Fell in a hole, got out.

I’m gonna write the wonky post of Medium’s turnaround. I’m not sure if a company is allowed to be this blunt about how bad things were. But it’s very much of the Medium ethos that if something interesting happened to you, then you should write it up and share it. So hopefully this will give some inside info about what happens to a startup in distress, and one way to approach a financial, brand, product, and community turnaround. I’ll throw in a full investor recap to round it out. To be clear to the Medium community: the cleanup is behind us and now we are onto being ambitiously good at serving readers and writers.

In 2022, Medium was losing $2.6M each month. We were also losing subscribers so you couldn’t even look at that spend as an investment in growth. Internally, we were kind of ashamed of the stories we were paying and promoting as winners on the platform. Our subscribers were less kind — calling out that we were swamped with get-rich-quick trash (and worse).

Then the startup ecosystem froze. There was no more investor money to shore up our dwindling bank account (not that we deserved investment). There was also no acquirer willing to take on a complicated, shrinking, expensive business. On the plus side, that made decision making easy: make Medium profitable or shut down.

There was even more woe than that, but there was also always a group of people who wanted to see Medium succeed. The shape of this story is what Kurt Vonnegut would call Man in Hole. We were doing well, we fell in a hole, we climbed out.

Doing well.

The doing well part came from the prior CEO,

. He founded this place, previously founded Blogger and Twitter, and now has retired to Chairman, majority shareholder, and prolific author of text messages to the current CEO.

Ev had two eras here. The first was the design era where the team reinvented what a writing platform could look like, both simplifying and beautifying every part of the experience. The second was the invention of a new business model, moving away from the toxic incentives of ads and instead offering a single bundled subscription that any writer could share in.

This business model is where we started sliding into a hole. It turns out that getting that business model right in a way that achieves our ambition for a better internet, serves readers, serves writers, works as a real business, and resists hustlers, spammers, and trolls is difficult.

Fell into a Goldilocks-style quality hole

I tagged in as the second CEO in July of 2022 with a twofold mandate: fix quality and fix the finances. As stated above, the finances were on fire. But so was the quality of the writing that we were paying and giving the strongest promotional push to.

By the time I took over, we’d been through Goldilocks-style quality failures. We’d failed in a too-expensive way and then failed in a too-cheap-but-we-still-paid-a-lot way. What we needed was to get clear on “just right.”

To be fair, Medium has had several high watermarks for quality content. The first, 2012–17, before we even had a subscription, was when Medium was a home for the purest and smartest writing on the internet — just people with important ideas and information to share. The second, 2017–21, was when we employed an armada of experienced media executives and editors who then went out and commissioned thousands of professionally crafted stories.

That high-end professional editorial group ended for both reasons of money and reasons of purpose. I was an active Medium user and publisher at the time and felt most strongly about purpose. At some level the strategic logic made sense: people will only pay for a subscription if it has the highest level of quality and so Medium should/could go purchase that type of quality by hiring professionals.

But as a community member, my experience was of outside professionals coming to compete with the personal writing that we (the original Medium community) were already publishing. The pros took the oxygen away from the amateurs, even though it’s us amateurs who are both the foundation of the platform and the ones most likely to be sitting on the most uniquely commercially viable personal experiences. Medium is best when it is giving voice to people who aren’t trying to be professional content creators and we think those voices (you) often have the most valuable stories to tell. The internet can’t just be for media pros, influencers, hustlers, and content creators. There also has to be a place, here, that understands the value of user-generated content, of people sharing their professional or academic work, of the lessons that come from living interesting lives and writing about it.

When I joined as CEO, I came to also feel strongly about the cost of this professional editorial period. Although that team built Medium’s membership to more than 760,000 paying members, it also lost a lot of money. A big part of my actual job here has been to dig us out of the debt from this period.

That editorial period was followed by a messy 18-month low watermark for quality. An investor,

, says, “You always find product market fit when your product is giving away money.”

We were giving away money, thinking it was an incentive for the people who’d always been on Medium. Unsurprisingly in hindsight, it attracted an entirely new crowd of writers with suss motivations.

By the middle of 2022, the readers were complaining that Medium was flooded with never ending get-rich-quick schemes and the founder (Ev) was complaining about clickbait and barely warmed over summaries of other people’s content. Here was a winning strategy from that time: find a Wikipedia article, put a viral headline on it, rewrite the content as breathlessly hyperbolic broetry, profit. You could make $20k on a story like that.

I agree with the Ev — the point of Medium is to be a mission-driven business. The mission is to deepen people’s understanding. Too much of the writing we were paying for was missing any underlying knowledge, i.e. it was off mission. It begged us to question why bother coming to work?

We’ve written about the quality improvements before. We introduced the Boost, which adds human expertise to our recommendation system. We changed our Partner Program incentives to reward thoughtful, informed writing. And we added Featuring, giving publications a direct lever to promote their own view of quality — on the idea that readers should have the final choice in who they trust.

None of us would say this was easy, or even that these systems are perfectly balanced right now. But the stories that win on Medium are night and day different, to the point where last year we credibly claimed to be working on a better internet that valued thoughtfulness and connection over misinformation and divisiveness. Nobody called us liars, which is one of many signs that we succeeded.

Falling into the hole cost a lot of money.

There were two groups of Medium people at the bottom of the hole, investors and employees. (Well, and readers, writers, and editors too!)

The investors were done with us, i.e. they weren’t interested in helping to climb out of the hole. That’s normal for them. They expect some investments to fail and when that happens they walk away. We were one of their fails.

The team, very impractically, wanted to climb out of the hole. I think there is something about the Medium ethos that motivates the staff here even when things are grim. And I’m not even done saying how grim.

Medium’s future depended on this team (and future team members) wanting to do years of work, but the decision making power and incentives were all weighted toward the investors who (reasonably) were done supporting us.

We owed those investors $37M for loans that were overdue. Folks, on paper that means we were insolvent.

The investors also held an additional $225M of liquidation preferences. This is the most common startup investment term and boils down to the investors get their investment money back before the employees see any return. In good times, with frothy startup valuations, this is totally fine.

But in bad times, with an on-paper insolvent company, it says to the staff that we might do years of work with 100% of the benefit going to now absent investors. This a no-go when it comes to employee morale.

Together, the loans and the liquidation preferences represent that falling into the hole cost us a lot of money. It gets a bit worse and I want to say that just for completeness.

Taking on this much investment led to a wild governance structure. You’d think that because I’m the CEO that I’m the boss. But for big decisions I need to get the approval of the investors and the details of approval at Medium meant getting the majority vote of five separate tranches of investors who, remember, had stopped paying attention to the company. Also, as is normal in venture capital funds after a certain time period, these investors were contemplating selling their holdings off to scrap collectors, which would mean we’d go from a governance by absent but predictable investors to a governance by unknown and unpredictable investors.

Oh, and just to make things extra complicated, we owned and ran three additional companies.

This is the bottom of the hole and the best advice I got at this point was not to be a hero. This came from one of our investors who rightfully called out that the psychology of entrepreneurs is that we think we can invent our way past any problem. But all of the above meant that any improbably inventive journey we could concoct would be fatally hampered by an inability to recruit or to make major decisions. Even a heroic level of execution could be kneecapped out of the blue by any of these investors.

The only way out of the hole was profit and restructuring.

We didn’t run out of money, sell the company off to private equity, or shut down in bankruptcy. Instead, Medium has been profitable since August ‘24.

We also renegotiated our loans, eliminated our liquidation preference, simplified our corporate governance structure down to one tranche of investor, sold off two of the acquired companies, and closed down a third.

Writing this all out feels like we did something extra hard. Because of the quality issues, it wasn’t just a matter of cutting costs because if that’s all we did we’d have a profitable business selling access to content that embarrassed us. That might look like business success, but we looked at it as a failure of mission and a way to waste our lives.

So we had to keep enough of a team to innovate on quality (noted above), but also we definitely needed to cut costs, figure out a way to grow, and renegotiate with the investors.

The team did great. I think I did ok too. I had 15 years of small-time CEO experience before Medium, but I’d always made it a point of professional pride to make the companies that I started profitable. I just think that’s what entrepreneurship is supposed to be about.

But I did have two superpowers. One is that running small businesses gave me a chance to see how every part of a company operates, often because I had to be the one doing it. Two, there really is no such thing as a social media platform having a bigger power user than I was with Medium. I had been a prolific user in every capacity, from hobby writer, to thought leader, to promoting a business, to daily newsletter writer, to building three of the biggest publications here. Nearly 2% of page views on Medium were going to my publications and writing.

Climbing toward profit

The investor restructuring required a bit of a sweet spot. The business had to look good enough to save, but not so good that there were other options.

So along with fixing our content quality, we set about trying to fix our finances first. This is the basic financial risk that everyone will understand. We were spending more money than we were earning. Every month our bank account balance got smaller and eventually we were going to run out of money, go bankrupt and shut down.

The gap we closed was a $2.6M loss in July of ’22 to a $7K profit in August of ’24. Since then, we’ve been consistently profitable. We’ve banked some of that profit for a rainy day, but generally are focused on investing it all back into making Medium better.

Conceptually (but not literally) we think of the details of the fiscal turnaround in thirds: more members, lower costs, fewer staff.

1. More members. Unsurprisingly, we’re most proud of this. We started out with a shrinking subscription. Did I mention that? When I said that quality was a mess, I also meant that members also hated it and were unsubscribing en mass. That’s not true anymore. By switching the quality bar here, we’ve proved that people will pay for thoughtful and informed writing. That’s a nice vote of confidence for a better internet.
2. Lower costs. This too gives us a sense of professional pride. Most of that was in our cloud costs, cutting them from $1.5M per month to $900k. That represents a lot of engineering optimization and discipline. The internal Medium mantra was around a ladder where each step represented $10k. We didn’t care if it came from growth or from cost savings and so we were happy to get a lot of both.
3. Fewer staff. These deserve to be talked about, but it is hard to do respectfully and I know that it is a very fraught topic. Medium used to be 250 people and is now 77. I don’t know the full history of the several rounds of staff reductions, but I did lead one of them. I’ll just say both that no decision maker here was ever cavalier about this and that these reductions are also the reality of a business that was not succeeding. Medium is a healthy business now at 77 people and would be bankrupt with 250.

In the cost savings, we also learned a painful lesson about office leases. It’s normal that leases last years longer than you want. But you don’t have a choice — sometimes if you want an office you need to sign a lease that lasts longer than you have money to stay in business. But in normal times, there is also a market for subleases, so if your business can’t support the lease anymore you can find a new tenant to replace you.

Well.

We were paying $145k per month for an 120-desk office in San Francisco that we stopped needing. Like a lot of companies during the pandemic, we went remote. Also like a lot of remote companies, our staff moved all over the country. So we didn’t need the office during the pandemic and we didn’t have enough bay area employees to need it after. We are committed to being a fully remote company now, so the whole idea of offices is permanently moot.

However, every other company also had this experience and so the sublease market went to zero. Our landlord was so difficult about renegotiating that we came to believe that they had pressure to lie to their own investors about utilizations rates in the building, counting us as utilizing a full floor just because we paid. But on a given day of this 7-floor office building with 800 or so desks, there were usually fewer than 20 butts-in-seats and none of those were ours. We tried every way to get out of this, even offering to pay full price on the remaining months just so that we could recoup some of the maintenance and cleaning fees. But the land lord refused for a long time and we think they did this because they needed paying tenants while they renegotiated their own relationships with their lenders. Once those negotiations were done, they allowed us to buy our way out of the lease and move out.

Getting out of the hole also meant doing a recap.

This is the renegotiating with investors part.

To be honest, I kind of loved working through this mess even though I don’t have any background in it. Medium attracts curious people, which I am, and this mess was one of those business situations that you might hear about theoretically but never learn the reality of.

An interesting wrinkle is that the frozen startup market actually worked in our favor. It meant that there were really only two options, shut down or try to operate the company at a profit. In a healthier market, the loan holders might have been able to force a sale. But in that frozen market, the Medium team really held the most power: give us an incentive to do the work or we walk and you’ll take a complete and total loss.

This sort of negotiation is called a recap in reference to the “cap table” that represents every investor’s ownership stake in the company. I started out very wary of the entire idea of recapping Medium because it’s just such a betrayal of my sense of business relationships. If you take someone’s money, then you have a duty to make them money in return.

So the mental shift, and I think probably all entrepreneurs would have to go through this, is to realize that sometimes there is no future for the company unless you clean up the cap table.

An investor friend,

, met with me the day before I started work here. He seemed genuinely enthusiastic about my plan for saving the company, but then raised the idea of the recap. It was the first time anyone had brought that up to me and I felt certain that I could never do something so violent to the prior shareholders. But he was brutally clear: any work I would do would come to nothing unless I eventually renegotiated with the investors. About a year later, I accepted that he was right.

That then left the how. Typically a recap happens under threat of death and it’s driven by an outside investor who is saving the company. All existing investors are offered a choice: either take the deal offered by the outside investor or the company will run out of money and die.

But we had no options for outside investors, both because the startup investor market was frozen and because we weren’t investible even in a good market because we didn’t have “venture scale” growth.

So I got to learn two other forms this “threat of death” could take. The first, fittingly, came from a post on Medium “Clean Up Your Own Shite First.”

The investor who wrote that,

, made the case that for relationship reasons with other investors, new investors don’t actually want to be the ones to force the recap. They’d rather you do it first and the way to do it is for management to threaten to quit.

An aside, this is a perfect example of what I meant by the commercial viability of amateur writing. This amateur writer sharing inside knowledge of their profession has been worth millions of dollars for everyone. If you are a paid writer on Medium today, then you can credit the entire portion of that payment to this post by Mark. UGC for the win!

I can’t quite convey to you how far out of my depth that management-walks strategy is. It’s beyond just that I’ve never seen a recap before. I’m just not that aggressive that I could imagine putting an ultimatum to investors over more than $200M worth of investor rights. And yet, the logic is clear and I did eventually accept that without the recap Medium would fail in the future and my work in between would be for naught.

So I started down that path of making the case that there was no incentive for the staff without the recap, but then realized that we had $37M in loans that were coming due to multiple investors. So that was an additional, and more clear, threat of death.

The case I made to the loan holders was to convert their loans into equity or management would walk, and then to create enough ownership for them by going to the rest of the investors with terms for a recap.

Essentially a recap comes with two things. Investors give up their special rights, like the the liquidation preference and the role in governance decisions. Plus they generally take a lot of dilution so that if they once owned 10% of the company they might only own 1% afterward. For this reason, recaps are sometimes called cram down rounds because the existing investor’s ownership gets crammed into a much smaller pool to make space for the go forward team and go forward investors.

The recap gets papered over as if it’s a new round of financing. But Medium had been through so many rounds, that we’d had rounds named Series XX and Series Z. So our lawyer called this one Series A prime, giving us a name that represented a clean start.

For the prior investors, there is a piece of the recap that helps to balance out fairness which is that they all get a right to participate in this new round. Although the terms of a recap are fairly aggressive, the participation right theoretically stops you from cramming the old investors down to zero. In our case, only 6 out of ~ 113 investors participated. I think that low participation is a clear signal that we weren’t offering unreasonable favorable-to-us terms.

Besides the negotiating of terms, there’s also a lot of relationship work to get a recap done: investors, prior staff, current staff.

The investors were actually pretty easy. I think that validates many of the truisms about startup investors. The better the investor (we had top names) the more reliable they are as partners. These investors are in the hits business, not the nickel and dime business. So they don’t try to squeeze a few nickels out of a deal like this. They are also in the relationship business and so they go out of their way not to be difficult because they don’t want a bad reputation with entrepreneurs. I never thought of myself as someone who would be a hype man for VCs, but after this experience I’ve had an easy time speaking highly of Ross @ XYZ, Mark @ Upfront, Greylock, Spark, A16Z.

One of the themes of all this is that old companies get written off. This turned out to also be true with many of the Medium alumni. I’m actually friends with a lot of them because I’ve rented office space in various Medium offices over the years. These old employees also see their equity crammed down so I called a few and made the case that their current equity was most plausibly worth nothing, that the recap could make it worth barely more than that, but that doing it would mean their work building Medium wouldn’t go to waste. For a few, I also made the case that if they really wanted valuable Medium equity they should come back to work here. If you work in startups and are in the equity isn’t worth the paper it’s printed on camp, then here you have a perfect case study of why that is often true. None of these alumni had any power to stop it — I was just calling out of a sense of obligation.

That leaves the current staff, some of whom have equity going back to the earliest days of the company. They all get crammed down too. I fretted over this for awhile, but the logic of a recap does eventually win out. In order to justify the recap, you have to make the case that you are clearing incentives for the go forward team. That means everyone’s past effort is getting crammed down and only go forward efforts are being rewarded. So we made new equity grants with new vesting, but didn’t do any grants replacing old equity. That includes me. It was also pretty straight forward to make the case that their prior equity was most plausibly worthless: expensive to exercise, hidden behind a massive liquidation preference, and attached to a company that couldn’t pay overdue loans. I keep using the word plausibly because we really don’t ever know what a company is worth until someone tries to buy all or part of it. But the current liquidation preference after the recap is less than the current annual revenue of the company and so we think that equity more plausibly has value now.

All of that represents that we are out of the hole. We have clean finances, profit, a product we are proud of, simple corporate structure. More and more I appreciate our lawyer calling out that we were making a fresh start.

Now we often remind ourselves that we did this work for a reason. I can’t say that there was any rational reason to do this work other than that I love reading and writing, fell in love years ago with this company because it also loved reading and writing, and now want to see what we can build on top of a solid foundation. I’m three years into being CEO here, but 13 years into being in love with Medium itself. So to me, regardless of the business impracticalities, saving the company has felt like time well spent.

Some Appendix-type items.

I’m just noting some things that didn’t quite fit into the story, which was already very long.

• To bridge the time between when we decided to do the recap and when we actually did the recap, we issued a Change in Control plan (CIC) to benefit the staff. This is like a contractual equivalent of equity, is a fairly rare vehicle, and I’m willing to share the docs we used with any entrepreneur who thinks they might need this vehicle. It ended up getting replaced by the recap, but filled a gap to make sure the staff here would benefit from their work if the recap failed.
• I completely left out the psychology of the team. That’s a big part of a turnaround because the starting point is a team that has been through a series of failures and it’s unclear why the new guy (me) isn’t just the next failure. I ended up relying on the “find your allies” advice from the book The First 90 Days and just the general theme that we needed to build confidence in the plan. I think I read that last part in an HBR article, but I can never figure out which one.
• There was also a $12M loan which wasn’t past due. This got converted into equity as part of the recap.
• There’s a lot of ego sometimes in startup valuations. Ours topped out at $600M and I have no ego about what our current valuation is. But I’m also not going to tell you because I don’t want that used as a point of comparison with other startups. We are profitable and they are not. That’s a comparison point that serves us better!