When your VC funded startup goes bust ?
May 11, 2016 3:09 PM Subscribe
I'm curious to hear stories of startup founders who, having received significant chunks of VC money, then find their startup has gone bust . How do they fare financially ?
I'm not in this situation. I will never be in this situation. I'm just curious.
It's fairly routine to hear stories that go like this "Foobar.com received $100M in VC funding when their mobile app to track shoelaces became the talk of the valley in 2014, since then sales have slowed and the company in now no more".
I often wonder how the original founders fare financially during the course of, say, five year arc from "sitting in a coffee shop thinking" to "a story in Forbes about the VC round" to "updating my linkedin profile".
They start off owning 100% of a company worth $1. They go through a phase of owning 5% of a company "worth" $100M. They end up owning 5% of a company worth ... less than a dollar.
At some point in this story do the founders get to siphon off a significant sum of money or do they end up broke (allowing for having paid themselves some sort of salary for five years) ? If so how ? Is it the sort of money that would make you think "Well I'm not Zuckerberg but I'm still better off than if I'd taken that permy job with Big Corp Inc"
I'm not in this situation. I will never be in this situation. I'm just curious.
It's fairly routine to hear stories that go like this "Foobar.com received $100M in VC funding when their mobile app to track shoelaces became the talk of the valley in 2014, since then sales have slowed and the company in now no more".
I often wonder how the original founders fare financially during the course of, say, five year arc from "sitting in a coffee shop thinking" to "a story in Forbes about the VC round" to "updating my linkedin profile".
They start off owning 100% of a company worth $1. They go through a phase of owning 5% of a company "worth" $100M. They end up owning 5% of a company worth ... less than a dollar.
At some point in this story do the founders get to siphon off a significant sum of money or do they end up broke (allowing for having paid themselves some sort of salary for five years) ? If so how ? Is it the sort of money that would make you think "Well I'm not Zuckerberg but I'm still better off than if I'd taken that permy job with Big Corp Inc"
The founders do not siphon off funds, no. On paper, the payout is when the company turns profitable; in reality the payout everyone is there for is going public.
So, when the gig goes bust, generally speaking they have 20% of $1 plus whatever they were able to save from 5 years of what is normally a very healthy salary. Which is about 20% of $1.
posted by DarlingBri at 3:32 PM on May 11, 2016 [2 favorites]
So, when the gig goes bust, generally speaking they have 20% of $1 plus whatever they were able to save from 5 years of what is normally a very healthy salary. Which is about 20% of $1.
posted by DarlingBri at 3:32 PM on May 11, 2016 [2 favorites]
A *very* healthy salary, in the case I was, um, privileged to watch first-hand. The rest of us had $100+/mo in parking fees, but the founder only had to come in to work one day in ten and was making probably five times what I did.
posted by restless_nomad at 3:37 PM on May 11, 2016 [2 favorites]
posted by restless_nomad at 3:37 PM on May 11, 2016 [2 favorites]
Anything left if not spent on things to make the business go may be due back to the VCs depending on signed agreements.
posted by tilde at 3:37 PM on May 11, 2016
posted by tilde at 3:37 PM on May 11, 2016
The founders do not siphon off funds, no.
This is not true at *all*. It's all too common for founders to take money off the table during funding rounds. E.g.
posted by asterix at 4:02 PM on May 11, 2016 [9 favorites]
This is not true at *all*. It's all too common for founders to take money off the table during funding rounds. E.g.
posted by asterix at 4:02 PM on May 11, 2016 [9 favorites]
On paper, the payout is when the company turns profitable; in reality the payout everyone is there for is going public.
The most common payout is getting acquired. Quicker than an IPO, doesnt require profitability and can even pay better than an IPO in the right situation. See What's App for example.
The problem is when the company gets acquired too cheap, which can lead to employees and even CEOs getting stiffed, as the VC's like to have preferred shares that get paid out first, letting them sometimes take all the acquisition cash.
So even if the company gets sold for millions, employees can still end up broke.
posted by w0mbat at 4:05 PM on May 11, 2016
The most common payout is getting acquired. Quicker than an IPO, doesnt require profitability and can even pay better than an IPO in the right situation. See What's App for example.
The problem is when the company gets acquired too cheap, which can lead to employees and even CEOs getting stiffed, as the VC's like to have preferred shares that get paid out first, letting them sometimes take all the acquisition cash.
So even if the company gets sold for millions, employees can still end up broke.
posted by w0mbat at 4:05 PM on May 11, 2016
"[A]ll too common" is more judgmental than I meant it. There are legitimate reasons to take money off the table; this post talks about some of them.
posted by asterix at 4:06 PM on May 11, 2016
posted by asterix at 4:06 PM on May 11, 2016
I thought that this little blog post explained some of the inherent issues pretty well, even though he's focusing specifically on cap tables.
posted by janey47 at 5:08 PM on May 11, 2016
posted by janey47 at 5:08 PM on May 11, 2016
If they get to that 100M through many rounds of funding it is likely that they have sold some of their holdings to investors, "taken money off the table" as asterix said.
In the more common case of raised maybe a couple of rounds and much less than 100M, they may not have much to show at all except a few years making below-market salary, but having raised multiple rounds of funding sets them up quite well to a) go to bat again if they want to, b) go work in a senior position at companies looking for innovative talent, c) go work for a VC until they're ready to start a new thing. So don't cry too many tears for them. Of course, in hard funding environments, this might all change.
posted by ch1x0r at 5:10 PM on May 11, 2016 [1 favorite]
In the more common case of raised maybe a couple of rounds and much less than 100M, they may not have much to show at all except a few years making below-market salary, but having raised multiple rounds of funding sets them up quite well to a) go to bat again if they want to, b) go work in a senior position at companies looking for innovative talent, c) go work for a VC until they're ready to start a new thing. So don't cry too many tears for them. Of course, in hard funding environments, this might all change.
posted by ch1x0r at 5:10 PM on May 11, 2016 [1 favorite]
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posted by southof40 at 3:12 PM on May 11, 2016