We Spent $3.3M Buying Out Investors: Why and How We Did It

https://open.buffer.com/buying-out-investors/

by janpio • 8 years ago

443 171 8 years ago

open.buffer.com

alberth• 8 years ago

I’m confused.

The article says Buffer is doing $4.6M in annual revenue.

But Buffers own dashboard says they are doing ~$15m

https://buffer.baremetrics.com

vm• 8 years ago

$4.6M annual revenue was when they raised the Series A in 2014. The baremetrics dashboard is current.

mmastrac• 8 years ago

"At the time of the Series A, we felt on top of the world. We had around $4.6 million in ARR (annual recurring revenue) and were growing revenues around 150 percent per year."

guan• 8 years ago

I understood the $4.6 million figure to be for 2014, when they raised the Series A.

dsl4• 8 years ago

Look at the "Live Stream" on the lower right. It is all placeholder data. I think its just a demo page for whatever baremetrics is.

tommoor• 8 years ago

It’s real data, anonymized

samspenc• 8 years ago

I applaud Buffer for sharing these challenges and financial details, as they have done openly in the past (such as with salaries etc).

goseeastarwar• 8 years ago

This is the oft-cited dream of founders that think they’ll just pay back the VC’s if the relationship isn’t working out. The reality is that no investor in their right mind would take that deal if they had any confidence in a more successful outcome down the line.

Ceredron• 8 years ago

Any reasonable investor would gladly take that money from Buffer if they believed the money would give them better chances of more return elsewhere. That does not mean Buffer is worthless. It's not black and white.

icelancer8• 8 years ago

It's reality if you structure the leverage like the CEO did heading into investment rounds. Not everyone can do this and not everyone will prioritize it either.

kayoone• 8 years ago

Seems like Joel is quite stubborn regarding his values and vision for Buffer, which i believe is a good thing but i can see how it can lead to differences with co-founders and investors once the vision does not align anymore. Felt like it was all over for him when they asked him to eventually step down and from that point he planned to remove them.

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.

dsl4• 8 years ago

Came to the comments to say the exact same thing: this is basically just a vote of no confidence in management.

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.

imbusy111• 8 years ago

Personally, I think you should treat all stock options/common stock as a lottery ticket with near zero value anyway when joining a startup. In 99% of situations, cash is all you're going to get.

ant6n• 8 years ago

Well, if they actually start paying dividends, that could be interesting, I guess.

sergiotapia• 8 years ago

Always ask for cash compensation. Stock options vest super slow, you can get fired before they vest, and if you're super lucky and stay there for years and years, you have to be DOUBLE lucky for them to be worth anything.

Buy this lottery ticket and you'll know if it's a winner in 6 years.

???

Just ask for cash!

tptacek9• 8 years ago

How did you get there from here? This appears to be an A-round startup that just paid $3MM to gain the flexibility to award liquid equity to (among other people) it's employees. Doesn't that make it better than the average equity-issuing startup?

paulie_a• 8 years ago

I honestly can't understand why an employee would insist on anything other than straight cash. Stock options are a joke. I'll take the cash.

icelancer8• 8 years ago

What? This is a vote of no-confidence in chasing unicorn-type results. That's fine. Lots of people want to work for a company that produces slow and steady gains.

scarface743• 8 years ago

From looking at the salary spreadsheet, it looks like they are paid about average. To think that anyone should accept a much lower salary than thier market value on the tiny hope of striking it rich is crazy. Every employee of a non public company should always consider only the cash compensation.

echan002• 8 years ago

Why is he stubborn? Isn't he just running his company his way?

TAForObvReasons2• 8 years ago

You are permitted to run the company your way when you are wildly successful and can raise money at obscene valuations (see Facebook). Otherwise it is a delicate dance with the investors.

ChuckMcM• 8 years ago

It seems to me that the nature of venture funding is such that it would be unusual for the investor and the CEO to be aligned with respect to the company's financial performance. This is true in public companies where activist investors push management to extract more value out of the business even when the CEO feels this will compromise employee morale and customer value.

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.

rajacombinator• 8 years ago

Article explains somewhat about the hows but not really the why, other than alluding to “differences in vision.” Maintaining transparency about these things is a bit tricky!

dsl4• 8 years ago

In any other situation it would be the CEO leaving. The investors clearly didn't have enough votes to boot him, and took a cashout to avoid it being a total loss.

devcpp2• 8 years ago

Yep, the key figure in this piece is the CEO owning 45% of stock. Hard to beat in any vote.

sytelus• 8 years ago

This is an excellent piece and kudos for being transparent. This is possibly a story of virtually every startup that doesn't quite make it to 10X: You get funding and expand team rapidly but then revenues are not keeping up so you cut down and then wonder where you go from here. For many startups there is a path of being sustainable profitable business that perhaps will never become unicorn but then investors aren't happy with that. I think buying out investors is an excellent idea in this situation and every founder should always think about this possibility when signing the term sheets.

sebleon4• 8 years ago

$2.5m of $3.5m was for founders and early team [of Series A money]

Terms:

Series A class of shares included a protective provision which meant that Buffer was unable to offer liquidity for other shareholders
a return of 9 percent annual interest on their investment at any point

So... the founders raised a series A mostly to give themselves liquidity, at the expense of a high interest loan that also threw their early investors under the bus? Well, they definitely achieved their vision of putting together an atypical round.

Given their lack of interest in going down the VC-startup path (high growth at all costs, keep raising, aim for IPO, etc), it's unclear what their motivations were to raise a VC round in the first place.

echan002• 8 years ago

Not everybody is perfect. Sometimes goals change and you realize what you wanted before isn't what you want today. Plus, he did mention his cofounders left, so maybe his ex-cofounders wanted the VC route.

sebleon4• 8 years ago

Right on, mentality likely shifted along the way.

And yes, everyone makes mistakes, but author shows great character in making things right later on.

nichochar• 8 years ago

Who feels bad for VCs though? 1. they didn't have to sign the sheet 2. It's really refreshing to see founders and people with vision be in control for once, instead of the opposite

jjeaff3• 8 years ago

Stories are legion of VCs throwing their founders under the bus the moment it suits them.

tptacek9• 8 years ago

How exactly does offering an immediate return to those early investors throw them under the bus? Buffer put together a deal and their investors took it. For them to "buy" their equity, it had to be "for sale", and it turns out it was.

The normal story of what happens when a company takes an investment planning for hypergrowth and that doesn't pan out is that the company "pivots" to some usually-less-promising hypergrowth opportunity and repeats until it dies. The outcome here seems far better for investors, which is presumably why they took advantage of it.

sebleon4• 8 years ago

Ah, to clarify: Buffer threw the seed investors under the bus when they inked a deal with the Series A investors.

However, kudos to the founders for fixing this mistake later on. While their intentions at Series A were questionable (raising to pay themselves), they made things right later on, though they did pay the price of a co-founder and CTO departure. Everyone makes mistakes, but true character can be seen when you deal with them.

Our seed investors had been supporting the company for almost six years, and several were starting to ask when they may get a return
The Series A class of shares included a protective provision which meant that Buffer was unable to offer liquidity for other shareholders (seed or common) without approval from a majority of the Series A.

eldavido• 8 years ago

There's a lot of negativity here.

I give Buffer a lot of credit. They seem to deeply internalize the idea of "realistic expectations" and it sounds like the buy-out was a win-win solution where everyone got (mostly) what they wanted.

As he says, the investors might not have been happy about it, but at least he has the backbone to resist trying to squeeze growth out of a market where there's none to be had (in the short term). Most CEOs wouldn't be as courageous, preferring to try to spend like crazy in the search for growth, which just torches investor capital even as it adds little long-term value to the business's equity.

In short, a bold move by a very honest guy who's in it for the long term.

TAForObvReasons2• 8 years ago

The interesting question, if the intention was to stick it out in the long term, is whether raising VC money in the first place was a good idea. Bootstrapping the business would have probably been closer in line with the vision and allowed him to retain control without eventually souring relationships

noelwelsh• 8 years ago

It's easy to have 20/20 hindsight. The situation was different when Buffer was formed. There weren't as many examples of successful bootstrapped companies and Joel (the founder) was much less experienced.

I don't want to say getting VC was a mistake for Buffer because I can see it might have had an upside of connections and advice for what was an inexperienced team, and I think at that time the management team was more bought into the VC model. Buffer has definitely transitioned away from the VC model, though, and buying out the investors now is the right decision IMO.

A lot of comments in this thread are quite harsh. I applaud Joel for having the courage to honestly share his experiences so others can learn from them.

robhunter• 8 years ago

Wasn't a significant amount of the VC money for Buffer allocated to founder liquidity?

dahdum• 8 years ago

I don't think this sounds like a win-win, the founder moved the goalposts and bought the Series A out for the minimum possible (9%) so he could start paying himself.

I read the fluff around core values, but my first thought is that Joel would rather not risk his personal fortune by growing the company further. Better to ride the 25% margin as long as possible, giving himself enough liquidity to retire wealthy, than take a chance on growth.

Maybe I'm too cynical, but I admit I'd be tempted to do the same thing.

freeone3000• 8 years ago

This is a completely legitimate way to run a company. Heck, I wish more did this.

tptacek9• 8 years ago

As an operator or employee of a company that doesn't plan to raise further money from a VC, you want them to pay the minimum possible. Every dollar that goes to the VC is a dollar that can't go to the team.

Meanwhile, if the investor didn't want to sell at the number they came up with, they could presumably just say "no".

You are, yes, probably being too cynical here.

throwaway2048• 8 years ago

I bet you can name 20+ big name startups off the top of your head that made their product substantially worse and/or completely folded due chasing growth at any cost.

I guarantee you this has annoyed you more than a few times as a user of their products.

In a market where VC style multi billion dollar exists just isn't going to happen, trying to force it is just going to ruin everything good about your product and company.

And VCs would rather see you ruin it, with a tiny chance of succeeding, than see you have a successful small/medium sized company.

jondubois• 8 years ago

> Maybe I'm too cynical

Every time I've told myself that, I later found out that I wasn't.

Under capitalism, the world always presents itself as better than it is.

paragpatelone2• 8 years ago

I think it is a bold move. In their situation it seems like the right move.

I am seeing a lot of sentiment on HN that feels sorry for VCs. VC already get paid above 200k/year; no need to feel sorry for them.

People should feel sorry for the founders & the employees who did all the work. Now if they get liquidation, then that is good.

pilote• 8 years ago

It's not just a return for the VCs, but all the contributors that gave their money to the VCs to invest, like your university's endowment fund, retirement and pension funds, etc.

godzillabrennus• 8 years ago

Big VC funds pay like that.

Entrepreneurs turned VC often don’t have the dry powder to pay themselves well when they use their own cash to start fund 1.

Not all Vc’s are equal.

gadders• 8 years ago

Fair play to them. I'd take this any day over "This is an exciting move for customers as we limit what we give them for more money" or the other corporate bollocks that gets spewed on the regular.

syntaxing2• 8 years ago

So investors put $2.3M into the company and got back $3.3M. They essentially have a ROI of 1M over a span of four years. Am I crazy to think that this is a pretty good deal for the investors?! If someone gives me a ~40% return on a crapshoot investments (like how most start ups are), I would be pretty happy!

tomasien3• 8 years ago

It's fine for the VCs if they can recycle and re-invest that. Otherwise it's a 0.

syntaxing2• 8 years ago

Can you please elaborate what you mean? The money is only useful to the VC if they can re-invest it elsewhere?

devcpp2• 8 years ago

Yes, you are slightly crazy. The whole idea of VCs is that while most startups are indeed crapshoot investments, some will make returns in the 100x.

1.5x is sometimes "good enough" but it won't keep a VC afloat if all of its investments go like that. Even 2x means that you only get to invest twice and fail once. And forget about profits or a living wage.

glangdale• 8 years ago

Yes, you are crazy to think this. :-)

Buffer seems like a fairly successful startup relative to the average. A roughly 8% return per annum is not a good return for a VC given that many of their investments in a given round will go to zero.

There may be reasons for this going the way it did, but I doubt VCs would be all that happy with this.

zminjie• 8 years ago

You are thinking from the perspective of an individual investor. For VCs, this kind of return is abysmal since it won't cover the 7/10 companies that went completely bust. In order to VCs to take high risks on early stage companies, they need the winners to return 100x so the fund even makes financial sense. It's one of the main reasons why VCs constantly push startups for hyper growth.

This is certainly better than losing the investment completely but I can't imagine the investors being too thrilled about this outcome.

erikpukinskis• 8 years ago

It means the three that have a liquidity event only need to cover 5/10 instead of 7/10.

Is that not a helpful result?

lucasgonze• 8 years ago

VCs must aim high, but a medium-size win isn't the same as going bust. It's still better to get a return with strong linear growth than to get nothing.

nodesocket2• 8 years ago

Didn't the investors have the choice to take the cash-out? I am actually surprised they agreed. It seems logical Buffer is not going anywhere, and growing, and an acquisition is still very much possible which would represent much larger returns.

paragpatelone2• 8 years ago

Who cares if it's bad for VCs. They already get paid over 200k+ in carry every year for over 10 years. They are also not investing their own personal money.

icelancer8• 8 years ago

> For VCs, this kind of return is abysmal since it won't cover the 7/10 companies that went completely bust.

Only very myopic VCs would think this way globally. If every business did this, it would be terrible. But each business is its own opportunity/set of circumstances, and forcing everyone to 10X+ is as equally stupid as cashing out $1MM on a four year term sheet on $2.5MM invested.

You must evaluate each opportunity individually to maximize profit and growth. The intentions can always be to shoot for hypergrowth, but if the probability drops below the profitability point, you shouldn't be forcing the issue. Terrible investors do this, and it happens fairly regularly, though it's slowing down as founders become a bit more intelligent with their options.

cycrutchfield• 8 years ago

If those investors had put their money into the S&P500 instead, they would have had a better return on their investment.

odonnellryan• 8 years ago

True, and the risk here would probably make this a "bad investment" in reality.

icelancer8• 8 years ago

Only in this specific timeline. On average over a longer timeframe that is more representative of the market, they definitely would not have.

Kpourdeilami• 8 years ago

I think when they invested, they expected more less like a triple-triple-double-double growth from 2014 to 2018.

In 2014 their ARR was $4.6M so investors probably expected their revenue to follow the $4.6M -> $13.8M -> $41.4M -> $82.8M -> $165.6M trajectory. Buffer's current ARR is $15M, which although is pretty good, is not enough for it to work well with the VC model.

mrnobody_67• 8 years ago

see - https://techcrunch.com/2017/06/01/the-meeting-that-showed-me...

the math is pretty crazy... even $50m and $100m exits would doom a fund.

icedchai• 8 years ago

I wouldn't. That's a ~10% yearly return. You can do better with index funds, never mind growth stocks. This is hardly a home run for a VC.

tomasien3• 8 years ago

This is great news - it sounds like Buffer is a great company to work for and own as an operator. I do think they're a cautionary tale for trying to build a VC backed (in mission and capitalization) company the way they did, but VC backed is not and should not be the norm so that's not a big deal.

dyeje• 8 years ago

So the same company that gave paycuts to their entire staff (except the CEO and Director of People) 8 months ago, has enough money to buy out their investors? Interesting.

Paycut Discussion

https://news.ycombinator.com/item?id=15861043

jVinc• 8 years ago

Sounds a lot like the CEO gauging the company growth and employee pay in order to build up enough cash to push out investors, get a majority so he could "provide liquidity" for himself.

I can't say if this is close to the mark, but if so it makes perfect sense why the other founders left. Being at the head of a ship with a captain trying to slow down so he can line his own pocket is a special kind of hell.

StudentStuff3• 8 years ago

This definitely could be the case, but alternatively there may really not have been a huge amount of increasing month over month growth left in the B2B segment. Sure, you can work your employees harder to get more leads and customers, but that really starts to show through after a few weeks or months, with diminishing results as time goes on.

rloomba• 8 years ago

I actually had the same thoughts. I'm surprised he's being so transparent about this. I feel for the employees at this company -- just because a company is profitable, doesn't mean that employees are being paid fairly/market rate.

I wouldn't be surprised if the founder tries to sell the company in the new few years a discount of the current valuation. With 45% ownership, that's a very large chunk of change.

anemitz• 8 years ago

1) I believe most employees were paid more in that discussion from 8 months ago.

2) If any employees own equity it's also in their best interests to buyback shares since they'll own more of the company. It also means the founder(s) see a bigger potential pay out in the future and will continue putting all of their energy into the business.

The Buffer team's idea of success became different from the VC's who initially invested -- it's smart to capitalize on this and buy back your cap table if the price is right, you can afford it, and you think the company will succeed.

barbegal• 8 years ago

Most of the staff got a pay increase. A minority were given a pay cut[1]. The Hacker News discussion was based on an incorrect reading of the data posted.

[1] http://disq.us/p/13b30h1

dmdque• 8 years ago

I haven't seen anything concrete about paycuts in that thread. Any what kind of numbers we're talking about? Also surely not everyone got a paycut, right? (Even excluding execs)

richardlblair• 8 years ago

When you give someone a pile of money you will always wonder if you get that money back, let alone see a return.

Returning anything to investors should be seen as a positive. If you disagree, go give someone 6+ figures and have them lose it. You're opinion will change rather quick.

jgh• 8 years ago

otoh me giving someone 6 figures and having them lose it is much more meaningful to me because:

1. It's my money, not money someone has given to me to invest

2. It's a pretty significant part of my net worth. If I was worth $100 million and gave someone $100k and they spent it all without any return, I doubt I'd lose much sleep over it. If I do that now it would be very hard to get over.

I'm not really disagreeing with you here, but the emotions at play are different I think.

rdlecler12• 8 years ago

If I remember correctly, these guys were proud and very public about building Buffer as a lifestyle business as were the VCs that backed them. At the end the VCs would came out with a negative IRR which was not unexpected—a lesson into why VCs don’t invest in lifestyle businesses.

wslack• 8 years ago

I find it strange that being this profitable is labeled a "lifestyle business." The hypergrowth/unicorn exit isn't a healthy outcome for many businesses.

olllll• 8 years ago

Because you aren't building a business. You are creating an asset you can sell.

Businesses are great and I don't think most people are trying to talk down about them. But VCs are trying to build an asset they can sell. Because when you sell an company that has a high rate of projected growth you get all that money now as opposed to waiting 20 years. There are plenty of investments that pay out solid returns for 20+ years. VC type funds are attractive in no small part because they pay out in a shorter period of time.

It really has little to do with building a business outside of the fact that the asset happens to be a company.

aj7• 8 years ago

I’d love to have been a fly on the wall where it was accomplished that the VC’s were pushed out. ‘Cause that’s what happened.

jessep• 8 years ago

I'm not confused as to why he wants to buy back control of the company, but I'm confused why he wants to be so profitable. Does he say somewhere why he isn't reinvesting more of the profits in the company? Why not be a little closer to the line?

lxe• 8 years ago

creating a unique culture with a fully remote team and high levels of transparency, it now started to feel like we had to choose between those things. It was suggested that some of the fundamentals that I had come to value could be removed to create a productivity environment that would increase the growth rate. I refused to compromise on the transparency and remote work aspects of our culture, so we started to explore slower growth goals

In what way did "remote culture" specifically negatively affect productivity? How was this measured against the more traditional way of working? Or was this just a perception/bias issue, like "oh hmm the team is remote, so I guess that can be blamed on slow growth"

wgyn• 8 years ago

Collaborative Fund suggested that we account for these various paths within the structure of the Series A funding. We added downside protection for the Series A investors, in the form of a right to claim a return of 9 percent annual interest on their investment at any point starting five years after the initial investment. At the time, I didn’t appreciate how important this clause would become. Even our legal counsel commented that this was not something he saw too often.

The wording suggests that this was a decision he regrets / a feature of the agreement he didn't think was important at the time. Is that the case? Would it have been less onerous with a lower rate? In general, I'm curious if / how they would have redone this decision.

jaequery• 8 years ago

This looks to me like a no brainer move! Way to go and congrats on the buyout!

mrhappyunhappy• 8 years ago

Does anyone even use buffer? I remember it gaining traction several years back but that's about it.

icelancer8• 8 years ago

The data is open here:

https://buffer.baremetrics.com/

As an anecdote, we are happy paying customers and have been for some time.

1123581321• 8 years ago

Interesting to see number of accounts decline, but revenue per account and total revenue increasing. Assuming social networks got better over time at providing account management features at the same time Buffer got better to selling to agencies and large companies.

Danieru• 8 years ago

Woah, this has got to be the most positive recruiting message ever. It is clear buffer prioritizes the right things and executes then achieves those goals. Impressive.

AYBABTME• 8 years ago

The way this company operates is inspiring, but as a recent churned customer, the resulting product is lacking. The web UI mixes up order of operations when dragging posts around and when I looked at implementing an API client for their service, I quickly realized why the UI had out-of-order problems. The API doesn't respects any sort of contract, changes types of responses in inconsistent ways and is basically impossible to implement in a typesafe way. The API used by the UI seems to rely on ordering of events received on their backend, but these events don't seem to be commutative, and each UI update seems to be its own API call...

All this to say, I appreciate the goals of Joel in building a strong culture and strongly support this, but the product itself isn't that great to use as a customer, which is probably why growth isn't what VCs want. And I'm just hypothesizing that a hard look at the tech stack could maybe help.

nvrmor• 8 years ago

He's trying to pass this off as a startup growth post, but it's pretty much a direct response to calm the VCs who made Buffer happen in the first place.

sytse• 8 years ago

"Whereas in the past we’d “had it all” and achieved growth alongside creating a unique culture with a fully remote team and high levels of transparency, it now started to feel like we had to choose between those things. It was suggested that some of the fundamentals that I had come to value could be removed to create a productivity environment that would increase the growth rate. I refused to compromise on the transparency and remote work aspects of our culture, so we started to explore slower growth goals, and what that would mean for the future of Buffer."

I respect the commitment of Joel to all remote and transparency, he's an inspiration. Personally I think that high growth can be compatible with all remote and transparency. For example both us at GitLab and InVision are all remote with high growth rates.

ig13• 8 years ago

One of the under-appreciated facets of SaaS economics is that you have to grow your growth constantly, regardless of whether you're bootstrapped or VC funded.

If you're steadily adding 100 customers/month you might think thats great because of the accumulating nature of subscription revenue - but actually that's a death sentence.

Your churn will grow as your customer base grows.

If you've got a 5% monthly churn rate then at 1000 customers you'll lose 50 customers/month. At 2000 customers you'll be losing 100 customers/month - and all of a sudden your 100 new customers a month will net out to zero. After that point you'll start losing customers.

From a quick look at Buffer's baremetrics board that's what happened here.

You either have to have net negative dollar churn (which is very very hard if you're selling to SMEs) or you have to have an exponential growth rate that means you can escape the churn effect and that almost always require external capital to fuel the growth.

svantana• 8 years ago

If you've got a 5% monthly churn rate then at 1000 customers you'll lose 50 customers/month. At 2000 customers you'll be losing 100 customers/month - and all of a sudden your 100 new customers a month will net out to zero. After that point you'll start losing customers.

Actually, in this scenario the number of users will asymptotically grow towards growth/churn = 100/0.05 = 2000 in perpetuity. So it's not a "death sentence" but will lead to growth stagnation.

ig13• 8 years ago

Yes.

Plenty of SaaS businesses (both bootstrapped and VC financed) end up flatlining. How sustainable this is depends on what space you're in, generally if you're revenue flat you become much more vulnerable to external factors (competitors coming into market, CAC increasing, recession, etc).

IMTDb• 8 years ago

The idea is to manage your company so that you generate profits at 2000 customers. At that point you have several options:

- Be happy with cash piling up in the bank, and redistribute it to employee/investors/founders.

- Lower the churn.

- Increase your ARPU.

- Use the profits to create anew product/offering that generates new growth.

Kiro• 8 years ago

I don't understand. Who owns the shares now if they were bought with the company's own money?

owens992• 8 years ago

No one. There are now fewer shares outstanding.

ie. before there were 10M shares outstanding which represents all the shares owned by employees founders investors etc, now (as an example, these are not real numbers) there are 8M shares outstanding because the Series A investors no longer have shares those shares are taken off the market by the cash.

flanban• 8 years ago

Good, for them. Quality of life is overhead VCs will not pay for.

We Spent $3.3M Buying Out Investors: Why and How We Did It

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