Groupon Insiders Take $345 Million Off The Table In Latest Funding Round | Hacker News Reader

Groupon Insiders Take $345 Million Off The Table In Latest Funding Round

techcrunch.com

37 pointsabraham35 comments

This is the 2010 version of an IPO.

Thanks to government regulation, it's become so onerous to do an IPO to the public that the little man is effectively left out of these opportunities.

My guess is it won't be long until secondmarket comes under SEC regulation and catering to accredited investors won't be a shield anymore.

Interesting note in this article: $345 of the $500 million in funding will go to "executive officers, directors, or promoters." This somewhat contradicts what I read yesterday from P Morgan Brown (via The Atlantic Tech) [1]:

"What Groupon is doing is something that no other tech company has done in recent memory--made a real run at securing a big chunk of the SMB market...[T]o put that organization in place is going to take a ton of cash."

Groupon might be after SMBs, but what kind of sales team can they purchase with $155 million? (Serious question, not rhetorical).

[1] http://www.theatlantic.com/technology/archive/2010/12/what-g...

It's $950m, not $500m. So they have $600m left to go hire a commissioned sales force.

Yeah, I slipped up numbers since TC says they've raised $500m so far. I'm very interested in how they're going to spend the other $600m.

Yet another case where there is a liquidity event for the capitalists but not for the programmers. The promise of "generous equity" as a part of the compensation package remains a raw deal for non-founders.

"generous equity" as a part of the compensation package

I see this in job postings occasionally, and it always strikes me as the Lady Protesting Too Much.

Just tell me an order of magnitude of percentage ownership, and I'll be the judge of whether or not it's generous. I have yet to experience anything but the latter, which isn't surprising if the entire employee option pool is 10% by itself and the founders take no dilution from new hires.

The most interesting part of this story to me is that Jason Fried is on the board of Groupon.

and if he wasn't already, he's now stinking rich

I discovered that yesterday. It's been over a year (announcement: http://www.groupon.com/blog/cities/jason-fried-joins-the-gro...) and it wasn't a secret, but I was surprised that I hadn't heard about it when it happened.

It does seem to clash with what 37signals discusses all the time regarding VC funding. I know that their main point is to fight the default mindset of going first to investors to fund you discovering what to really build, but nevertheless, a huge funding round whose main objective is to have some insiders cash out doesn't fit Jason Fried's perceived philosophy. (granted, DHH might be the more vocal of the two about it)

It might clash with his philosophy buy really, in Groupon's position, what else can you do?

In my opinion, this is a perfect example of what's currently very broken with the VC/funding model. Groupon is wildly successful, wildly profitable, and yet it's investor can't get paid anything without the whole company having to do this weird funding rigamarole.

In the old days they would have just gone public and everybody would be happy. But with the latest regulations nobody wants to do that anymore. And they don't want to sell their company, for good reason. So they're stuck.

What there really needs to be is some accepted, pre-defined method for investors to profit from a successful company's cash receipts. That would simplify this whole process, but I don't know how feasible that is.

What regulations are keeping companies from going public? I ask out of ignorance.

SOX http://en.wikipedia.org/wiki/Sarbanes%E2%80%93Oxley_Act

It's not keeping companies from going public as much as being a big enough pain and expense to make methods like Groupon's more desirable.

Can someone please summarise SOX in layman's terms?

In very layman's terms (best I can do right now):

1. Going public now requires months and months more of extra accounting due dilligence, audits, etc. that will cost millions upon millions of dollars.

2. Now that you're a public company most of the executives and especially the CFO are severely, criminally liable for any accounting fraud that happens in the organization regardless of whether they knew anything about it.

SOX was a reaction (over-reaction) to the Enron and Worldcom disasters where accounting fraud took down huge public companies, destroyed thousands of jobs, and cost billions of dollars. And the executives just claimed they didn't know anything when they obviously did.

So now theres extra audits, execs are liable regardless, and nobody wants to go public anymore.

Sarbanes-Oxley is the biggest one by far. Practically single-handedly killed all IPOs in the United States.

Plus nobody wants to IPO in this economy anyway.

If they were to payout investors with their cash receipts, they would have LESS cash to actually reinvest and grow the business. For Groupon, given the amount of competition and the local focus of the business, this would hurt their competitive position significantly against any competitor who decided to reinvest all their cash and raise more money.

And if all the businesses work that way, why ever invest? Owning 10% of a company that pays no dividends and can't be sold is worthless unless you can find a sucker.

You gotta have some solution where investors have something of some actual value at some point or you're going to see investment go away once they all decide there's no upside.

No business grows forever - mature businesses should always pay dividends back to their shareholders, public or private.

True, certainly, but you can't expect people to invest and wait until the business is "mature" to collect anything in general. A business may take 10 years to mature or more, and it doesn't take much of a discount rate on your money 10 years from now to make the investment very unattractive under any realistic risk model.

There is a way: it's called dividends. The problem is that dividends are subject to double taxation: first at ~44% (Federal + CA) for the corporation, then at the dividends rate for the individual, which is currently at 24.3% (15% Fed + 9.3% CA).

Compare to a sale of stock, which is only taxed at 24.3%, and you can start to see some of the advantages.

Another advantage includes being able to capitalize on a multiple of your revenue/profit, instead of on a 1X every year, as well as continuing to put the company's revenue towards growth instead of cashing it all out.

I personally think dividends are a much more sane way to invest than stock price alone. It seems to me that AAPL or GOOG are "priced" by investors mostly based on archaic ties to dividend models when in fact, it's really just hoping that some sucker down the road will be willing to buy your shares at a higher price. Dividends would allow us to price stocks using metrics tied much closer to the underlying business rather than the perceptions of the business, which in my mind would increase the healthiness of investing overall.

I understand the voting/bankruptcy rights of stock, but for most retail investors, it seems to me that holding shares of Apple is really just a large Ponzi-scheme (this has probably been debated on here ad nauseum).

I agree that dividends are a healthier and saner way to earn money from investments. The problem is that as a little guy I have no control over whether some company makes a dividend distribution, or even whether they make a profit or not. I can control whether I buy that stock in the first place, and control whether and when I sell that stock. Therefore to make money in this latter scenario, the stock price must change (usually up, but if you're shorting, down can work too) in order for me to make a profit. Thus it's in my best interests for a stock's price to fluctuate, regardless of whether that fluctuation has any relationship to the fundamental health or profitability of the company. It's weird. It's dumb. But that's the way it is.

And that's just the incentive for the little guy who's an outside investor. Imagine now you're a big guy with a lot of financial clout, and inside connections, especially as far inside as being on the board or one of the executives. You not only are incented to cause distortions to the stock price, regardless of merit, but you also have greater power over the "upstream" numbers (how to define profit, when to book profits/costs, etc.) and over the media presence and general public's perception of the company. Greater potential upside plus greater power to manipulate, is a recipe for bad things.

I personally think "double taxation" does not exist.

Taxes/fees/whatever are taken out when money changes hands. Whether it moves from one individual to another, or between an individual and a company, or between two companies, etc. It doesn't matter. It's just "single" taxation. But there might be a series of them with N hops.

Consider this: consumer A pays out money to buy some good from company B. Out of that money, some is siphoned off in the form of sales taxes. The company gets the balance of that. Company pays some portion of their earnings in taxes. Company also pays some portion of their revenue to their employees. Out of the money paid by the company to their employee, some is taken out as tax. Employee gets the money. Out of that money, he uses some of it to buy some product. Out of that total purchase price he pays, some is taken out in sales taxes. And so on, and so on. Repeat with other sorts of transactions and money flows. Thus, there is no "double taxation" just taxation. If you argue there is double taxation, then, in reality, there is also triple taxation and quadruple taxation and infinity taxation.

Double taxation is code for "I just don't like that particular tax and want it reduced or eliminated". It is not a factually valid criticism in and of itself, by my reasoning.

agreed, but in no other case is an income tax levied twice on the same owners of capital...hence why people refer to it as double taxation.

interestingly, the total federal rate paid on dividends = 1-(.65*.85) = 44.75%. I wonder how this compares to the total individual income tax rate (including soc sec/medicare/etc) and at what points in the individual income tax schedule is one rate more favorable than the other.

37signals took money off the table w/ money from Bezos....exact same play

That's the least interesting part of the story.

Agreed. We can sit here and think about your personal investing decisions, or think about how Groupon will use this new funding to expand their business. The latter is relevant to aspiring entrepreneurs.

"Somebody also pocketed a $7.5 million “finder’s fee” for helping to put the deal together."

That's interesting and a lot of money. Is it common?

If the "finder" is an investment banker, this seems very low.

I've signed a finder's fee agreement before. All I would have had to do is send an email intro to someone who eventually invested. I believe it was for 10 or 15% of what would have been raised.

As a rule of thumb, investment banks will charge about 7% of the value of a stock issue for an IPO.

So, for comparison a ~$1B IPO (which this round was comparable too) would have earned a bank about $70M in fees. By that metric, only paying $7M in fees seems cheap. Even assuming the lawyers/diligence/audits/etc cost another $10M (and I suspect that's probably way too high), Groupon is still getting off pretty cheap.

You know investors have confidence in a company when they finance what basically amounts to a executive cash out round.

Investors had plenty of confidence in mortgage-backed securities, too.

I had to pinch and remind myself that very few Internet startups see money like that thrown around, but at the same time, it goes to show how rewarding success can be in this industry.

This is exciting!

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