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Comment by mattmaroon | Hacker News Reader

Why does nobody mention the fact that it would be very unusual for VCs to allow a company to be acquired at a 2x return? I don't know what their pre-money was when they took that 4.25m, but even if they gave away half of the company, that's a post-money of 8.5m. No VC is going to approve a sale for less than 30m in that situation, and even that might be too low.

I don't have any inside knowledge of what went on there, but I can't imagine that selling for 20m was an option for the founders even if they had wanted to.

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VCs should allow a company to be acquired when they believe its value has peaked, not some preset ratio or return. A smart VC would sell at 80% return if he thought it was only down from there.

Well, it's fairly rare a VC invests in a company that early stage and thinks it's peaked a year later. I agree with you, but that doesn't happen.

There's certainly a psychological/selection bias aspect to it. If they bought in early they're more likely to have a rosy vision of the future prospects than your average spectator.

I'm getting more and more convinced that having to take VC is a competitive disadvantage. Granted, some types of startups have to have some kind of VC funding, but I'm planning to avoid it if at all possible.

Well it has advantages and disadvantages. You can get $5m from a VC round while only giving up the same amount of equity you would to take $0.5m from angels. At the same time, you drastically reduce your potential exits by limiting yourself to much higher dollar amounts.

You have to weigh the pros and cons and decide what's right for your situation.

A friend of mine couldn't sell to a great offer a few years ago because it was blocked by the VC and the company died a slow death.

I guess anything in life is a gamble and this is no different.

I can only imagine a VC would approve such a deal if it became obvious that a purchase by MS was the possible exit. Hopefully the Xobni guys have a plan though for what to do when the next version of Outlook will inevitably ship with a similar feature.

They have balls. I know them well enough to say they had long term aspirations long before Microsft came a knockin. They're in no worse shape now than they were before that. In fact, it's much better.

Honestly, I am not a MS hater. Really.

But Outlook is not going to ship similar features.

Outlook SEARCH does not work right. It is broken, go try it.

How many years has it been since Lookout?

BTW, I am a full time Visual Studio user, not a hater.

Well, hopefully the VC's don't have majority control of the xobini board after one round of funding. If your VC's don't want you to sell early, they don't have the power to stop you unless they have this power written into the terms of your funding agreement. I've heard of VC's trying to get a liquidation preference with a 2X or 3X cap, which would effectively deter founders from taking quick exits, but I haven't heard of them getting flat-out veto power. So I imagine that the Xobini founders certainly did have this option. Why else would they have wasted time negotiating and signing a letter of intent to sell?

You can have control of the board, but veto rights on acquisitions is a very standard provision in the Investors Rights Agreement for institutional rounds. I'd be shocked to hear of a series A financing without that provision - that would be truly unusual.

You're wrong. They don't need majority control of the board to veto a merger or acquisition. Most funding rounds give the investors preferred shares. An acquisition would have to be approved by the majority of preferred stock and the overall majority.

I'm of course not privy to Xobni's investment terms, but I'm sure it includes that. They get that sort of veto power in >99% of funding rounds.

You're probably right. Also, I would imagine that if you take 5mm in funding from major VCs that you don't plan on a quick & cheap exit.

Would a VC pass on 2x even if they knew it was the sweetest the deal would be?

What if its the best possible exit?

Do you think the VC's are valuing xobni higher than $20m even in the face of Microsoft inevitably copying all of their features?

I suppose a VC would not pass on 2x if they knew they were peaking there. At the same point, if a VC funds a company, and nothing catastrophic happens in one year, they're not selling at 2x. To do so would invalidate their original judgment.

I'm sure it occurred to Vinod Khosla and the guys at Xobni that Microsoft might one day implement their functionality. It's too obvious not to have.

I sort of did: http://news.ycombinator.com/item?id=118759

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