Wizards of the Coast, Equity Distributions: Part 1(peteradkison.com)
peteradkison.com
Wizards of the Coast, Equity Distributions: Part 1
http://www.peteradkison.com/blog-entry-2-wizards-of-the-coast-equity-distributions-part-1/
5 comments
FWIW, TechStars was great about this. David Cohen and Andy Sack gave fantastic advice to our round (Seattle '12). I've been doing this for awhile, have read the relevant books and heard a lot second-hand from people who've raised a lot of money, but having mentors give great guidance around this from personal and networked experience was leaps and bounds better.
One would hope that investors, on dealing with unsophisticated entrepreneurs, would tell them "Hey, it seems like you don't know the ropes of this yet, let me explain it to you" but the overwhelming number of anecdotes where I hear that have that sentence followed by advice so bad it shocks the conscience.
Most people know that when they deal with savvier and more experienced people in the upper class, they're at serious risk (okay, high probability) of getting an unfair deal, but their model of "unfair" is 60/40 or 70/30, which most people can accept in the course of getting their vision off the ground. See also: http://en.wikipedia.org/wiki/Ultimatum_game
In practice, it's often more like 95/5 or even 99/1. The people who know the game and have the power take almost all of it, and leave just enough to keep people motivated to produce.
Most people know that when they deal with savvier and more experienced people in the upper class, they're at serious risk (okay, high probability) of getting an unfair deal, but their model of "unfair" is 60/40 or 70/30, which most people can accept in the course of getting their vision off the ground. See also: http://en.wikipedia.org/wiki/Ultimatum_game
In practice, it's often more like 95/5 or even 99/1. The people who know the game and have the power take almost all of it, and leave just enough to keep people motivated to produce.
Can someone explain to me how this is even possible? I mean, when a corporation is created, before it takes any investment, someone has to own it, right? How is it possible for the founders to not start out owning 100%?
It's more clear if you read his follow-up to the post. (http://www.peteradkison.com/blog-entry-3-wizards-of-the-coas... <-- highly recommended)
What probably happened is that they (on the basis of really, really, REALLY bad advice) started with something like 1,000 shares of the company, valued at $0.50 apiece. They did genuinely own 100% at that time. Then as they raised the 300k they issued additional shares, at valuations between $0.50 and $4, diluting the founders horribly, because the founders did not award themselves new shares.
The fundamental problem here is grossly misvaluing the company (i.e. the total value of 100% of the shares) at the time new shares were issued. For example, if you had hypothetically bought them a drafting table for $100 (an example used later), you ended up with a 0.5% stake in the company (implicitly valuing the company at $2k at that point). A tech company which only exists as a napkin held between two hungry young men with no asset other than a gleam in their eye gets a notional value of $250k+ on day one. If you attempt to invest in them later, after they have e.g. a product with customers for it, the value gets re-pegged SHARPLY north of that, perhaps in the single digit millions or higher if they're doing really well.
He mentions that a lot of the money men involved were annoyed by hordes of small investors making seemingly outsized returns on their initial investments. I don't think he quiiiiite understands that they're not wrong: their outsized returns were essentially large gifts of surplus value from the founders to them. (The money men, of course, seem a little put out that the founders didn't instead make a large gift of surplus value to them.)
What probably happened is that they (on the basis of really, really, REALLY bad advice) started with something like 1,000 shares of the company, valued at $0.50 apiece. They did genuinely own 100% at that time. Then as they raised the 300k they issued additional shares, at valuations between $0.50 and $4, diluting the founders horribly, because the founders did not award themselves new shares.
The fundamental problem here is grossly misvaluing the company (i.e. the total value of 100% of the shares) at the time new shares were issued. For example, if you had hypothetically bought them a drafting table for $100 (an example used later), you ended up with a 0.5% stake in the company (implicitly valuing the company at $2k at that point). A tech company which only exists as a napkin held between two hungry young men with no asset other than a gleam in their eye gets a notional value of $250k+ on day one. If you attempt to invest in them later, after they have e.g. a product with customers for it, the value gets re-pegged SHARPLY north of that, perhaps in the single digit millions or higher if they're doing really well.
He mentions that a lot of the money men involved were annoyed by hordes of small investors making seemingly outsized returns on their initial investments. I don't think he quiiiiite understands that they're not wrong: their outsized returns were essentially large gifts of surplus value from the founders to them. (The money men, of course, seem a little put out that the founders didn't instead make a large gift of surplus value to them.)
The fundamental problem here is grossly misvaluing the company (i.e. the total value of 100% of the shares) at the time new shares were issued.
Aha, that makes much more sense. So the problem wasn't that they didn't have founders' shares, or that they didn't have enough shares; but rather that they were selling off shares at ridiculously low prices.
Tarsnap Backup Inc. officially has 100 Common shares outstanding, but there's no way I'll issue new shares for $0.50 each. ;-)
Aha, that makes much more sense. So the problem wasn't that they didn't have founders' shares, or that they didn't have enough shares; but rather that they were selling off shares at ridiculously low prices.
Tarsnap Backup Inc. officially has 100 Common shares outstanding, but there's no way I'll issue new shares for $0.50 each. ;-)
I would certainly not suggest giving away those 100 common shares for picodollars because that would compromise your business results and make it affirmatively more difficult for sophisticated investors to join you, leaving your company to only receive investment from worse investors.
By the way, I signed up for Tarsnap and am using it "in anger" for Appointment Reminder. My predicted bill for this month is something on the order of 60 cents. It is, literally, the smallest business oriented bill I have ever forced my accountant to look at, and would fall below the noise floor but for the fact that I want paper records of me having paid for a professional backup service in case I ever have to prove this for my insurance agency. (I have professional liability insurance and data loss/data breach insurance for Appointment Reminder, chiefly because I have hospitals as clients and they want to know that if I screw up there will be deep pockets in the neighborhood to sue to settle up with. The insurance company is basically renting their deep pockets out on a "We are willing to bet that you won't screw up" basis, but to protect their interests, they have a 15 point checklist for various things Serious Businesses do regarding data security and if it turns out that I'm not a Serious Business than my Serious Business Insurance Policy will not actually cover me.)
I would, and this is my honest and true opinion as a customer rather than as someone who has nagged you for years to raise your prices, prefer to pay $100 per month for no reason other than to avoid having my insurance company think that I am a stupid kid playing at being a real business by entrusting core parts of my infrastructure to a service which costs me sub-coffee money. In the event of me having an insured loss (which, n.b., I hope to never have and to just set fire to the $10 a day I pay for insurance), I really don't want to have that conversation. Please make me not have to have that conversation. I can pay.
By the way, I signed up for Tarsnap and am using it "in anger" for Appointment Reminder. My predicted bill for this month is something on the order of 60 cents. It is, literally, the smallest business oriented bill I have ever forced my accountant to look at, and would fall below the noise floor but for the fact that I want paper records of me having paid for a professional backup service in case I ever have to prove this for my insurance agency. (I have professional liability insurance and data loss/data breach insurance for Appointment Reminder, chiefly because I have hospitals as clients and they want to know that if I screw up there will be deep pockets in the neighborhood to sue to settle up with. The insurance company is basically renting their deep pockets out on a "We are willing to bet that you won't screw up" basis, but to protect their interests, they have a 15 point checklist for various things Serious Businesses do regarding data security and if it turns out that I'm not a Serious Business than my Serious Business Insurance Policy will not actually cover me.)
I would, and this is my honest and true opinion as a customer rather than as someone who has nagged you for years to raise your prices, prefer to pay $100 per month for no reason other than to avoid having my insurance company think that I am a stupid kid playing at being a real business by entrusting core parts of my infrastructure to a service which costs me sub-coffee money. In the event of me having an insured loss (which, n.b., I hope to never have and to just set fire to the $10 a day I pay for insurance), I really don't want to have that conversation. Please make me not have to have that conversation. I can pay.
Let me introduce you to "Bigiain's Managed Tarsnap Backup Service" - for the low low monthly fee of $99.40 (on top of Tarsnap backup charges), we'll provide you with a professionally monitored, secured, authenticated, managed, and 100% guaranteed digital _and_ paper invoicing service - complete with 99.999% SLAs on the invoicing and _punishingly_ punitive guarantees of eventual consistency in your long term invoice and payment ledger.
(Call now, our operators are standing by…)
(Call now, our operators are standing by…)
Perhaps a little less cynically, I wonder if there's a market for "Enterprise sales as a service"?
How many Tarsnap-like services are there, which with the right salespeople and a 5,000+% markup could be sold into "The Enterprise" - which would be a completely non-competitive demographic to the developer/startup trying to sell at <$30/month (or even <$1/month)?
Patrick, iterested in going 50:50 partners in BEMTBS? (Bigiain's Enterprise Managed Tarsnap Backup Service) You do sales, I'd handle "fullfillment" (read: invoicing), out of goodwill we can cut Colin in for 15% of all sales (and not even charge him commission on the Tarsnap bills incurred by our customers).
(Oh, and Patrick, BTW - my offer above of our $99.40/month plan is the "Personal Plan". Our "Business Plan", which includes all the features of the Personal Plan plus the words "Business Plan" on each invoice and statement is $248.40/month, and our "Enterprise Plan", which includes everything with the Business Plan plus the words "Enterprise Plan" on the invoices and statements _plus_ up to 3 faxed copies of each invoice as well as the PDF and USPS physical/paper mailed copies, is only $499/month.)
How many Tarsnap-like services are there, which with the right salespeople and a 5,000+% markup could be sold into "The Enterprise" - which would be a completely non-competitive demographic to the developer/startup trying to sell at <$30/month (or even <$1/month)?
Patrick, iterested in going 50:50 partners in BEMTBS? (Bigiain's Enterprise Managed Tarsnap Backup Service) You do sales, I'd handle "fullfillment" (read: invoicing), out of goodwill we can cut Colin in for 15% of all sales (and not even charge him commission on the Tarsnap bills incurred by our customers).
(Oh, and Patrick, BTW - my offer above of our $99.40/month plan is the "Personal Plan". Our "Business Plan", which includes all the features of the Personal Plan plus the words "Business Plan" on each invoice and statement is $248.40/month, and our "Enterprise Plan", which includes everything with the Business Plan plus the words "Enterprise Plan" on the invoices and statements _plus_ up to 3 faxed copies of each invoice as well as the PDF and USPS physical/paper mailed copies, is only $499/month.)
Patrick: Please say yes.
Seriously, I'd love to see people reselling Tarsnap. This is the main reason I provide accounting details in CSV format. As long as you pay me for your / your customers' usage, I don't care how much you charge your customers.
Seriously, I'd love to see people reselling Tarsnap. This is the main reason I provide accounting details in CSV format. As long as you pay me for your / your customers' usage, I don't care how much you charge your customers.
I've often considered the ways I could pack up Tarsnap for Windows users, and/or make a pretty GUI for Linux/OS X. It's encouraging to hear that you'd be supportive of that!
Very much so. Windows support is something I may be able to do myself, but a GUI is definitely something I don't have the expertise for; at some point I may end up hiring someone to write one, but if someone writes one on their own, all the better.
A match made in heaven.
but... are you bonded?
My predicted bill for this month is something on the order of 60 cents.
Great! And if you're like most Tarsnap users on that scale, you go around telling everybody about how awesome and inexpensive Tarsnap is.
Seriously, I have lots of customers who pay me less than $1 in cash each month, but orders of magnitude more in free advertising.
I would [...] prefer to pay $100 per month ...
I think you're the first Tarsnap customer to say this. Send me an email and I'll see what I can do for you. ;-)
Great! And if you're like most Tarsnap users on that scale, you go around telling everybody about how awesome and inexpensive Tarsnap is.
Seriously, I have lots of customers who pay me less than $1 in cash each month, but orders of magnitude more in free advertising.
I would [...] prefer to pay $100 per month ...
I think you're the first Tarsnap customer to say this. Send me an email and I'll see what I can do for you. ;-)
On a certain level they would be right to complain. Tarsnap has a flaw: buses.
The problem is that Tarsnap is one person. If Colin dies suddenly (in the sysadmin world, the primary cause of theoretical death is buses), you have a problem. Say your account is down to €10 and you have 100G of data stored in there when when the #10 express mows down Colin. You might not be able to get it back since you can't top up your account now unless your method of payment is fully automated on his side.
Looking over his website, I don't see if there is a Colin-backup plan anywhere. There should be. Until then Tarsnap should be one of your backup systems - not the only one.
The problem is that Tarsnap is one person. If Colin dies suddenly (in the sysadmin world, the primary cause of theoretical death is buses), you have a problem. Say your account is down to €10 and you have 100G of data stored in there when when the #10 express mows down Colin. You might not be able to get it back since you can't top up your account now unless your method of payment is fully automated on his side.
Looking over his website, I don't see if there is a Colin-backup plan anywhere. There should be. Until then Tarsnap should be one of your backup systems - not the only one.
Thank you.
Create a heroku app that offsites our db backups for $10-20 a month and I'll be happy to pay to have redundancy to heroku's free backup.
> A tech company which only exists as a napkin held between two hungry young men with no asset other than a gleam in their eye gets a notional value of $250k+ on day one.
Here's what I don't understand. Why?
Here's what I don't understand. Why?
There's a market between sellers of equity in early stage companies and buyers of equity in early stage companies, and sellers in that market largely will not transact with you below $250k, because they'll have better offers for their scarce product. (This assumes, naturally, that the founders appear to have a credible chance of bringing a technology product to market.)
I have a great product, have quite a few people that use it, and would kill to have $250k in venture money to take it to the next level. I'm just in Alabama - and that's why $250k seems like such a high number for a napkin idea (I can't tell you how many napkin ideas I have). $250k is a TON of money if you don't need to hire anybody.
You don't get $250k in exchange for the napkin. You'll be able to possibly convince someone to pay $25k for ~9% of the napkin, contingent on you devoting the next months/years of your life to exploring napkin-like directions until it either burns or blossoms. (If you already have a product with revenue/traction, there's plenty of reasons to counsel AGAINST taking the money at those terms, by the way. Or any terms, for that matter.)
The story of all the small investors surprised me, because i thought there were more rules about who could invest in a company. Are these rules new, or do i misunderstand something?
I'm a "suit", without a "Esq.", so if you want real detail here perhaps an attorney with a focus on equity issuance can reply.
Rules do exist about non-accredited investors buying shares of private companies or shares in public company private placement. Those rules give the "little guy" extra rights. This is why you won't see them investing capital in venture led financing rounds or able to trade on places such as Second Market.
Non-accredited investors end up with equity in private companies all the time through "Founder's stock" or grants from the option pool. They may even put in "seed money" to get it started so often in a venture backed company you'll have some early capital from what gets called "friend and family money".
Rules do exist about non-accredited investors buying shares of private companies or shares in public company private placement. Those rules give the "little guy" extra rights. This is why you won't see them investing capital in venture led financing rounds or able to trade on places such as Second Market.
Non-accredited investors end up with equity in private companies all the time through "Founder's stock" or grants from the option pool. They may even put in "seed money" to get it started so often in a venture backed company you'll have some early capital from what gets called "friend and family money".
This is painful to read, especially the part about rich establishment late-comers whining about early, small investors getting "too much" payoff. Apparently people from middle-class backgrounds who "got lucky" don't deserve it. This reminds me of when Mark PinkAss whined in public about the Google chef making $20 million.
The people at the top of society really don't want anyone else to win because, as they see the world (and the OP clearly does not subscribe to this) it's completely zero-sum. These people do not believe in fairness at all. They're constantly looking for ways to take advantage of people, which I suppose is how they ended up at the top, but it makes the world ugly and I wish it would stop.
The people at the top of society really don't want anyone else to win because, as they see the world (and the OP clearly does not subscribe to this) it's completely zero-sum. These people do not believe in fairness at all. They're constantly looking for ways to take advantage of people, which I suppose is how they ended up at the top, but it makes the world ugly and I wish it would stop.
It wasn't a case of establishment late-comers whining. It was a case of establishment late comers not actually coming at all, late or not, because the system was rigged so they couldn't make any money. Since WoTC needed the investment, it was WoTC's problem and so they amended their terms.
If you're in a situation where you need to borrow people's money, it's up to you to offer terms that are acceptable to them. If you don't, then there's no law that says they have to lend to you.
If you're in a situation where you need to borrow people's money, it's up to you to offer terms that are acceptable to them. If you don't, then there's no law that says they have to lend to you.
In general, I think these behaviours are better explained by the Hedonic Treadmill theory, rather than by malice.
If your $1M house isn't perfect, you start looking at $2M houses. If your monthly costs are what other people hope to make in a year, any decrease in your means seems horrible and unfair.
This doesn't address Pincus' comments, but there are jealous rich as well as jealous not-rich.
If your $1M house isn't perfect, you start looking at $2M houses. If your monthly costs are what other people hope to make in a year, any decrease in your means seems horrible and unfair.
This doesn't address Pincus' comments, but there are jealous rich as well as jealous not-rich.
I've started one business and had options in two. In the end, one of those businesses (not the one I started) wound up paying me some lump sum. Presently I distrust futures of any kind; to put it simply, I am more interested in present-day pragmatism than greed.
I think the author comes from a similar line of thinking, as his tone seems to suggest. I'm not rich but I do fine. I'd recommend: do what you love; money comes and goes, someone with more flexible morals or risk affinity will certainly make more of it, but in the end you won't regret it.
I think the author comes from a similar line of thinking, as his tone seems to suggest. I'm not rich but I do fine. I'd recommend: do what you love; money comes and goes, someone with more flexible morals or risk affinity will certainly make more of it, but in the end you won't regret it.
One would hope that investors, on dealing with unsophisticated entrepreneurs, would tell them "Hey, it seems like you don't know the ropes of this yet, let me explain it to you" but the overwhelming number of anecdotes where I hear that have that sentence followed by advice so bad it shocks the conscience.