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Comment by moneywoes | Hacker News Reader

Roughly how much would the founders net

Hard to say from the outside. Most founding teams end up with around 20% of a company at IPO so you could use that as a reference point.

However, this company was a few stages before IPO so there could have been less dilution from investors - allowing the founders to get a bigger cut.

On the other hand, some investors have really aggressive terms that can screw founders in situations like this. For example, their contracts could stipulate that an investor gets the first $45m of any exit even if that investor only put $15m into the company.

My impression is that those kinds of preference terms have been unusual over the past decade in SV.

It's a private transaction, so it's unknown and unless it's leaked out we are unlikely to ever know. There was a startup I was co-founder of at one point, and seven years later (about the same age as Paperspace) we sold for a similar amount, and the net of my shares was a little over $100,000. The CEO got more, other early joiners less. And among my direct knowledge of individuals in the startup community, this is not an unusual case, but rather typical. Many times companies are sold but the money goes primarily to the venture capitalists. Even seed and early round investors can get minimal or no returns after later dilution after a sale.

The "20%" case is typically the best case that happens only in the 1/10,000 chance of extreme fast growth into a new behemoth, OR where the founders are already high net worth individuals or come from high net worth families, and can provide their own money in conjunction with VCs instead of relying on them for most capital.

Because this is all private and not discussed, we tend to only hear of the very exceptional cases, and ignore the vast majority of the non-lottery winners in the startup world.

If you want to share some more (approximate) numbers, I'm very curious. What equity percentage did you have at the start? And were your shares worth more at an earlier investment round than at the exit?

Starting equity was a little less than 10%. Valuations went up as several rounds were raised up to $30+m and share value went up until at one point it was north of $20m paper dollars. After market re-valuation an additional $60+m was raised and value went down a little but was still substantial. Then the IPO market all but disappeared. Final sale price was around $150m and common shareholders including myself initially received zero. Essentially the VCs converted their preferred to common and then voted to sell to a related party (another company the same VC firm had invested in).

According to a lawyer who setup our initial investments, this was actually illegal so common investors including myself sued, but was this bankrolled by one of the big early investors as it's incredibly expensive to try and do a shareholder lawsuit against a major VC firm and investment bank. It ended up being settled out of court and that's where my $100,000 came from. The CEO came out a little better, but people who sweated years (and I mean frequent all nighters, weekends, true dedication) ended up with even less than me. And the only reason we even received anything at all was because we had a HNWI common investor who also got screwed and backed the lawsuit, they ended up getting their money back and a small return on investment from what I remember of the settlement terms.

Just a word of caution to founders and early employees of startups to know what they are getting in to and the typical case of what happens (a small or non existent exit is the typical case in a tech startup), even when you see those big number raises and a big sale and you just assume that everyone is making bank.

Common getting zero makes sense if pref holders had liquidation multiples ("we get 3x our investment back first"), but not if they converted to common, unless their conversion to common had some weird mechanic attached to it that massively diluted the remaining common down to effectively zero % (which sounds sue-able). I'm really curious about the mechanics of how your common holding netted out to zero if prefs also converted to common?

Yes so what happened is they converted, then had majority common, then voted to recapitalize and sell, after which recapitalization they made out with a profit but common got nothing. The problem with this legally was they didn't have the right to convert without a common vote beforehand, essentially they did it in reverse order. Their leverage was the company was not cash flow positive (in no small part because of the massive management fees the VC loaded on as part of funding), and so needed funding to continue. They also offered the existing board members a $1m bonus as part of post-sale consulting (essentially a legal bribe) as part of agreeing to the sale. It's all not technically legal, but you know the golden rule, he who has the gold makes the rules.

Because of the settlement terms I'm not able to name the VC, but I can tell you this kind of behavior is by no means unique to this VC, in fact it's rather de rigueur for the VC and PE worlds. It's even defensible in a way, they owe fiduciary duty to their limited partners, NOT to the common shareholders of the company they invest in.

I currently advise startups seeking financing to either a) only go the VC route if you think you're in megagrowth into the next dropbox et. all or b) you have enough self/family wealth to take VC investment on favorable terms ala stripe.

Ah makes (mechanical) sense now. Thanks for the reply.

That's nuts. I'm thinking about selling my business but we'd probably only get $200k or so. I'm 50% owner, no VCs so I reckon I'd get the full 50% minus taxes but I'm also about 8 years in and haven't taken a penny out so $100k would make me real sad. Sorry dude.

That VC deserves to be named.

Name any of them, they all work this way, more or less. This is standard practice

agree

I recall this was one of the plots from the HBO show Silicon Valley

Thanks for providing insight to the process, very fascinating.

Hard to watch, not only because it rang so true, but also because I've known people personally who gave their all to the company and when it didn't work out in the end, commit suicide. It's a cautionary tale of putting your entire self concept into your startup / employer.

To calculate that you'd need to know what they raised at.

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