but he’s not going to do it unless the VCs walk away from the investment.
It wasn’t a growth story, so from that point of view it was dead money for the VCs anyway. But why would they agree to the founder’s payout at their expense?
Either the VCs are very impressed with this founder and plan to participate in his next company, or they’re fed up and just wanted to be rid of him.
It's not that they weren't able to. It's that the 800k isn't worth the legal fees and the possible PR damage (Bessemer doesn't want to be known as non-founder friendly because they made a fuss over 800k).
It's been repeated a couple times in this thread, but VC make money by 10x-100x their original investment. They invested 800k expecting to make back 8M-80M. Anything less than that isn't worth the additional time, especially for a seed stage investment where they might have 50-60 of these per year.
I think, for anyone trying to start a company and take VC funding to understand how the VC business model works. A VC incentives are much different than a founder's much of the time. In this case, the best case for the VC is for the founder to continue working on the company.
It is absolutely not 'non founder friendly' for a VC to go after their 'participating' value especially when there is actually money on the table.
There would be zero negative PR fallout from that.
This founder basically ripped off his investors, it's completely unethical - and he'll never get a dime of VC money again.
If VC firms didn't care about getting their 1x money out then the terms wouldn't be there in the first place.
It's normal to do that, and a $500M firm returning 10% a year takes 20% of that, so 2% which is not really a huge amount of money for a team of people.
> also realized that the same people who are good at starting companies aren’t always the same people who are good at growing or managing them. The company itself has so much more potential than I have the ability or interest in offering and on top of that, I just wasn’t enjoying myself anymore.
I thought this was a key insight, and I'm happy the author is frank about it. Some people enjoy building things from scratch, others enjoy taking a good idea and scaling it. IMO, both are hard problems and its good that he bailed before trying to go down that route.
Congrats! Sounds like a good outcome. From what I've read (my understanding may be wrong), using a revenue multiple at all for valuation is surprising for companies A) under $5M total valuation and B) with lower growth rates (looks like Baremetrics grew ~11% in the last 12 months). Can someone who knows better than I weigh in on the valuation math here (in general -- no one knows the exact details of this transaction, obviously). I'm not questioning it, but I am curious to get perspectives on this real world example.
The revenue multiple is probably not the metric they used to arrive at the valuation, but it's certainly a normalizer that people use to compare outcomes.
Multiples of trailing 12 months net profit would be more common for a smaller entity.
> No time-based or performance-based earnout... Everyone on the team stays…or goes
Curious about this one; are the acquirers not bothered about the possibility of everyone jumping ship? They have a new CEO and generalists on hand to take over the business immediately? And/or the business is basically in “runs itself” mode, with most of the work being done on growth opportunities?
Normally I think of the golden handcuffs as a necessity to stop the business from imploding and being worth zero, but interested to know why this wouldn’t apply.
you realise this is a $4 million business right? it's not 40 or 400.
Yes, can you elaborate a bit more?
Seems to me that with a small team, you're more likely to have N=1 bus-count processes which would be sensitive to someone leaving.
Great outcome for both sides.
Josh gets the exit he really seems to need for his personal and financial well-being.
Xenon gets one heck of a product for honestly quite cheap. Better marketing will actually go a long way here.
kudos for the transparency, a really interesting post
The bit about $3.7M seems really odd - how is that even legal?
Conrad Black literally went to jail for selling newspapers and taking a personal commission on the side. [1]
When you're selling company value, but taking the money yourself in the form of some kind of arbitrary comp, that's defrauding investors, it's a form of embezzlement.
That the investors 'didn't care' is fine, but I don't see how it could have been arranged in the first place - the acquirer does not get to decide how much the 'founder' is going to get.
Also - the $800K write off seems odd. A million dollars is not nothing, and there would definitely not have been $800K in lawyers fees, far from it.
Something here doesn't seem quite right.
Also - folks - if he is negotiating comp outside of share value, that's not only hosing the investors - but any employee equity as well.
A small team where some other guy has 5% of the company, that's $150, not a lot, but not nothing. If the package was dealt outside of equity, those equity holders were screwed, if in fact there were other shareholders/equity holders.
> "We recognize the work that’s gone into the past 7 years and it sounds like this is a great landing spot for the team. We’re grateful for the opportunity to have supported you along the way."
That is incredible and, as the author says, classy. If I ever find myself actually doing the investment rounds for anything I create or help create, I hope that people like General Catalyst take an interest.
the same people who are good at starting companies aren’t always the same people who are good at growing or managing them
This is an excellent insight
@shpigford - Are you able to exempt your exit from capital gains under the QSBS tax laws?
For those curious, more here: https://www.brownadvisory.com/us/qsbs-tax-exemption-valuable...
Update: QSBS was applied here: https://twitter.com/Shpigford/status/1326163478529314817
Founders can, his situation varies. Either QSBS or ideally through 83(b) (where one pays all taxes on company stock at founding in first 30'ish days).
You misunderstand 83b, that’s just about paying the income tax on restricted stock grants up front instead of as it vests. You still would owe gains on the appreciation of the stock. QSBS allows some or all of the gains to be tax free.
I'm assuming he held his shares through his own holding company.
I have no knowledge about how to consider the acquisition details, but MAN the energy of this guy. It’s formidable.
All I can is congrats and im jealous. This is the exit ive dreamed about
I'm really happy for Josh, I loved the blog posts. Always so honest and straight forward. Sadly, many SaaS companies hit a brick wall after initial investments and the first growth streak. Especially, analytics companies.
I've worked with a mobile analytics company in the past and it was pretty much the same story. Only, they weren't as transparent and couldn't walk away with a profitable exit.
So this really looks like the best way he could exit without burning himself out.
I support Josh and his healthy approach to showing others what is possible when you share and contribute to the internet.
The numbers work out to 7.5% equity owned by 10 employees. Would that be a typical equity share for a company like this?
I think someone said there were 7 employees. I saw some of the jobs listed for YC startups and on AngelList showing 1% equity for first engineer roles. So yeah that seems about right by my estimation.
It sounds a little low, but not unheard of. Standard option pools are generally between 10-20%.
Nice outcome. Congratulations!
Do anybody know how much Xenon Partners (te same buyer) paid recently for UXPin.com? I think that UXPin is 5-10x times bigger, but saw that their CEO after selling the company instantly joined Google as a senior manager.
UXPin had a few investors and 3-4 cofounders. So probably different outcome?
Thanks for sharing this. This has the kind of details that I would have loved to see and almost never gets shared in so public a manner.
I respect the soul searching that you went through and the decision that you took.
Thanks again. Wish you the very best in whatever you _start_ next.
Interesting "journey", but as I was reading I can't get over how similar this site looks to Stripe's old UI. From the color scheme to the icons for each product in the menu bar, it's almost a 1:1 copy.
Originally (we used Barmetrics in 2014-15), it was marketed as more of an analytics tool for Stripe. I think designing to mirror strip was intentional early on, and worked well enough to not change over the years.
> As part of the structure of the deal, Xenon guaranteed I’d take home $3.7m, regardless of what came up during due diligence.
I have never seen this before. Guaranteed outcome regardless of DD. Is this an outlier company?
Congrats Josh :)
Congratulations on reaching an exit and good luck with the next venture!
I applaud the author's transparency. Congrats on the deal!
Good for you! I’m happy reading a sort of reasonable-ish success story.
4M is a lot, but an amount I can wrap my head around.
Oh I didn't connect the dots that this is the "job hopper twitter guy". As someone who's last 4 companies have been acquired - I found him to be extremely frustrating to follow.
Losing so much respect for people, reading some of the comments...
> 2.65x ARR
What about gross profit (or more precisely, EBIDTA)?
hey Josh - just want to throw it out there that we love baremetrics.
Did his 10 team members get zero? Is he proud of that?
thanks Josh for sharing this info
Amazing
I know there's a trope about the naive founder getting screwed by shifty-eyed VC sharks, but it really sounds like Josh screwed his investors and employees here.
> I wanted them to at least get their money back, but ultimately, for the $4m purchase price to work, we’d need to ask them to walk on their [$800,000] investment.
He clearly didn't want it very badly, then. Nearly $3 million wasn't enough? That's about $420k per year for the time he put in, not counting anything he already took out. Keeping the extra money only increases that to about $530k/yr.
And it sounds like the early employees get nothing, other than not getting fired immediately.
I like the Baremetrics product but man this really leaves a bad taste in my mouth about Josh personally.
You're making a veritable crap-ton of assumptions here. Happy to talk about specific concerns, but not if you're going in to this with guns blazing looking for a witch to burn.
I'm curious how it works from a technical standpoint. If they invest, do they not own shares of the company, and then during the sale the shares are sold, did they just gift the shares back to you personally? Does that have tax implications?
Investment vehicle was a SAFE. They basically cancelled the SAFE as part of the deal. We've had carryover losses for years, so from a tax perspective, there was no hit on either side.
Wouldn't this count as a liquidation event and thus give them the right to purchase shares at the price that the buyer is purchasing them at?
Depends on whether it was a stock sale or an asset sale.
Makes sense, thanks!
Now that you mention it, you're right, maybe some of that extra $300k went to the employees? I don't know because I wasn't in the room. I'm curious how much money employees got, and why $3.7 million was enough when $2.9 wasn't.
That entire $300k went to employees.
As for $3.7 vs $2.9...that was basically the number that, to oversimplify, would roughly give the outcome I wanted for "retirement" when it comes to investment interest over the next 50 years.
Basically, it's the number I felt comfortable with to not instantly feel like I needed to get back to work in a few years.
He worked out a win-win deal that gives them publicity and him $4M. In gaming terms, I believe this play is known as a QUAD KILL.
So what did employees get?
Salaries? https://baremetrics.com/blog/why-we-spent-250000
> We aren’t spending Silicon Valley-amounts on salaries, but we’re certainly not on the low end. From the perspective wanting my team to love where they work and not have to worry about money, I’m very happy with the salaries everyone gets.
For a few years before I sold my small (UK) company, our employment contracts had a bonus clause in. It guaranteed a bonus payout from a pool of 5% of any future sale, based on a multiple of years service (up to 5) and salary at the time of sale.
We sold for a similar sum and the bonuses were pretty small by SV standards - a bit more than £20,000 for a few, down to a few £00 for people who had just joined (maybe 50% annual salary for a few).
Me & my partner had a fishy earnout clause over 12 months, but I got us pleasantly fired after 3. Half the staff got made redundant after 6, which I don't believe was a surprise to any of them. Nobody buys a business for its cosy culture, or sells one expecting it to stay.
I think it's right for founders to be up-front about the likelihood and consequences of an exit, which is why we put it in our employment contract. But IMO more than 10% would be very generous for these ordinary private buyouts at 4-5× profit - no rocket ship valuations. At least that's clearer and more certain (and less tax efficient) than the kinds of games people play with options & rounds of funding.
UK tech companies, salaries & employee expectations are a whole different world from what's discussed here. Maybe Baremetrics was closer to that world than SV.
(In another life I wish I'd looked into what our old customers Torchbox did last year which is form an employee-owned trust and sell to that - https://torchbox.com/blog/not-selling-up/ )
Depends on the employees and when they joined and if they exercised stock options or not. Big range from a few thousand to over $80,000.
Did you also take a salary during these years?
$80k for how many years of work? Unless it’s one, I’m with the parent. I’m sure it’s all legal and ‘equitable’ according to the terms, but that’s peanuts of a return for somewhere between 4 and 7 years of work (based off a typical vesting schedule).
No, it's an $80k bonus on top of the salaries they got for X years of work, and they're all still employed as well.
We don’t currently know what their salaries are, but it’s pretty common for startup salaries to be 50-60% of normal salaries. The rest is typically LLC stock grants. It’s done this way with the promise of “when we sell” those stock holders will make bank. $80k isn’t ‘bank’. Especially if Baremetrics was following the startup-standard salaries.
Anyone taking a startup job on a 50-60% of a normal salary without several percent of the shares is doing themselves a massive disfavour.
Most of my startup jobs have paid market rate. The shares and options have compensated for the risk, not a lower salary.
I'm sure some accept lower salaries, and certainly the salaries won't be comparable with the very top end of the market, but most people don't work in the top end of the market.
A startup that tried talking me into a massive cut without offering me basically founder-level share amounts would be an instant red flag.
All indications are that they were operating on a profit basis, not a growth basis, so I think it's a poor assumption that anybody was being paid a half-salary. As the post states, they're keeping their same compensation going forward, and all are choosing to stay, suggesting it's very satisfactory, and has been all along.
> All indications are that they were operating on a profit basis, not a growth basis
From the founder himself:
> We've had carryover losses for years, so from a tax perspective, there was no hit on either side.
I realize that tax losses can differ from cash losses, but are you so sure about that?
I mean, that's somewhat my point? They were not pursuing rapid growth. From the post:
We’re also a company that has purposefully operated right around breakeven for years. So, unless you’re a “strategic acquistion” that throws acquistion multiples out the window, a slow-growth software company without lots of profits and a product that’s technically quite complex is ultimately just not going to get a huge multiple.
It's peanuts, but it's also REALITY. Few people get big windfalls working for startups as employees or even founders, but maybe you get a little bonus on top of your salary if there's an exit.
Few employees may get a windfall in reality, but it doesn’t make it easier to see (nor does it justify the founder’s choices).
Those employees are just as responsible for the company’s success as the founder is; it sucks to see them get shafted while the founder walks away with “fuck you” money.
Agreed, which is why it's good that this stuff is being shared. It's a datapoint to consider for those of us as we make career choices. But let's face it, if we are not founders, then we are just "the help".
And without “the help”, most founders (OP included) won’t make it to the sale. You can’t scale without “the help”. You can’t grow your market without “the help”.
To badly paraphrase someone: “The idea isn’t what’s valuable, the implementation is.” That implementation is probably >90% thanks to “the help”.
There's a sense of entitlement here that's not sitting well with me. Don't get me wrong, I think employees of a "startup" deserve to get some sort of payout during a liquidation event, but I think that payout should be directly proportional to how much risk was assumed.
Did they take a full standard salary? (Doesn't have to be SV 100k+ salaries, but standard for whatever is paid in their area). Did they do more than just code? etc etc
By your logic, the butcher who worked for market wages in a meat processing company should get a big pay day because Nestle decided to buy them.
The point is not that founders don't take on more risk than employees. It's that that software engineers fresh out of college are not good at evaluating risk adjusted returns. If they were, they'd realize that the current market rate for joining a startup is a bad deal, thereby forcing startups to up their equity compensation. Many a starry eyed new grad has been lured by tales of riches from a startup founder / snake oil salesman.
There's a vast difference between a butcher in a meat processing facility and a trained professional software developer who is responsible for creating/supporting/etc your software.
As for entitlement, what entitles a founder to get ~50x the payout of their employees? Especially when they're also taking a SV level salary (not living in SV) and spending VC money.
If you don't like it, become a founder yourself. For better or worse, the reality is that maybe 5% of developers out there have the stamina, the ingenuity, and the risk tolerance to build a business. Speaking anonymously, as a person who started a business ~12 years ago that employs 17 people. The stuff you have to deal with non stop as a founder who is developing product, working on HR, working on code, working on infrastructure, working on the career growth of your employees, all the while also engineering a business that can in theory run itself without continuous micro-management, is insane. Not a single one of our employees, even our high producing hustlers, do half what my founder and I do on a weekly basis. You have to be a master of everything, because the moment you aren't the lead expert in the room, someone gets you off the rails. Running a small software based business producing a customer facing product is insane.
Add to it the last four years of "culture" growth leading all west coast tech workers to demand you add 10% overhead to your business to advance diversity, equity, and inclusivity, which in reality is just advocation for the right kind of politics to be brought into company culture, and you get a crazy stressful soup for any founder.
I actually very specifically chose the butcher example, and no there isn't. At the end of the day, a butcher, like a software developer can be trained to be good. Initially a butcher would ruin meat and cut into profits by incorrectly making cuts. Over time the butcher can and will get better. Far fewer mistakes towards the end of the career. Same with software engineers. After a point this comparison breaks down, but at least up to here it's comparable. Self taught or not, many educators have proven that good engineering can be taught and practiced. Over time everyone gets better if they care enough. Not everyone can be Donald Knuth, but no one's looking for Donald. Most start up founders just want competent engineers.
Moving on to your second point about entitlement. Of course the founder is entitled to 50x the payout. You seem to be severely discounting risk. Did you see this founder's list of other failures?[1] They can pay themselves whatever they feel is right. They took the risk, failed multiple times, and finally got lucky. Of course they can reward themselves how they see fit. There are so many founders who never see the reward and end up with worse careers because they only kept founding companies rather than choosing a "stable" career. To me it seems like, in your view, the guy who didn't take the risk founding companies and got to join a "sure" job by joining a rapidly growing startup gets to be rewarded comparably to the guy who started something, working, spending years not sure where it was going to go. Why would anyone take the risk of starting a company? I'd rather join a fast growing startup if my reward is quite comparable to the founder's. Low risk, high reward.
If Google can reward a cook, why can't a meat processing plant reward a butcher? Masters at their craft deserve to be rewarded when businessmen rely upon them to succeed.
Google can reward employees because they make monster profits.
If you can, you should get a job at Google and get a great salary (which is still a tiny sliver of Google's monster profits).
If you can't then you have to settle for lower paying job at a company that doesn't have monster profits like Google and therefore cannot pay you outsized salary.
Employees don't "deserve" anything other than the market salary.
It goes both ways. Employers don't "deserve" Google-level programmers for half the salary that Google is willing to pay. And I'm sure they would love to get great talent at reduced prices just like you would love to get great salary regardless of your talent and contribution to the business.
The market salary happens when both parties work to advance their self interest. "deserving" has nothing to do with it.
It's all good until founders understand that "we are just the help". They are the ones with the most risk, and they cannot simply walk away to a new job if they don't like how things are going. But a lot of founders put too much weight on early employees, require working as much as the founder, or require to take responsibility in things that far outreach what they were accepting to when signing a contract.
> They are the ones with the most risk, and they cannot simply walk away to a new job if they don't like how things are going
If a founder is spending VC money and paying themselves a SV grade salary, I would have trouble calling that a significant amount of risk.
The founder walked away with the ability to buy one nice house or two crummy ones in Silicon Valley outright. The outrage!
None of his employees were there that long from what I can tell. The initial employees got laid off I think 4 years ago and were probably there 1-3 years (who knows if any bought out their equity). Current employees were there 1-3 years. Only two current engineers from what I can tell. It also depends on how much salary they were paid as many people will take cash over equity.
I assume they also got paid in that time? You're making it sound like they've made a big sacrifice to (only) receive $80K at the end.
Most startup employees don't even get 80K. My last "exit" as an early employee was barely 20K. I doubt my current startup will be any better. I look at this as a "bonus" and not anything that was expected. The average startup employee will be lucky to get non-zero.
If you want "returns", you're better off getting a stable, higher paying job and investing the excess in public markets. You have diversification and liquidity.
So was the founder. SV level salary, per their words.
And, as I've said elsewhere, startup salaries are rarely on par with the industry average. Working at a startup is typically sold as "you'll be paid less, but if we sell you'll get a payout to make up for it".
It is pretty simple though, either they negotiated some stock based component to their compensation when they started and would be getting payout, or they didn't and they have been fully compensated by their salary.
Are you sure that Baremetrics employees were sold that? If not then what is your issue?
I got an incredible place to work for over 5 years, for an amazing company, and an even more amazing boss. I got paid well for it, and I also got a nice payout when the company sold. Don't worry about the employees :)
I didn't see this in time to make a difference by replying, but this crosses into personal attack in a way that's not cool with the site rules: https://news.ycombinator.com/newsguidelines.html.
If you wanted to say how it seemed to you and raise the questions you felt were unanswered, that's of course fine. But jumping to psychological interpretation and personal denunciation based on a handful of beans in a blog post is not the kind of magic beanstalk we want here.
Not making any other assumptions here, but I think this is a great example of something that's become more and more obvious to HNers over the past few years: from a financial perspective, if you have an opportunity to join a FAANG vs a startup, it pretty much almost always makes financial sense (usually much more sense) to join the FAANG. And since it usually makes a LOT more financial sense, it can often make a lot of the other points moot as well, because you could save so much more working at a FAANG that you could afford to take time off to do whatever you want, or retire early.
I mean, in this example Baremetrics actually had a pretty good outcome, better than most, and the employee's basically got very, very little for their overall equity. Even the founder probably got less than a mid/senior level FAANG employee would get (and the FAANG employee had no risk).
Of course, not everyone can get an offer at a FAANG, but again, if you could get an offer, startups basically never make sense anymore. You almost always will get more even if the startup hits, which is rare.
> Of course, not everyone can get an offer at a FAANG
Note that this is true for many reasons, not all of which are related to technical ability. Not everyone should try to get a FAANG job, either.
Factors candidates may consider:
* how much time they want to spend interviewing/prepping
* what their previous experience has been
* where they went to school
* where they are willing to live
* what type of work they like to do
* what type of organizations they enjoy being part of (largeco, smallco)
* how much control they want over their work
* what kind of impact they want to have
* how much they want to learn (and what type of knowledge--general vs specific)
In addition to salary, all of these play a role in determining whether a startup, small biz, other software company or FAANG make sense for an individual.
But I'm making the argument that most of the bullet points in your list make no sense to consider because the remuneration at FAANGs is usually so much more, and that money would then give you the freedom to do what you want.
I mean "how much time they want to spend interviewing/prepping"?? If a FAANG will average 2-3x payout, it would be insane not to be willing to prep for literally months if that made the difference between getting a job and not.
Is someone making 450k in SV (renting a home, commuting hours each way, having to fly to see family) really living a better life than someone making 150k in, say Birmingham? Where they could work from home, live close to family, have a bike commute?
It's not for me (or you) to decide for others, however :) . I just think there are many more dimensions than raw salary to consider. You could work like a dog for 5 years at a FAANG, make a ton of money, and die just after you retire. It's all weighing the risks and rewards and there isn't a formula for that.
BTW yes, 2-3 months of free time to prep may not be worth it given:
* one will miss/sacrifice other aspects of life
* one may not get the job. Nothing's guaranteed, after all
* the job may not be right even if they get it
>commuting hours each way
At that salary you're looking at probably a 15 minute commute. By bike even if your office isn't in SF itself or you don't mind the hills. It's the startup employees in the bay area that don't have the money to live closer or have their own places.
>You could work like a dog for 5 years at a FAANG
From what I've found, startups and non-tech companies work you a lot more than FAANG especially if you're not looking for fast promotion in FAANG.
Somebody who makes $450k can easily buy a home in the Bay Area that’s close to any FAANG campus, and bike to work, and in many cases, not work like a dog.
(A $1.5M mortgage is around $6k per month today.)
And at the end of the year, even if what’s left over in terms of percentage of income is the same (and it’s usually not, because many COL expenses don’t scale linearly with the cost of housing), you end up with more in the bank to send your kid to college or to retire.
>> Is someone making 450k in SV (renting a home, commuting hours each way, having to fly to see family) really living a better life than someone making 150k in, say Birmingham? Where they could work from home, live close to family, have a bike commute?
You are presenting a theoretical ideal that is probably close to unattainable.
- how many tech startups are in Birmingham?
- how many VCs would be OK funding a startup in Birmingham? I know we're in COVID era now, but how long before VCs again start telling you to move to SF/SV (or perhaps NY)
- how many 150k salaried tech startup jobs are in Birmingham? I'd estimate in the single digits, probably zero.
I won't weigh in on your "is it better" question, but if you make 450k a year in the Bay Area you definitely do not need to commute hours each way and you can probably afford to buy a home if you want.
That REALLY depends on the details of the hypothetical persons situation.
EDIT: looks like copy/paste deleted some of the post, adding back:
$450k is likely $200k base, $40k bonus and $210k RSU (source levels.FYI). Most lenders won’t touch RSUs unless you had 2+ years at the same income level and even then they don’t like it. So taking 45% DTI (debt to income) ratio of base + bonus nets $9000 payment (principle + interest + taxes + insurance) and translates into $2mil purchase price assuming the hypothetical person also has $400k downpayment and reserves. That price point gets something like this:
https://www.redfin.com/CA/Mountain-View/2507-Alvin-St-94043/...? (3/1.5 1500 sqft 5800 sqft lot)
Let’s say RSUs take care of savings/extras.
Schools don’t look great for this house. This is where commute comes into play - you can trade long commute for more house and better schools.
Unfortunately, the geographical reality of Bay Area mean that there isn’t a lot of middle ground between short commute/lots of cost/other trade-offs or very long commute, but better everything else.
FWIW, if you scroll down you'll see the median price in that neighborhood is $1.5MM, which'll bring it down to about a $6K house payment. Easily doable at your salary estimates unless the buyer has a crippling candle addiction, and there's lots of wiggle room for location between $1.5-2MM if the buyer wants schools or anything more than proximity to work.
That median includes condos, which won’t be doable for families.
If you want a house, median is above $2M: https://sanjoserealestatelosgatoshomes.com/mountain-view-ca-...
Another thing to consider is that housing stock in Mountain View is very old on average, so the $2M price point doesn’t get you a mansion, but rather a very modest house (especially when considering that we are talking about TWO MILLION DOLLARS after all)
Fair point! I've never seriously considered living in the bay area so I don't know the full cost of living. Appreciate the context.
you probably aren't making 150k in Birmingham, at least most people are not (even skilled programmers)
Most people aren't making 450k in SV either.
Money isn't everything. I've turned down interview opportunities at both Facebook and Google because the roles on offer were not roles I was interested in doing. In the past I've broken off Google's interview process because the glacial pace they were moving at just was not worth it to me.
I earn well, so granted I'm not turning down as much as some would, but to drag out a tired old saying, I work to live, I don't live to work. I have plenty of things I want to do - some of them I can do in the right job, many I can't.
Of course one of the luxuries of already earning well is that the multiple of my current salary it'd take to convince me to take a job I don't actively love the sound of is far higher that it otherwise would be.
I think the parent was mostly aimed at "how much time they want to spend interviewing", which is an outlier on that list. It's trivial relative to the others.
My point is that there are many reasons why someone may not see a job at one of these companies as all that interesting, and if you don't see the job as all that interesting, then the time it takes to go through interviews suddenly is a big deal.
I think it always makes sense to consider everything, even if you're not gonna weigh your considerations equally because you might discover something that renders the offer unacceptable to you. If you're really just after high payouts and nothing else, was going into IT even the best choice to begin with?
> If you're really just after high payouts and nothing else, was going into IT even the best choice to begin with?
I don't know many other professions where high salaries are pretty much a given, without cutthroat competition among your peers?
You can get high payouts building a company, becoming a top lawyer or medical professional, but the investment in time, effort, and money is much higher, and the chances of success are lower.
Are you comparing average doctors or lawyers to the highest-paid and most career-motivated and personal-life-sacrificing programmers? Because other professions can be strategic too. E.g. the median income for patent lawyers or many medical specialties blows IT away. And those professional credentials are still valuable when you're 50 or 60, while your hot programming skills from your school days will have become an outsourced commodity that hiring managers deem worthless.
With a decent tech income for Canada (i.e. cheap for Bay Area standards), I can live well, achieve financial independence before 45 and work for a great company with inspiring coworkers.
Could I speed this up by another 5-10 years by moving to California to help monopolists serve ads, suppress competition and lure users into walled gardens? Sure I could. And what's wrong with stoking the world's most overpriced und undersupplied real estate market with another willful participant in the process.
That said, "insane" strikes me as an extreme choice of words for someone forgoing this golden opportunity.
I think it really depends on where in FAANG, or even in the same company.
My experience in the one of them has been the opposite of what some of the bullet points implies, or at least in a 'positive' direction.
where they went to school
I know for a while the rumors were basically that if you hadn't gone to a place like Stanford, you weren't getting a job, at least at Google (Maybe Facebook too?)
Is this still the case? (Was it ever the case, or were things a more flexible?)
It's absolutely not true, these companies have tens of thousands of developers, there aren't enough graduates from top universities for that to be the bar. That was maybe the case 15 years ago.
If you’re a new college grad, it’s definitely easier coming from those schools. It’s also almost impossible to get a FTE job after college without interning, and they recruit heavily from the top schools.
If you have experience already, where you went to school gets dramatically less important the more experience you have. I went to a decent (but definitely not top tier) state school and have 15 years experience, had no trouble getting interviews at FAANG companies and passed interviews at a few.
My experience (went to a small liberal school that nobody recruits at) is that it makes things easier for your first job, but doesn't matter at all after that. Even then, grads from my college end up at Google/Apple/Facebook pretty regularly.
This is at all relevant only for getting into the interview process, which is something that is largely handled by recruiting. Once a candidate makes it to a phone screen with someone like me, where they went to school has no bearing on whether they move forward in the process.
"where they are willing to live" is key. 400-500k a year still isn't enough for me to want to raise a family in SF.
I think there’s a sweet spot in well-funded Series A companies. You get the benefit of a small team and large impact inside the org which feels nice to a certain kind of person. The company is big and mature enough that you get decent impact on the world as well. Also great for many people
And most importantly, the company can afford to pay well. Not quite FAANG level, but plenty for you to reasonably plan to retire (in a FIRE way) at 50 instead of 65.
And heck if it does hit, you’re early enough for a nice cushy bonus.
edit: yes the difference in comp is easily 100k+, but making 180k+ cash to not be a small cog in a gigantic machine, to me, doesn’t sound that bad
The cash difference (RSUs are cash) between startups and FAANG is something like $200k+/year if you're moderately senior. That goes up if you're lucky or good enough to get promoted further within FAANG. Startups tend to cap compensation for ICs pretty heavily. That's a lot of money to give up.
Not even close to FAANG level compensation in my experience. I’m just a moderately experienced backend/infra person and VC backed startups would straight up tell me they can’t compete when I told them what FAANGs had offered. We’re talking well over 100k difference in TC, and a significant difference in cash, and that’s not even accounting for liquidity.
It's not just startups. The reality is that (as a developer or certain other types of positions) if you can get a job at one of these companies and are OK with working for them, especially in SV, no one else outside of maybe finance for certain skills is going to seriously salary match. Some people are less concerned about the money but many are indeed focused on maximizing their comp.
A startup makes sense if you are looking to do something different or to expand you skillset. Working at a major corporation can feel stifling over time. The important thing to understand that there is almost 0% chance that your "1-4%" ownership will ever be more than 6 figures.
Agreed, but that's why my argument is that if you have the chance to work at a FAANG, work there first, then you can easily afford to take time off and do whatever you want after a few years.
And that is if you even have 1-4%. It is common to get 5,000 or 10,000 or some other amount of options/shares while having now access to the cap table -- you know the numerator but not the denominator and no details on preference.
The only realistic value to assign is zero.
Almost a 0% chance it will be worth anything more than $0 and, maybe, a good story.
This is a commonly repeated trope, I guess it's to inoculate people from being "suckered in", but it hasn't been true from what I've seen, having lots of friends involved startups. Even "failing" startups frequently get acquihired for non-trivial amounts per person, and since the point of that is to get the people, those amounts typically go to retaining the people. And many of the people I've known have done really well by employee equity, a couple with multiple 7 figure payoffs, some with instant retirement amounts, a couple with serious maybe-I-buy-a-jet megawealth.
It's not guaranteed like a FAANG salary (which actually isn't completely, the past few years have seen great stock appreciation), usually it takes a few rolls of the dice, but it's just not accurate to describe it as a definite 0. Startup selection ability pays a serious role here, I've seen people whose picks I shake my head at consistently, and some people who can home in on successful ones like heatseeking missiles. If you're the type to take the story of a business person about lofty valuations and prospects at face value, though, you're probably going to have a bad time and end up bitter and talking about how bad a deal startups are on the internet.
Selecting at random, i'd disagree with you. Selecting with loaded dice sounds intriguing. Can you please share some high level selection criteria to evaluate potential startup employers? The only one i follow is repeat-founder-previous-exit.
Like investing in companies, its not a list of hard and fast criteria. You have to ask yourself if you could reasonably see this company being huge ($10B+) - do they have a great product? Does this have an aha! feel like Stripe and Dropbox did at their public launches? Do the founders really understand their market well? What are the risks - is this a hardware startup in a totally new market? Is the market saturated? How do people feel about the existing products? And do the founders respect you enough to share cap table/preference overhang, the percentage your equity stake represents, and growth metrics? Also, value your equity stake at the current valuation, not a future one - the current valuation already has the expected future growth priced in. What is that equity grant worth per year that it vests? Do you need a larger grant to make it worth the salary disparity vs your other offers?
But basically, you really need to do your homework and treat it like you’re making an investment.
Thanks for the detail.
For everyone else, the last point is CRUCIAL
> treat it like you’re making an investment
Remember, if you are giving up a market total-comp package (e.g., 200 or 300k+) for a below-market startup package -- you are literally investing the difference. Treat the difference as an investment.
Also keep in mind, unlike public stock or real estate investments this major, you also often have no visibility into financials -- discount for that.
You also cant sell when you may need to -- discount for that also.
Unlike a property or stocks, you dont get interim dividends/yield -- discount for that also.
You may also be forced to invest heavily or forgo stock if you leave the company -- discount for that.
You may have different goals than the investors or owners of the company. Maybe you are happy to sell if that means you get 5M, but the investors are looking to add a "Unicorn" to their resume. They are willing to risk your 5M for that, and you don't get a say.
I did the math one time, many years ago when I was working for a London based startup. They offered me a small portion of equity with vesting to offset the lower salary.
If the company sold for $10 million, I would have ended up with about one years worth of the lower end salary...which was about 1/2 of what I could make from an average offer in rural parts of the US.
Ten years later, the company finally sold.
Are you counting the FAANG stock performance of the last few years as part of that "no risk" alternative? Because that's hindsight. Stock is always a risk (apart from same-day sales, which only net a small percentage and may be blacked out).
And you're kinda simultaneously arguing it's a good outcome and a bad one, in both cases the reason is the founder owned most of it. The net is that it's a mediocre outcome, just that in this case one guy did ok. If you can get nine other people to contribute towards building up your side project to sell for an average market price of the technology and business, you can get more, sure. But it's not "successful startup" more.
> Even the founder probably got less than a mid/senior level FAANG employee would get (and the FAANG employee had no risk)
Not really... he's been working on the startup for 7 years. Let's assume he had an average salary of 150K during those years. Plus he got $3.7M on the acquisition (it's not clear from his post if that's what he takes home or if it's pre-tax). That's 4.75M.
Now let's assume a senior engineer in FAANG with a an average salary of $350K for 7 years. That's 2.45M. That's a very rough comparison and not taking into account taxes (the FAANG engineer is likely to pay more money in taxes overall).
But the bigger difference is how he spent those 7 years. He spent it building and managing his own company with all the freedom in the world. Compare that to a senior engineer in FAANG...
Update: someone in the comments mentioned he'll likely not need to pay any federal tax on the acquisition money. That makes a huge difference and the take home gap is much larger than my initial estimate.
All the freedom in the world, and all the responsibility in the world too. The constant pressure to make the correct decisions for over 7 years would definitely be worth a 2x multiplier at least right?
It's definitely worth the multiplier. But that's not the right question imo. The question is if his well being was affected by that responsibility. From his post I didn't get the impression he was under a lot of pressure (unlike a senior FAANG engineer...). He worked hard of course but that doesn't mean he suffered. He just lost interest.
I'm not saying running a company is not stressful. Of course it is. Even is it's yours and no one can fire you. But it's very different when you're the one who is making the decisions and not depending on other people and politics.
Very much disagree just because, FAANG or not, working for a large corporation is not for everyone. That said, I would never work under a solo founder for the reasons exemplified by this outcome.
I don't even like VCs and I feel like what was pulled here was pretty galling. How does someone rationalize calling up an early investor and telling them to eat their investment because...more money for me?
> Of course, not everyone can get an offer at a FAANG, but again, if you could get an offer, startups basically never make sense anymore. You almost always will get more even if the startup hits, which is rare.
Of course plenty of people prefer to work at startups because the environment is more fun and you have direct influence on what ships and often direct contact with customers.
Remember when Google suddenly gave an across-the-board 10% raise to every employee to try to stave off defections to startups? Sure, there are certain jobs that are fun (depending on your interests) and of course it's easy to find "phone it in" positions at FB and Google, but most of my friends avoid FAANG or are glad they left.
Once your comp hits $X there's more to life than money.
It was a 25% raise across the board. Some of that was converting potential bonus into salary, but still that was a good day.
not everyone works at a startup or small company to cash out someday. Lot of people just get a regular job at these companies just like they would at a large company. There is no expectation of any additional payout because they are employees who get decent salary, benefits and are happy to go home with a work life balance. If you want founder benefits, you have to be willing to work like a founder and most people don't want to do that contrary to what HN crowd may think or believe.
The federal reserve keeps statistics on this and I believe there is a business school professor at Harvard Biz that did a significant review: entrepreneurship on _average_ underperforms just taking a job. On net, mostly individuals lose money because like OP the outcome is mediocre to poor and very lengthy, even thought some do very very well.
Why are you making moral judgements on a business decision? The investors didn't HAVE to take a write down, they chose to. The early employees didn't HAVE to join this company, they chose to.
Why do you deem it immoral for a founder to do what is best for himself within the bounds of the agreements he has made?
This kind of calling-out is common in HN and quite distasteful. Comments like this all amount to saying "X is immoral because they refused to give a charitable donation to Y". Charity is not a moral requirement and arguably it's not even a moral good.
We all make moral judgements like this all the time, and it’s totally normal to do so. Morality isn’t defined by what is legally permissible; it’s possible to be simultaneously entirely compliant with your legal obligations, and an absolute raging arsehole who has acted in an immoral manner.
It's not that it's legally permissible, it's that it's within bounds of what all parties agreed to.
If I agree to sell you my car for $5,000 then you show up with the money and give it to me and take the car, I don't get to change my mind later and get mad that you didn't give me more and call you immoral.
For startup employees it's more like they agree to help fix a car you intend to sell in return for payment and a take in the profits of the sale.
A lot of startup exits seem to take the form of you then selling the car to someone for a break even amount, who just happens to also pay you individually an extra $5,000 on the side.
Is it a good deal for you? Yes. Is it a scummy move? Yes.
The reality is that many startup employees may have stacked Stanford STEM degrees yadda yadda yadda, but they can’t do basic math, don’t have a good intuitive grasp of probability, have outlandish expectations, and/or don’t ask clarifying questions about the cap table.
One of my startups sold for about $25-40MM depending on whether you count pre- or post-earnout. The typical engineer got maybe a quarter of a percent of options on common stock. You’d think that would net out to $62.5K but we had a messy cap table. Various investments’ preferred status ate deeply into what remained for common stockholders.
Even if there were no cap table issues, the engineers wouldn’t have been happy, because they hung their hopes and dreams on a multi-hundred-million dollar exit. We experienced 90%+ engineer turnover over the next six months. (We got by just fine.)
Rule of thumb: do not join a startup for the money.
Agreed on not joining a startup for the money. Although it seems like a lot of damage has been done in setting a cultural expectation that joining a startup early will see you become a multi-millionaire, to the benefit of startups everywhere I suppose.
Correct me if I'm wrong here, but isn't another major issue faced by early employees that the math might look good when they join the company, but further rounds dilute their stake so much that it becomes meaningless?
Savvy investors include non-dilutive clauses when they know money needs to be raised, but good luck trying to negotiate this as an employee. It’s also not too bad if the dilution occurs at increasingly higher share valuations and help compound growth (see TSLA).
Yes, though the expression “an up round is an up round” has a lot of truth to it. Dilution is important if you care about control, but as long as the stock is worth more on a per-share basis, you’re doing better.
The problem is when people anchor their calculations about their future lottery winnings to the current float.
I try to tamp down expectations when I’m hiring by trying to sketch out a wide range of plausible scenarios (basically the Drake Equation for startups) but I’m going to go out on a limb and guess that a lot of hiring managers and HR departments set new hires up for disappointment by not throwing cold water on their very optimistic math.
And startups should really be upfront about those cap table details with those employees, especially if there's >1x preference on some of the investment, or other unusual issues.
I don't get to change my mind later and get mad that you didn't give me more and call you immoral.
But on the other hand, if you’d agreed to sell me your car at a price under what you might be able to get elsewhere—maybe because I was financially struggling and you were doing me a friendly favour—you’d probably be pretty miffed if I won the lottery and still demanded you stick to your offer…
If I were miffed, I could rescind the offer or ask for more. Just like the investors could have demanded their money back if they wanted too.
They chose not to, which would seem to indicate they weren't miffed. Nobody forced them to do anything. It's not immoral to ask someone for an accommodation and accept it.
The investors didn't give him the money as a friendly favor to help him it out. It was an investment. Presumably they make a lot of them and understand the risks involved in doing so. If you're going to get hurt feelings whenever one of your investments doesn't pay off, you're not cut out to be an investor.
> Why are you making moral judgements on a business decision?
On what planet are "business decisions" not bound to moral judgements? That's one of the craziest things I've ever heard.
> "This kind of calling-out is common in HN and quite distasteful."
Frankly there's nothing distateful about recognising that in a hierarchical system such as a corporation those higher up the tree have a duty of responsibility to protect the interests of those below them.
Quite how modern capitalists have managed to convince people that this shouldn't be the case I'm not quite sure, but the results are hostile to a functioning society.
Arguably charity is the primary moral requirement.
Can you elaborate how charity is not a moral good?
In this case, charity would distort incentives by softening the outcome of bad decision-making.
Each of those employees signed up for a salary and equity.
That equity turned out to be of very little value to them in the end, probably less than they were hoping for.
If they all got paid out anyway, they would not have learned that small equity stakes can turn out meaningless, and that exits are way less profitable for employees then founders.
Some of these employees might now go on to be founders because they learned the dangers of working hard on something in which there is no equity. In the end they might create something of massive value, which the world never would have had if they simply benefited from charity.
I think the lesson of this exit is also more valuable for all HN readers than it would've been if he had just paid out the employees, for the same reasons.
A counterexample I'd offer is that upon being treated charitably those employees could then be incentivised to use that windfall to pursue their own ideas, seeing the success of their founder benefactor and being empowered with a financial cushion they would not have otherwise had.
They might then go on to create something of massive value which the world never would have had if they simply did not have the financial means to do so.
Remembering the "charity" they received in helping build the business that enabled them to succeed as founders they then pass that same "charity" on to their own employees upon a successful exit, kickstarting a cycle of innovation that spreads much farther.
There's an argument that "that's not the way the world is" but the world is as compassionate or dispassionate as we make it. Personally I'd like to see it move towards a point where taking everything just because you can isn't viewed as acceptable.
> Personally I'd like to see it move towards a point where taking everything just because you can isn't viewed as acceptable.
It's not clear to me what you're actually suggesting.
You think that when someone takes more than they need, they deserve to be shamed? How do you determine how much one can take?
We all want the world to be more loving and compassionate, but rules and financial incentives drive productivity in our economy. If the financial incentive to start a company is reduced, there will necessarily be a cost to innovation.
Imo, the goal should be creating a system where the rules are fair and clearly outlined. The rules and incentives for employment were very clearly outlined in the employment contract these people signed. And, the founder does not seem to be the type of person who over-promises. So, I see nothing wrong here.
> You think that when someone takes more than they need, they deserve to be shamed? How do you determine how much one can take?
Shame is a pretty good motivator for encouraging people to behave in a manner deemed appropriate by society. I don't think there's an easy or definite answer for how much is appropriate. I guess the question I'd ask in return is: in the case of the woman caught on security footage dumping a whole bucket of Halloween candy into her plastic bag. Why is it that we find it appropriate to shame her and not a founder/ceo who does effectively the same thing? Why can we not apply these same rules of decency to business?
> If the financial incentive to start a company is reduced, there will necessarily be a cost to innovation.
I don't think this is necessarily true. By spreading the fruits of successful innovation more broadly you put the people who enabled that innovation in a position to use that experience to innovate further.
I'd argue that model where innovation centers around founders aiming to hit unicorn status and then retire with 'fuck you' money limits it in the sense that those once you've earned your 'fuck you' money you aren't really incentivised to innovate any further.
> The rules and incentives for employment were very clearly outlined in the employment contract these people signed.
I'm questioning whether they were fair, not in this specific case, but I'm asking more generally is our approach to employment as a society reasonable and fair.
> Why is it that we find it appropriate to shame her and not a founder/ceo who does effectively the same thing?
In the case of Halloween candy, the owner of the candy is offering each person up to a few pieces of candy for free. If you take more than a few pieces, you are stealing from the candy owner. Stealing is bad because we believe in the right to private property. Stealing is, in fact, illegal. Of course, our legal system isn't set up to enforce punishment for small actions, so shame is a useful alternative form of punishment.
> Why can we not apply these same rules of decency to business?
In the case of employment, each employee is offering the business owner his/her time in exchange for a salary and equity. The expectations are crystal clear to both parties. When the business owner sells the company, taking his fair share of the purchase price (as determined by his equity stake) is NOT stealing. Nor, is it breaking any norms or expectations.
> By spreading the fruits of successful innovation more broadly you put the people who enabled that innovation in a position to use that experience to innovate further
I actually agree with this specific point for an isolated case. That is, in isolation, spreading the purchase price for a huge acquisition evenly across the employee base would probably lead to greater innovation.
However, this only makes sense in isolation. If you make it common practice to share acquisition price more evenly among employees, you destroy the financial incentive that drives much of entrepreneurship.
Startups are very risky, and without a huge payout for success at the end, the expected values just don't work out anymore. Smart engineers will be much better off applying for a traditional FANG job. In fact, this is already the case! What you're proposing would just make the math even worse. Remember, for every success case like this, there are 4 or more founders who failed. There better be a sweet reward at the end of the tunnel to keep them motivated to keep trying!
Furthermore, for small acquisitions like this, even if you were to split his 3.7M payday across his 20 employees, each person gets $18.5K. Hardly an amount that would spur innovation.
I'm not suggesting that acquisitions should necessarily be shared precisely evenly. I don't even think Josh necessarily earned an outsized return in this case. I do think that the current disparity in compensation that we're seeing is potentially dangerous to a healthy society. We're already seeing a move towards a rentier approach to the economy, where individuals can't afford to own property or other essentials. A major force driving this is inequality, those with the means have so much capital under their control that they can afford to outbid those that have a need for those resources.
> In the case of employment, each employee is offering the business owner his/her time in exchange for a salary and equity. The expectations are crystal clear to both parties. When the business owner sells the company, taking his fair share of the purchase price (as determined by his equity stake) is NOT stealing. Nor, is it breaking any norms or expectations.
I don't think it necessarily is crystal clear. A big part of the sales pitch to employees for many startups is that your.5% will be worth X when they reach Y valuation. This isn't too bad in itself, but when it turns out that the founders can issue new/preferred stock the incentives from an employees point of view become severely misaligned.
> Furthermore, for small acquisitions like this, even if you were to split his 3.7M payday across his 20 employees, each person gets $18.5K. Hardly an amount that would spur innovation.
I agree it that it doesn't look great for smaller acquisitions. Although there are some interesting (in my opinion) alternatives to selling to private equity. In my city for example, the founders of a print shop sold the company to the existing workers. The money was paid out over a few years from the company's revenue and they sat on the board to offer some advice on the transition. It seems like a more ethical alternative in that the workers are rewarded for their part in building the company, and the new owners are less likely to asset strip and gouge existing customers to recoup their investment. It has the added bonus of not adding to the concentration of capital in a small number of holders.
We're broaching many new ideas now, many of which I agree with. I agree that employers have an obligation to communicate in crystal clear terms what equity in the company means. I also agree wealth inequality endangers the stability of our society, and some form of wealth re-distribution makes sense. I also agree that worker cooperatives can make sense in some situations, though rarely.
I don't agree that employees deserve to be rewarded for their part in building the company above and beyond their cash and equity compensation.
> Personally I'd like to see it move towards a point where taking everything just because you can isn't viewed as acceptable.
I still am unsure what you're actually proposing we do.
I initially thought you were proposing we shame Josh for taking more than he needs. I strongly disagree with this principle for aforementioned reasons. To put it another way, Josh isn't taking "everything just because he can". He's taking what he owns, rightfully deserves, and worked and risked 7 long, hard years for.
This comment should be seen as unrelated to the Baremetrics case (because I don't know the employees' POV).
I think I understand your reasoning but I don't agree with it. It implies that workers don't already know they're in a much worse position compared to founders/business owners when it comes to acquisitions. Generally it suggests that workers "learn" through pain until they become founders. Which might apply to some people but certainly isn't the case for everyone, let alone a good reason to treat your workers badly. I much more agree with the sibling comment by Jochim.
The founder couldn’t have done anything without his employees. And yet he takes $3.7M, leaving almost nothing for his employees. It certainly sounds like the employees got royally fucked and he got the lion’s share of the payout.
Based on the numbers employees got 7.5% of the payout. There seems to be 5 current employees on LinkedIn and possibly some earlier employees who bought out their equity. That seems roughly a standard equity split for employees which just goes to show you how depressingly low the standard equity grants are for employees. As people say, don't join a startup to get rich unless you're the founder.
Which is true, but so is my phrase of "If you want to go broke, found a startup". It cuts very deep on the south side often for founders - whereas employees do get a paycheck. Founders will go YEARS often with little to no income.
I don't disagree however the paycheck for engineering employees is often a lot less than one could get from established companies. Every startup I've talked to sold equity as a large part of the total compensation and argued it makes up for the cash difference.
So you're being asked to give up $100-200k/year worth of salary by joining a startup which isn't trivial. For a tiny fraction of equity with multiple restrictions (10 year expiration, 90 day window to exercise on leaving, can't sell it, etc.).
Wholly agree in most cases the trade is not worth the equity
> And it sounds like the early employees get nothing, other than not getting fired immediately.
Why early employees should get anything from an acquisition ? If they don't have stocks, they shouldn't, that's how it works, a company belongs to its shareholders, not its employees.
Did the early employees expect a big payout? Not everyone takes equity when they start a company. If they do not have equity, then they did not get screwed.
I'm not the most financially savvy person. And I am not an attentive follower of Baremetrics. But wouldn't the investors have been getting dividend returns quarterly all along since their investment was made?
A) dividends require positive cash flow or positive profits, which might have not happened here. B) some preferred equity investors do just that. It’s a bit rarer but you can see a PIK 8% piece of pref with 4% current cash pay and a 4% accruing liability.
VC startups don’t generally pay dividends due to the cost of capital requiring reinvestment of profits (if any) to make the growth targets work.
The fact that people on hacker news are angry about this cracks me up. The vast majority of folks here really are the crotchety programmers.
Yes, a founder gets compensated significantly more than early employees. Massive shocker. If those early employees were talented enough, they’d be founders getting compensated.
I don’t know when this dramatic shift happened to Americans to believe building a successful company is mostly luck, but it’s depressing.
Shame on you, HN.
That rests on the perverse assumption that founders are the most talented and deserving individuals in the universe, and everyone one else should be happy to uncomplainingly serve the interests of these fabulous ubermensch.
To say that’s a naive and inaccurate view of the world would be an understatement.
No, it doesn’t. It simply means if nobody founds it there is no company in the first place.
Whoever wants to do the first 3-6 months (or 3-6 years) without a paycheck while figuring out the problem, solution and funding gets to be the founder.
If employees were lowballed underpaid, screwed out of vested shares etc that’s different but of course the person that decides to make the company owns most of it and gets the biggest payout when it sells.
No, it rests on the realistic assumption that there are a million engineers you can hire to be "early employees", and only a handful of Josh Porters with the talent to build something great and the risk tolerance to execute on it.
The market doesn't care about your fragile ego or low self-esteem.
No, it says that those that take the biggest risks get the biggest outcomes. Being an early employee of a startup doesn't give you the "right" to a big payout any more than being an founder of a startup gives you a right to inexpensive labor.
Or, you know, negotiate higher equity and stop bitching and moralizing when your payout isn’t high enough.
> Or, you know, negotiate higher equity and stop bitching and moralizing when your payout isn’t high enough.
Seriously, what is your point here, besides acting like a jerk? I mean, I totally agree with you, but that's why I think this thread is important. It should be a lesson to potential startup employees about how extremely lopsided the risk/return considerations are, that most equity deals are complete shit at startups, and that you should usually demand more equity if you have any negotiating power.
Indeed, the purpose of threads like this should be to convince startup employees as a whole that they're getting screwed on equity so they should demand more.
I didn't think it was a jerk comment at all.
Your point is 100% right though. Early startup employees rarely understand the risk/reward. Surely none of the 10 employees at a 7 year old software company doing 1.6M a year thought they were on a rocketship.
This thread has nothing to do with a level headed discussion on the "fairness" of equity (which doesn't even make sense). I was responding to a comment calling Josh a dick for finally getting paid for a company he built that adds value to thousands of customer's lives, instead of giving it to highly replaceable early engineers.
Average software engineer gets compensated with 6 figure income for 7 years leading to a $70k cash payout. What a jerk that Josh is.
Rise, proletariat, rise.
So one is supposed to negotiate for higher equity but at the same time those who have gone through it aren't supposed to discuss their experience and payout?
I suspect you're also one of those people who says employees should just have negotiated better salaries but also fires them for discussing salaries.
I respectfully very much disagree. Even Sam Altman has been arguing that founders should give more equity to startups, mainly because employees who are usually sold on "equity dreams" are all coming to realize those equity dreams are peanuts.
>I don’t know when this dramatic shift happened to Americans to believe building a successful company is mostly luck, but it’s depressing.
Because it's true? Studies (Gompers, et. al. (2009)) indicate that a second time entrepreneur has a 30% chance of success versus a 20% for a first time one. So there's some skill in it but it mostly comes down to luck.
edit: And if you're arguing skill then clearly the skill of the early employees matter tremendously and not just the skill of the founder. So why do you think it's wrong for those employees to get more stake?
Per your data they do 50% better the second time.
That clearly shows a vast improvement in skill. A luck doesn't improve over time. If it was "mostly" luck they would get roughly the same outcomes the second time.
The fact that that’s your conclusion based on that “study” is exactly why success is easy for some of us
Anyone who believes startup outcomes are mostly luck doesn’t have what it takes to be a successful founder—you need to have the belief that you can shape the outcome. The idea that we reduce outcomes to two buckets, success and failure and then flip a coin is reductive and belies the decisions and effort that lead every human endeavor to its own unique outcome. Keep in mind corporate projects fail all the time too, we just don’t talk in these terms because people’s salaries and jobs aren’t on the line. Of course luck matters tremendously in terms of riding a series of waves to make a billion dollar company, but it was paved with hard and deliberate work every step of the way. The founders could have reacted and changed direction completely at any stage along the way, therefore these fixed percentage figures are meaningless. How hard did each of those founders work? How many pivots? What type of businesses? What skill sets did they bring?
And to your last point, who is saying it’s wrong for employees to get more stake? Of course it’s not wrong, but as an employee you have to negotiate that. People can’t just magically get what they feel they deserve because it would add up to way over 100%. Remember, the company exists because of the founder, doesn’t matter how much you think you contribute, because at the end of the day the company does not exist without them. If you can convince them to give you more then you should, and if you can’t you are free to start your own company. I do not see what is so unfair about this situation and I say that as instrumental #1 employee who got less than 1% for a 9-year effort building a moderately successful company. You don’t get what you deserve in life, you get what you negotiate.
>Anyone who believes startup outcomes are mostly luck doesn’t have what it takes to be a successful founder—you need to have the belief that you can shape the outcome.
The two aren't mutually exclusive.
Startup outcomes are mostly luck, led by people who (have to?) believe that they aren't.
Sorry, what exactly about Baremetrics is luck?
You people seem to fixate on the Facebooks of the world instead of the other 99% of businesses built on blood, sweat and tears.
Probably because most of this website sits behind a desk writing software thinking it gets sold because of magical fairies and luck, not 10000 agonizing cold calls.
> You don’t get what you deserve in life, you get what you negotiate.
And negotiation require knowledge. This thread is about being told to not discuss that knowledge publicly and to not acknowledge the real life implications of certain equity splits.
As I said in another comment, this is like saying employees should have negotiated better salaries and then firing them for discussing salaries.
Wait, so your investors lose money, your employees (probably just a few) got at most $80k, and you get to retire? I mean, congrats on the hustle, but I wouldn’t waste your time trying to make it look good for everyone else.
Please review the site guidelines and stick to the rules when posting to HN. Note this one:
Have curious conversation; don't cross-examine.
We detached this subthread from https://news.ycombinator.com/item?id=25045906.
The employees got paid the wage they agreed on, too. How much more of the sale do you think they should have been given?
It seems very strange to me that their investors went "you know what.. its only money.. we'll take a loss so you can retire." Was there some caveat that prevented them from taking their share?
A VC leaving money on the table out of the goodness of their hearts just seems inexplicable.
If it don't make dollars it don't make sense.
The founder usually carries the majority of the risk as well.
You people really don’t understand the concept of risk do you
From what I've seen here in the past, this is true. The weak, oft-repeated argument is that employees also assume risk and yada, yada, yada, while completely ignoring the fact that the risk assumed by employees statistically insignificant when compared to the risk assumed by founders.
Extremely gross that he pocketed $3.7m but asked his investors to walk away from their $800K, because he needed to meet his financial "goals."
This is the flipside of all of the VC deals that completely fuck over the founders.
Do you imagine the VCs had to sell all their clothes and are now walking around wearing barrels held up by leather straps, before they retire for the evening to a cardboard box over a steam vent? You really think they had to cut back their Dom Perignon budget over this loss? Do you think they were "strongarmed" by this investor?
There is what is for them a teeny tiny pie, and rather than demanding their small slice back they said "you know what? Go ahead without us. Bon Appetit :)"
If I stole your TV you likely wouldn’t be moving into a cardboard box either. Does that make it ok?
If you borrowed my TV and later I said "you can keep it" that would make it OK, yes.
Wow, that's some brazen humble brag from someone who cheerfully announced how his envestors got screwed.
And employees
indeed, yes.
If you think a startup can "screw" a VC/investor when it's selling for only a 2.6x multiple... You are incorrect.
Maybe I'm hopelessly naive here, but $4M cash @ 2.65 ARR, so ~$1.5M ARR. Isn't that a bit low for SaaS at 7 years? Then there is the mention of running at breakeven most of that time. There are solo founder SaaS businesses making more than that with 80%+ margins. As others have mentioned, you'd be better off working at a FAANG.
So, did something go wrong here? What is it about this analytics business that makes it so expensive to operate? Were all the employees necessary? Was the pricing or marketing wrong? Or is this just the reality of most SaaS?
I gotta say, this really puts a damper on what I always thought was a fairly lucrative business model, if you could make it past the early bootstrap/product-market-fit period.
>~$1.5M ARR. Isn't that a bit low for SaaS at 7 years?
The median and modal ARR for SaaS businesses 7 years after founding is zero.
Across all businesses across all industries in North America a reasonable guess (with a wide confidence argument) would be 1x revenue as a baseline valuation.
Of course. The vast majority of all businesses fail. That's not what I'm asking. No one gets into business to just breakeven after 7 years. Most people are looking at this as a success story when it just seems like Xenon and their other investor that took a loss were doing them a favor.
>What I walk away with: $3,700,000 in cash
>practically speaking, never need to work again
Yikes, does someone want to tell him?
A $3.7M windfall is enough for most Americans to never work again.
Assuming he keeps ~$3M after taxes and can earn a conservative return of 4%/yr in investments, that's $120k/yr just from his investments. Many Americans live on far less. Also, he lives in Alabama, where cost of living is quite low.
It’s highly likely he gets to keep all or most of the $3.7M under the Qualified Small Business Stock (QSBS) tax exemption.
Exactly. He will only pay state tax in Alabama on the capital gain. I think it's in the range of 3% to 4%, but I might be mistaken.
For reference, in California it is ~10%.
Let’s say you work for a respectable $80k/year (more than enough to live comfortably in most of the world). If you get the job at 25 and retire at 65, that’s $3.2m.
So yes, he can retire for life.
> Yikes, does someone want to tell him?
Someone should tell you that $85k/yr NET is top earnings in some parts of the country.
Average household income in my state is $50k/yr.
In most places of the world 20% of that are enough never needing to work again.
I'm with OP - $3.7M seems like a lot, but it really isn't enough to retire on. I assume he'll need to pay taxes on that, a 20% long-term capital gains tax. Brings it down to about $3M. Being generous and giving him 3.5% return (real return) a year in fixed income, that's only $105,000 a year in income, which he'll need to pay taxes on as well. He'll net out around $85k a year.
$85k a year is surely enough to live off without working?
I'm in the UK, if I could earn a guaranteed £40k a year without working I'd be set for life and would have a pretty great life! That's would give me close to twice the national average salary.
£80k a year would put you into the tiny percent of top earners.
I agree it is plenty but remembering it is a household income I suspect, so yes is a very nice life, without being silly.
Don’t forget in America he needs to spend $12k a year on health care. And that’s like a minimum, last time I checked Obamacare, those kind of plans had $8-10k max out of pocket too.
So even with health insurance deducted, that still works out, with current exchange rates, at £63k, which is quite a high income - 95th percentile in the UK income distribution after tax.
I dont know how to tell you this, but 99% of the world population (and I am pretty sure at least 85-90% of Americans) WONT retire with anything even close to $3.7 MM.
He’s NOT 85% of Americans, he’s a tech entrepreneur who is capable of building and selling businesses with 7 figure exits. Personally I wouldn’t want to retire on only $85k if I had that kind of potential. At that income you still need to budget for food and travel - I’d prefer a life where I can eat out when I want, hop a plane with my wife and go somewhere whenever I want. Retirement is about freedom!
The federal reserve and treasury publish these tables. You’re actually very close to the cuttofs IIRC so kudos to you on good intuition.
Even if he didn't earn any interest and never earned another penny, at an $85k/yr burn, that $3M will last 35 years. Seems alright?
What happens when he lives 36 years?
> Even if he didn't earn any interest
Hopefully he puts some of it in interest-earning stuff prior to that point.
That was more a rhetorical question. The real issue is you can’t predict how long you’ll live so it’s not correct to say “draw it all down evenly over X years”
It's probably a mistake to assume he'll never earn another penny in income outside this payment.
That’s what retirement means and it’s what he indicated in the story.
That's not necessarily what retirement means, and it's not what he indicated in the story.
> I don’t have any specific plans for what I’ll be doing next, other than not doing any kind of software for a while. I’m itching to create more tangible things, especially art and music, so I’ll likely put a lot of effort in to exploring those things more.
Nothing in there says the art/music can't make any money, nor does he rule out software again in the future. As he notes, "I absolutely love starting things..."
Retirement frequently means something different for a 30-something CEO who just exited ("I don't have to work") versus a 70-something year old ("I'm done working").
$85k budget a year without touching the $3m principal. I'd say he'd have a great chance of never needing to work again if he wishes, especially if he already has some retirement savings and/or assets such as housing.
He lives in Alabama
what, that's it's not enough? Sure if you plan on living in the Bay Area for the rest of your life but in most other places it's definitely true.
Invest in stocks that pay dividends. Get a 3-4% annual return. Move to Spain/Greece/Portugal. Enjoy life.
You seem pretty sure of yourself— you must know his existing savings and cost of living?
Tell him what?