In the end it also means that their investors most likely lost their confidence in buffer, otherwise no investor would get out in a deal like that.
I have seen companies in the same position described by Joel in this post where they fired the CEO, installed a "seasoned team" to get the numbers up, and then sold the carcass to BigCorp as an acquihire bailout.
So with that experience of one of the other ways this story could play out, I found Joel's story one of "success" in terms of sticking with the plan as opposed to selling out. I certainly respect that and wish him continued success.
I can't imagine any employee joining this company from this point forward without demanding all-cash compensation. Management and the investors have effectively set the value of restricted shares at zero.
Investors are coming from a position of boom or bust to maximize that liquidity event because their success does not hinge solely on your company. If you are a founder, you are all in on it, and unless you are already independently wealthy, or come from money, you would/should most likely optimize for less risk with a healthy upside.
For most founders, making 5-10 million on a liquidity event is a life changing event. For most series a and beyond VCs, that's chump change and they will push to put it all on black and let it ride.
Buy this lottery ticket and you'll know if it's a winner in 6 years.
???
Just ask for cash!
I'm not going to exercise my options in that situation and you'd be crazy to pay taxes on this year after year.
Remember: to a first approximation virtually all startup equity from all startups is illiquid.
Not trying to sound smart but wouldn't a market with only one buyer mean they will pay the least possible amount?
I'm not trying to trash talk buffer. Just wanted to see if there's another angle to this.
We issue equity internally, not options. We hold right of first refusal and have independent appraisals of value of the business done, so when you leave, we have the right to purchase the equity back at the last appraised value of the company. Additionally, we also pay dividends (impacted by equity) and profit sharing (not impacted by equity but rather a percentage of salary) to our employees.
These things are what "lifestyle businesses" do, or what basically everyone outside of SV and indoctrinated MBA programs call... businesses.
Yes, this is exactly what we do with our equity and our employees.
It is ridiculous around Hacker News that this idea has been completely lost and almost everyone focuses on RSUs and unicorn valuations and longshots, rather than simply... I don't know, making a business that very calmly makes a few million dollars per year with double digit growth rather than insanity.
https://docs.google.com/spreadsheets/d/1l3bXAv8JE5RB9siMq36-...
Personally, I think the salaries are more than reasonable. A senior engineer with a $175k compensation seems fair enough.
It sounds like he just wants to turn it into a lifestyle business. Which is cool, they just need to be upfront about bonuses or profit sharing, and ditch equity.
Quick edit: I just re-read my previous comment and realized "cash only" wasn't the correct phrase to use. I meant it to include the other stuff I mentioned here (give employee some amount of cash) not just base salary.
The Buffer post is extraordinarily clear (almost numbingly so) about the mechanics of their Series A and why they needed to buy their way out of it. They had two structural problems:
(1) the terms of their A round included a strong incentive to liquidate the whole company early, in the form of a perpetual 9% annual interest payment due to the A round investors after 5 years.
(2) the terms of their A round forbade them from extending liquidity to other shareholders, including employee equity holders, without the approval of the A-round lead investor.
Unsurprisingly, Buffer's A-round investors needed to be talked into accepting the buyout, which they took at a substantial premium to their investment in the company.
I do not think the logic you're employing to value these shares is sound. Early exits are usually bad for employees (the lower the exit valuation, the less money is likely to trickle down to employees). Profitability gives Buffer lots of options to maximize returns to long-term shareholders, which is what employees are. To my eyes, Buffer's employee equity is more valuable given this information, not less.
They initially sold equity of the business, only incurring capital gains tax in their personal name. Now they buy back shares and destroy those shares, so their stake increases again. They bought back shares with taxed capital within the company, but without incurring dividend taxes.
Honestly, I'd sign with my blood if I could get my business to make £5M a year in profit and own nothing to VCs or banks.
VCs eventually need to post cash-on-cash returns to their LPs if they want to raise their next fund. It doesn't matter if they think the company can do another 10x or another 100x, eventually they just need to exit their positions and mark the book. Now granted maybe it's a sign that they don't think the business will do 10x in the next year, but that doesn't have much to do with the scale on which the business will ultimately succeed.
To me it sounds like he's trying to establish Buffer as a business, and not a startup. Let's make that distinction, and drop the "lifestyle" part.
And don't think for a second that your investors won't do whatever the heck they please once they have controlling interest, up to and including kicking you out of your own company if it serves them better.
Here is how I figured that. He had 45% of a company that was valued at $80 million in the buyback. That's $36 million. He paid back $3.3 million. That reduces the value of the company by $3.3 million and leaves his value untouched. So he now has 36/(80-3.3) = 0.46936... of the company, for around 47% < 50%.
kicking you out of their company