VC Decries Airbnb’s Recent Funding for Founder Control and Cashout

http://allthingsd.com/20111001/vcs-unite-chamath-palihapitiya-decries-airbnbs-recent-112m-funding-for-excessive-founder-control-and-cashout-in-email/

by sriramk • 15 years ago

296 149 15 years ago

allthingsd.com

kposehn• 15 years ago

This is a very interesting article! I do think that he makes a very good point that if you are already 90% vested, why be so concerned about dilution? I definitely think that, as founders, when we get liquidity we need to make sure the people that helped get us where we are get a slice as well.

After all, we aren't the only people that make a company succeed.

gojomo8• 15 years ago

The special one-time-dividend to vested early stockholders seemed a little fishy when I noticed in Groupon's S-1... but maybe it's just an efficient way to reward existing value without larger dilution/valuation.

If employees with unexercised but vested options were given a heads-up that such an unusual early dividend was coming – so that they too could choose to qualify – that might address much of Palihapitiya's concern about fairness.

canistr• 15 years ago

I'm probably wrong or misunderstanding the whole issue, but if it is true that new investors are simply paying early stockholders a special dividend, then wouldn't that make this a Ponzi Scheme?

michaelchisari• 15 years ago

While we could argue back and forth about whether it technically is a Ponzi scheme, whether that definition fits or not, it's profoundly problematic. We already exist in a relatively volatile industry that has seen it's fair shares of bubbles and busts. We don't need to add another unethical and chaotic variable to the pile.

ssx3• 15 years ago

This is not the definition of a Ponzi Scheme, you should probably look it up on wikipedia.

But I do agree with the article, dividend's like this are not the spirit of building a good company. Just founders who want a huge pay-day. I would have understood 1m-4m, but not 21m, thats a huge percentage of their investment.

sunir2• 15 years ago

Not really. I am not a lawyer but it seems to me that is not the case.

Employee stock options are meant not to be exercised until they are saleable. When you can them early in a private company your capital is locked up in a dead asset yet you have to pay capital gains taxes. The dividend would have to be huge.

Further watch out for insider trading. The value of the stock when the option was struck has to price in the promised dividend.

gojomo8• 15 years ago

My hunch is that for early-enough employees the dividend value could dwarf the exercise price, making the decision to exercise a no-brainer.

kloncks• 15 years ago

How uncommon are dividends like these happening within a VC-round?

bigohms• 15 years ago

Perhaps a rethink is needed of bringing the public sentiment into the equation by making this communique open. I appreciate that it does shed more light into the strong dilution resistant finance. However, the round particulars are private and the fair play would go privately to the guys with it.

Seems to be a lot of this going around these days.

paulkoer• 15 years ago

I think the interesting question here is who leaked this email to allthingsd. If the VC really wanted to give the Airbnbs a heads up (as he makes it sound in the email ... take care, let's keep in touch, etc) then I don't think there was any necessity to leak this and I am quite sure the Airbnbs wouldn't want it out in the open either.

And then... the Groupon comparison kind of sticks in your mind, doesn't it? I don't know, I get the feeling there is more behind this ...

veyron3• 15 years ago

Here's what probably happened:

1) Chamath talked with airbnb, and he felt that he was scoffed or otherwise disregarded

2) Chamath talked with Reid Hoffman, and both concur on the matter

3) Reid and others talk with AirBNB but the airbnb people stuck to their guns

4) Chamath believes that he is right in his view, and hopes that by going to the public, others (i.e. PG) will pressure airbnb to reconsider (especially with the groupon comparison)

Now, I don't know the airbnb founders directly, but I'm certain that if they felt that other investors were concerned about the arrangement, they would either change the terms or decline to take the opportunity. If Chamath doesnt want to participate, its his prerogative, and expressing his concern to the public really doesn't help his prospects of investing with airbnb or any other yc company.

sek8• 15 years ago

A founder who believes in his business, will never cash out early. period.

He would always get more after an IPO or exit. So why would he?

I assume the founders are not stupid, they know their valuation is not justified.

staunch9• 15 years ago

This line of thinking has been thoroughly discredited. Many of the most successful companies today had founders that took money off the table early.

If they didn't believe in the company they could just sell it today for $500 million (or whatever) and put $50 million in their pockets instead of $5 million.

steve89184• 15 years ago

Taking money off the table implies selling their stake, ie. shares. They didn't sell their shares. They gave themselves a one-time dividend.

colinplamondon• 15 years ago

What? It's a whole lot easier to swing for the fences when you're already a millionaire.

Selling 5% of your total shares for $3,000,000 sets you up well for life. Not great, but well. At 4% interest that's $120k/year. After that, it's gravy.

sek8• 15 years ago

It also takes a lot of pressure from you and maybe distracts from building the company.

On Wallstreet they call this "fuck you money".

angryasian2• 15 years ago

it also makes it a whole lot easier if the company is on shaky ground and built up by hype, when everything does happen to implode in on itself. I'm not saying that this is airbnb's case but ...

I'm not saying twitter is a failure by any means, but none of the people that built the company are still there ( Jack Dorsey started square so maybe he is that small percentage of people that can juggle two amazing startups ). When all the founders cash out early, it just makes it questionable.

brandnewlow• 15 years ago

Zuckerberg, Moskovitz, and Parker each got $1m from Accel when they raised their $12.7m Series A according to David Kirkpatrick's The Facebook Effect.

sek8• 15 years ago

The reason there was competition between VCs, this is a different motivation and the amount is not that high.

Murkin• 15 years ago

You missed the point, they take the money as dividens.

They are not selling their stock for that $20M lump.

The only 'foul' thing here, is that their employees (option holders) will probably get nothing.

sek8• 15 years ago

They sold shares for 20 Million to the investors to pay out this dividend, so the outcome is the same.

philwelch9• 15 years ago

Well, and that investors are being asked to "invest" millions of dollars into the founders' personal wealth.

prostoalex• 15 years ago

I don't pretend to know the ins and outs of this, but the dividend is to common stock. What if the next step after closing the deal would be founders telling employees to exercise as much as possible, and then announce the dividend?

Granted, most of that money would probably have gone towards AMT, but let's not vilify AirBnB before we hear their end of the story.

todojunkie• 15 years ago

"A founder who believes in his business, will never cash out early. period."

That is just not true.

You have zero clue of any one founders back story. How many years have they been building their business and not taking a pay check? Not taking health insurance? Struggling... Taking a payout, in some cases, can motivate someone who has been putting in 24/7 for year(s) to keep going. It can also allow the people in your life (family) to support you in pushing forward with your passions.

trim• 15 years ago

Didn't Chamath make most of his money cashing out Facebook stock early? Does anyone remember the story about him from a few weeks ago?

polymath21• 15 years ago

From what I understand, Chamath is okay with cashing out by selling your stock, but what the AirBnB founders are doing is just paying themselves a dividend of $20M (essentially just paying themselves a lump sum out of their funding round and not affecting any of their stock). Please correct me if I'm wrong.

steve89184• 15 years ago

This is my understanding as well. Chamath says that it's fine if all employees have access to this ability to cash out shares, but it sounds like AirBnB is essentially withdrawing money directly from the company, with no opportunity from employees to participate. He says it's basically a cash-grab that only the founders are participating in. I have a hard time disagreeing with him.

Did any founders of great companies ever do something like this? From my recollection, I don't believe Bezos, Jobs, Gates, etc ever did anything like this.

patio114• 15 years ago

I must have missed the post where a VC said "Guys, sorry, love your company but I couldn't in good conscience participate in a round where the rich people get paid and the poor people are told to wait for an exit." I must have missed that post quite frequently, because that describes every VC round ever.

A $120 million investment round means that about $2.4 million in cash money just moved from the limited partners (universities, pension funds, wealthy families) into the pockets of the VC firm's partners. Not stock, not options: cash money. This is the way the system has always worked, since time immemorial. VCs get paid a management fee (about 2%) win or lose, and a percentage of the profits when they win.

Just something to keep in mind when someone mentions their strong principles in the course of a discussion over how dang expensive butter is these days.

[Edit to add: My description of management fees is slightly simplified and ignores salient things like the fact that they recur annually.]

credo• 15 years ago

You're correct. VCs play a game where they win with other people's money. They make good money regardless of performance (for example, 10-year VC returns seem to be trailing 10-year stock market returns). They make a killing if their portfolio companies do well.

Are you suggesting that this VC pattern justifies the actions of founders who take $21M as dividends ? (to be more precise - founders of a young private company that is dependent on external investment for financing itself)

patio114• 15 years ago

Are you suggesting that this VC pattern justifies the actions of founders who take $21M as dividends ?

I don't think that particularly requires moral justification, any more than an engineer saying "That offer is interesting but I would prefer $5,000 more and an extra week of vacation" requires moral justification. Capitalism happens. Sometimes, it even happens to rich people.

Edit for context: "Capitalism happens" is shorthand I frequently use for "Sometimes one party in honest negotiation with another has leverage, perhaps because of how supply and demand for the product being sold shake out, and this is natural and not particularly noteworthy." I usually say it when rich people complain how much money they are paying for things like e.g. engineers or shares in a hot startup.

fleitz• 15 years ago

No kidding, I think we all forget the philanthropic mission of every VC out there. I think the primary problem is the insult of putting the VCs in the same class as the employees.

I will agree that dividends should generally be used when the investors are able to invest the money better than the company can.

eg. If an putting the cash into ops will generate a 6% return and investors are able to earn 8% then a dividend should be issued.

If you can fill out your round, get cash and not have to dilute as a CEO why wouldn't you? That would be like a VC turning down free equity.

jack7890• 15 years ago

No, that money doesn't go directly into the partners' pockets. It also goes to pay the VC firm's rent, travel cost, salaries of associates and support staff, legal/accounting costs associated with the deal, and a bunch of other things.

It is generally accepted that a vast majority of a VC partner's income comes from their share of the fund's return, not from the management fee. It is not unheard of for a VC firm's costs exceed the management fee, such that the partners loose money unless the fund has a positive return.

patio114• 15 years ago

legal/accounting costs associated with the deal

Industry standard practice is that startups pay for costs associated with deals, not capitalists. That one is virtually universal. The grapevine tells me that it is not uncommon to see VCs travelling as board members. Some of them don't exactly fly coach.

trevelyan3• 15 years ago

Honestly, why should anyone here care that the VC has to pay rent or salary expenses? Are they eating ramen or living in the office?

As a founder, I'm delighted the AirBNB guys are charging for admission to their equity sale. Call the payout back wages paid at market rates and call it a day. And if investors are reacting in shock to the sticker price they can get out of the showroom. Sorry you won't be joining us - perhaps there is a cheaper model you can lease somewhere else?

lutorm• 15 years ago

It is not unheard of ... that the partners loose money unless the fund has a positive return

Doesn't that seem reasonable? With the huge potential upside, shouldn't there be an associated risk?

vladd2• 15 years ago

VCs are guys handling money, they need entrepreneurs (guys getting things done) and vice-versa. They sign a contract which mainly defines how each gets to profit from the other one and the boundaries of their interactions afterwards. It's well-known and the web is full of articles about preferred stock, liquidation preference, convertible debt and similar topics.

But this article is about something new - a dividend that mainly goes only to the founders. It's about entrepreneurs screwing early-employees, entities that until now I've always considered as been in the same bucket. You can rightfully claim that the messenger sucks (which might be well-known) but that doesn't imply anything on the message itself (or its novelty).

sunnydaynow• 15 years ago

>It's about entrepreneurs screwing early-employees,

Yes, that surprised me a lot! Especially from founders that are somewhat "famous" and are connected to YC. I expected they don't play these tricks. Greed?

Anyone knows how their employees reacted to this news? If I would have worked 50+ hours for year(s) and then read this... :(

tptacek2• 15 years ago

You are mustering moral outrage over money that would in any other transaction go to the VC. For decades, VC have been transferring liquidity away from employees and to themselves.

There is something "new" here: the fact that founders have so much leverage in this market that they can claw that value back from investors.

The welfare of the "employees" is a total red herring. Venture capital investors have been fucking over employees directly for almost 20 years.

mikebo• 15 years ago

The way I read it, Chamath doesn't think the company will be as successful if this is the way employees are treated. That's a perfectly valid reason to pass -- it doesn't seem like a right vs. wrong stance.

0x124• 15 years ago

I'll buy that if Chamath is willing to forego his management fee on this and future deals.

A VC arguing the ethics of this deal with respect to early employees is more than a bit disingenuous, at first glance it looks as if they are doing this to protect the little guy but that is only because for once they are treated the same as the little guy.

iamelgringo• 15 years ago

$120 million fund. 2% management fee = $2.4 Million a year.

$2.4 Million a year sounds like a lot initially, but when you consider local salaries and costs associated with this. You might think that VC's make tons of money, but when you consider that the $2.4 Million has to fund their entire business, and when you look at how the costs break down, it starts to look a bit more reasonable.

Here's how those costs break down:

Office space on Sand Hill Road: 5000 sq ft @ $60sq ft / year = $300,000 3 exec admins @ $ $80k / year = $240,000 2 Associates @ $150k / year = $300,000 2 Analysts @ $100k / year = $200k 4 partners @ $300k / year = $1.2M Marketing / sponsoring events @ $100k / year Legal fees @ $300k / year

Now, when you exclaim that a $300k salary is exorbitant, consider that most engineering managers in Silicon Valley make about that much. $300k will allow you to purchase a house in San Jose ($500k for an average house in the burbs), but it won't let you purchase anything in Palo Alto (over $1M, easy. Monthly payments are around $7k).

Nurses working the night shift in Silicon Valley make around $150k a year without working tons of overtime. Firemen and policemen make about the same. An ER tech at a hospital makes about $70k.

Add to that, that most partners and associates at VC firms will end up working 80 to 100 hours a week. So, partners will end up having an hourly wage of about $75 an hour, which is what PHP contractor will make in the area. A decent Rails contractor will bill about $150.

So, when you break it down, the greedy blood sucking vampire VC's... really don't make as much as it's made out to be. A number of them are actually pretty nice, and great people to have a beer with. And, it's actually a pretty hard job.

Full Disclosure: I haven't made a penny from VC's. I've had a couple sponsor events for Hackers & Founders, and a number of them have been really helpful in teaching me the ropes of Silicon Valley.

ootachi• 15 years ago

A $300k salary is absolutely not necessary to live in Silicon Valley.

Also, a $1M house is affordable if you earn 300k a year. Why would you think it's not? You could probably pay that off in 10 years, far short of the 30 year time span on most mortgages.

pheaduch• 15 years ago

Interesting that he brings up Apple as during their IPO, if it wasn't for Wozniak and his "Woz Plan" the majority of Apple employees and the former earlier employees would have been frozen out of the IPO. Jobs was very much against giving up his share of the pie.

To me, being greedy is hardly the worst trait to have as entrepreneur.

abbott• 15 years ago

what traits are worse than greed for (successful) entrepreneurs? you highlight woz's intervention, but then say greed isn't as bad as...?

philwelch9• 15 years ago

It's strange that wanting to get rich is even considered a bad trait for an entrepreneur.

Off the top of my head, I'd say stupidity, laziness, cowardice, and soft-headedness are probably worse traits.

ispivey• 15 years ago

The problem Chamath is highlighting is not that the founders are cashing out. Or that early employees are not getting cash -- everyone with vested common stock gets a proportional amount of the cash.

The big difference is that since the founders aren't selling stock, they aren't being diluted, so the employees with unvested stock don't get more of the company.

Basically, vested common gets paid, common doesn't get diluted at all, unvested common gets relatively screwed (they'd own more of the company if it were a secondary sale).

Of course, dividend vs secondary also affects the investors' price, but I can't see Chamath making such a stink about a simple matter of price.

grellas2• 15 years ago

A few thoughts:

1. It is bad form for this sort of thing to be aired publicly. It may give us a voyeuristic fascination on something that is depicted as an internal intrigue within a prominent up-and-coming startup but this is fundamentally company confidential information that is not capable of being aired publicly without significant distortion. Who can answer the implied charges of impropriety? Those most directly affected by whatever is happening can’t do so without violating duties of confidentiality. Yet what are they supposed to do? Sit by while people now start making invidious comparisons of their activities with, say, the increasingly notorious Groupon venture? Come out and declare "I am not a crook"? Start attacking the author of the email, who may have intended it as a confidential communication and not even have had a role in its being leaked? Or start to spread over the public record all sorts of confidential discussions in hopes of trying to defend their reputations? I don’t know how this got leaked. But it amounts to an inherently unfair attack that is almost impossible to defend just by the nature of the case. In law, we learn early on that a one-sided story can almost always be made to sound compelling, while on a full airing it can just as easily be shown as just the opposite.

2. There is a long-time tension in the startup world between founders and VCs and, as someone who has worked closely with founders for nearly three decades, I can say unequivocally that it has not been the VCs who have tended to get the short end of the stick when the inequities arise. Now that fact does not justify founder abuse, if that is what happens in a given case (I say nothing about this case - we really don’t know the facts). For decades, investors categorically refused to let founders take even a penny out of the company as they were urged to "swing for the fences" to ensure that the investors got their projected minimum 10-to-1 one return on investment. And when they missed, it was the investors who would force a merger or sale of the company, take out their liquidation preference to get a return on their money, and leave founders with a zero-equity return after perhaps years of working for little or no salary and putting in 20-hour workdays in the process. This value proposition may have paid in a big way for founders in select companies but it has also left large numbers of seriously harmed founders in its wake over the years. Today, this is changed somewhat and founders at times have opportunities to balance their risks along the way as they strike their bargains with the VCs. How, when, and to what extent they take any money out along the way is a completely legitimate issue to be fought for by founders and resisted by investors as circumstances dictate. But the overriding goal of letting founders spread some of their risk is completely bona fide. The details get resolved by the founders, the company, and the investors through private negotiation, not through a public airing. If investors choose to accept something that sounds aggressive to the rest of us, that is their calculated risk. Last I checked, they qualified as "sophisticated investors."

3. Is it good policy to have a dividend declared for the benefit of insiders and for founders to take significant cash out of a company in the early stages even while other employees may not have that opportunity? Maybe, maybe not. That is a legitimate question for debate and it should be cast as a policy debate, not as a perverse prying into the details of a particular company whose circumstances we do not really know. The traditional justification for requiring founders to ride it out to the bitter end with no prospect of any real return unless the company hit it big is that it is important that founders have "skin in the game," i.e., show a real commitment to the venture as opposed to making opportunistic short-term moves that further their immediate gain at the expense of the venture. That is a legitimate concern at all times in a startup but so too is the idea of fairness to founders. Why, when founders have the power to assert more control, should they voluntarily accede to a historic policy the keeps them in handcuffs and leaves them with basically an all-or-nothing proposition in whether they ever get anything significant out of the venture? This makes no sense and it is natural that founders would want to change this older pattern and practice. We can debate to our heart's content whether this is good for startups or not - that should be a policy debate (including over where exact lines ought to be drawn on cash take-outs), not an excuse to take what might amount to cheap shots at a founding team that certainly deserves better treatment than to have a one-sided debate carried on at its expense.

vladd2• 15 years ago

The 3 points you make forget the little guy: that early employee, whose employee number has 1 digit, who trusted the founders when he accepted the option grant and put 60 hours of work or more each week in the hope of not being screwed when the founders negotiate confidentially with the investors on how the company will move forward.

There's no SEC for privately-held companies, there is basically no oversight and the confidentiality clauses make it almost impossible for this little guy to find out how he's getting screwed and by whom. Learning and talking about it is the only way to fix it, and I'm a bit concerned that you completely overlooked this aspect in your comment.

grellas2• 15 years ago

Very good point - I actually had just edited my point 3 (first sentence) to add this point, posted the edit, and then saw your post. This definitely fits into the equation in an important way as part of the policy discussion. Thanks for highlighting it.

keeptrying6• 15 years ago

Your "little guy" has been earning a salary for the last 3 years in the startup - in fact he makes more money than the founders.

I still think its okay to compensate the founder for getting the app to this point.

gojomo8• 15 years ago

You don't know if any 'little guys' were hurt. If the same amount of money had been taken in through sales of additional stock, at the same pre-money valuation, everyone with vested or unvested options would be more diluted. So treating cash-to-early-shares this way (rather than equity sales) can be a slight benefit to all employees and stockholders.

Meanwhile, investors are diversified and have great counsel, so they can look out for themselves.

The only question for me in a situation like this is if there are people who were vested but unexercised, who would have exercised had they known the unique dividend was coming. It'd certainly be nice for a company to give them the info they'd need to participate knowledgeably.

gavanwoolery• 15 years ago

Founder's can cash out without screwing employees. I had almost no stock as an employee in my first startup, but the founders took care of me post-acquisition.

steve89184• 15 years ago

I completely and vehemently disagree with your response. You are acting as if the dot com bust never even happened!! I have no clue how old you are, but if you are over the age of 35, maybe you'll remember that the dotcom "boom" was merely a two-fisted cash grab from investors into the pockets of the founders and VCs. I certainly hope that as in industry, we don't make the same mistake twice in 10 years, lest it will again kill future investment in Silicon Valley for the next subsequent years.

It probably sucks to be the founders of AirBNB to have this info exposed, but they have the opportunity to respond to Chamath's opinion. It certainly seems as though they are in an indefensible position, but maybe there's a good reason why they are withdrawing millions from an as-of-yet unprofitable company. As I mentioned in another comment, I don't recall Bezos ever doing this.

You seem to have forgotten about the lessons of the dotcom boom. It's not about the founders or the VCs, it's about the investors. During the dotcom boom, founders and VCs both screwed the investors out of billions upon billions. A great deal of money was lost during the bust, and a lot of peoples' lives were affected. If you were around Silicon Valley at the time, you would know that the amount of jobs lost during the bust was worse per-capita than Detroit in the 80s. As a morbid datapoint, commuting on the 101 got much better at the nadir of the bust, because so many peoples' jobs were lost. The company I was at had half a dozen layoffs in 1 year, and lost 50% of the employees. The last thing I want to see is another round of smash-and-grab VCs and founders bilking more money from investors, and killing investment again, possibly putting me out of job because the SV economy contracts again.

The point that Chamath made is that the money is ONLY going to the founders and maybe some initial investors. Employees are being locked out of this. Say what you want about companies like Google and Facebook, but Brin, Page and Zuckerberg never turned their companies into cash-grabs where only they benefited.

We need MORE transparency, not less, so when seemingly shady things like founders withdrawing millions from the company coffers occurs, I would like more information about this.

I want to know if this is another second-coming of the dot-com bust, where I could lose my job and be unemployed for months/years because VCs, founders, and Wall Street were all complicit in sucking and spending money from investors, and then causing a complete seizing of investment in the Valley.

I have to admit that SARBOX actually did end up exposing companies like Groupon. At least there is a modicum of transparency in the S-1 filings so that people could see the accounting techniques being used by Groupon.

user95000• 15 years ago

Everyone got caught up in the dot com boom. This includes founders, VCs, employee shareholders, public shareholders, and acquiring companies. To blame just founders and VCs as money-grubbers who screwed everyone else makes them sound much smarter than they actually were. Even the best VCs blew hundreds of millions of $ in bad bets, like how Sequoia plowed money into Webvan.

Public investors committed the largest valuation run-ups at the time. Remember how hot day trading was? In the end, they got left with the short end of the stick.

Your general sentiment is right. The people who are rich now are the ones who cashed out when times got frothy. Hard working employees should be given the same opportunity as the people who architect the deal.

SkyMarshal• 15 years ago

Fyi, George has been around a while:

http://news.ycombinator.com/user?id=grellas

http://grellas.com/

0x124• 15 years ago

> The point that Chamath made is that the money is ONLY going to the founders and maybe some initial investors. Employees are being locked out of this.

You seem to have missed an important detail: the dividend was to 'common stock', without a full list of stockholders you can not make the claim that employees are being locked out of this.

VladRussian3• 15 years ago

>It is bad form for this sort of thing to be aired publicly.

the financial dealings start to stink in Silicon Valley and in hi-tech in general and some people seem to care enough and are in position to at least voice their concerns.

shawnee_• 15 years ago

Separately, when you look at successful tech companies, it seems that dividends are an approach used by cash rich operations to distribute excess earnings — in fact, the most successful, cash rich tech company in the world, Apple, hasn’t issued a dividend and they have more than $75B in cash!

The fact that companies can get away with something like this is absolutely ludicrous. It illustrates just how far the stock market has gone from its original purpose.

Back before companies had the ability to sweet-talk investors with bulging pockets, companies wanting capital had to raise it the good-old-fashioned-way: IPO. IPO used to have the ability to allow a company to access as much capital as it would reasonably need to grow. But with the preponderance of heavily privatized companies milking both the private AND the public side of the investment machine, the value-creating just cannot be accounted for properly. Something in the gears here needs to be tweaked.

A company like Apple with $75B cash (if that's true) should have a legal and an ethical obligation to pay out dividends to its shareholders. Tight-fisting cash doesn't do anything to the wealth-creating mechanism in our capitalistic society.

nerfhammer• 15 years ago

Ah, but if they paid it out in dividends, it would be taxed!

Apple's cash hoard is functioning as a giant insurance policy against Apple's stock price, which if you buy and hold, never gets taxed.

megablast• 15 years ago

Also a lot of Apples "cash" is overseas, where it would lose a lot to be bought back in.

munaf• 15 years ago

Chamath's response: http://uncrunched.com/2011/10/01/chamath-palihapitiyas-state...

nhangen• 15 years ago

You mean "Arrington's response?"

Oh how Michael loves to insert himself into every piece of drama he can get his hands on.

cletus• 15 years ago

Absolutely 100% agree.

Founders cashing out is a big red flag. I said it about Groupon. I've said it before. This really is taking it to the next level: cashing out with a dividend to retain control and ownership.

I absolutely agree that for any cash out it should be open way beyond the founders. In fact, this is a good way for larger startups to kick the 500-shareholder limit can just a bit further down the street.

I see Airbnb as a fundamentally risky business. At some point Airbnb will be large enough to warrant the attention of local and state authorities because many people offering places to stay are doing so illegally or in violation of their own lease agreements.

This woman who had her apartment wrecked is just the tip of the iceberg. It is only a matter of time before a headline about a serious physical assault or worse. Airbnb can count their lucky stars it was "only" a ransacking and vandalism.

portman• 15 years ago

>> Founders cashing out is a big red flag.

No, it's not. Palihapitiya agreed that there should be a secondary component to the financing.

When a company is "shooting for the moon" and has a chance at a >$1B exit, investors want the entrepreneurs to cash out a portion of their stock, because it gives them the financially flexibility to swing for the fences. It aligns the founders and management team with the late-stage investors.

Fred Wilson does a great job explaining why founders and early investors cashing out in late-stage financings is a Good Thing for everyone.

http://www.avc.com/a_vc/2010/01/the-tug-of-war-between-ma-an...

http://www.avc.com/a_vc/2010/08/angel-liquidity.html

georgespencer2• 15 years ago

> Palihapitiya agreed that there should be a secondary component to the financing.

Agreed. I think what OP meant was "founders cashing out [using this method rather than a secondary sale]" is a big red flag.

0x124• 15 years ago

Probably the founders of AirBnB would agree that theirs is a risky business, which is one excellent reason to take some money off the table.

Think of it as hedging your bets, on the one hand you keep a large chunk of stock because the company may weather all the storms ahead successfully, on the other hand it may not. The insecurity can be translated in to a strategy where you remove some money now in case the 'worst case scenario' becomes a fact.

Nobody is forcing any of these guys to do business under these terms. If the VC doesn't want to be part of the round then they should just pass on it, it's not like there is a guy with a gun behind them making them ink the contract. If they don't like the terms, don't do the deal.

gruseom2• 15 years ago

You start with "founders cashing out" and end with the woman who had her apartment wrecked? What is common here, other than that you don't like Airbnb?

Reminds me of Freud's story about the peasant who says to the other peasant "Hey, you broke my pot" and the other says "First, I didn't borrow your pot, second, it was broken when you lent it to me, third, it's my pot."

tworats• 15 years ago

It's important to note that the VC is not objecting to the founders taking cash off the table. He's objecting to the method (dividends as opposed to a secondary sale). His arguments are convincing to me - and I'm a founder so my bias is naturally for the founders.

gabaix2• 15 years ago

Why do the founders want to cash out?

It looks to me you can increase your salary to live a good life, while waiting for the big exit. I understood Groupon did this because they thought Groupon was at its peak. Is that the same thing for AirBnB? Am I missing something here?

SoftwareMaven• 15 years ago

The founders aren't getting diluted in the deal, since they are being distributed as dividends. This will give them the opportunity to run past third to slide home instead of taking the standing triple, since they won't be left with nothing if the umpire calls them out.

gabaix2• 15 years ago

Got it. Also dividends are better than higher wages for tax purposes.

rdl5• 15 years ago

This looks like two issues:

1) Founders de-risking a successful but still growing company at a series b or later financing (or even a late series a). I really don't see a problem with founders diversifying their personal portfolios (otherwise, many have 100% in company stock AND debt from school, etc.). You don't want them to get distracted, but being short on cash doesn't help you make a successful product.

2) De-risking via a special dividend, vs. secondary sale of stock. Yes, it lets founders avoid selling some shares. If you're doing it at a $1b valuation, it doesn't seem like a major factor either way, but if there could be a precedent for people raising $20-50mm rounds, dividend vs. sale might be a better way to put $1-2mm in the pocket of each founder after a few years, so they can shoot for a >$1b exit.

I'm curious if this form was suggested by the AirBnB side (or their law firm) or the VCs.

Hitchhiker• 15 years ago

The Vanity of Wealth and Honor

" If you see in a province the oppression of the poor and the violation of justice and righteousness, do not be amazed at the matter, for the high official is watched by a higher, and there are yet higher ones over them. But this is gain for a land in every way: a king committed to cultivated fields.

He who loves money will not be satisfied with money, nor he who loves wealth with his income; this also is vanity. When goods increase, they increase who eat them, and what advantage has their owner but to see them with his eyes? Sweet is the sleep of a laborer, whether he eats little or much, but the full stomach of the rich will not let him sleep. " - Ecclesiastes 5:8-12

0x124• 15 years ago

If you don't like the terms of the deal, don't do the deal (he doesn't want to do the deal, see third and next to last paragraphs of the email).

A VC complaining about the terms under the pretense that 'the little guy is treated unfairly' is a bit like royalty complaining about the price of cake.

Nobody forces him to do this deal on these terms. He's just scared to miss out on a big hit, he'd like the ring side seats to be cheaper by keeping all the money in the company or by buying out some of the founder stock.

Too bad, you can't have it both ways.

He may have a point about early employees (a 'special dividend' that excludes certain shareholders is not very elegant) but it is not his to make, and the dividend in this case was to 'common stock' which seems to imply that anybody with vested shares participates in that dividend.

His 'concern' is about the unvested employees, but that's a nonsense argument, as long as your stock is unvested, you don't have any stock.

Options do not participate in dividends until you exercise them, they never do because they are not stock and that's a pretty clear-cut thing.

Pretty low-class to dump this email in the public domain, I think that people will remember this when dealing with this particular investor in the future.

NY_Entrepreneur• 15 years ago

Ah, what a morality play -- secrecy, power, greed, collusion, dirty dealing, guilt, shame, etc.!

If HN can't outgrow the fascination with morality plays, then what hope is there for the rest of society and society as a whole?

We need a new Web site: VC_secret_confessions.com!

bond• 15 years ago

Follow up: http://allthingsd.com/20111002/airbnb-investor-chamath-palih...

crazyfoo• 15 years ago

Cross-posting from my Quora answer:

http://www.quora.com/Airbnb/Why-are-Airbnbs-founders-excludi...

I have no knowledge of specifics outside of the ATD article mentioned, but my read says that the dividend will go to all common shareholders. So employees who have both vested and exercised shares will receive their pro-rated portion of the proceeds as well. It just seems that the founders must hold 93% of the vested shares (21/22.5), which is reasonable given that they started vesting years ago, when they were still in their cereal-selling phase.

Addressing the founders' decision to dividend-to-common instead of secondary selling some of their common shares:

In a typical venture financing, only preferred shares are sold, and there is a price per share that is set by the round's valuation. After closing, the price per share of the common shares/options is determined by external auditors in what is called a 409A valuation process. This process is a little bit of a game, whereby the company tries to come up with reasons (financial models, market comps, etc.) to depress the price of the common shares relative to preferred. This has the benefit of giving subsequent hires a lower exercise price on their options (and eventual higher profit upon exit.)

The price delta between the classes can be as high as 10:1, though it's usually closer to 3:1 and narrows as a company approaches IPO. However, were anyone (founders or employees) to sell common stock in the round, the common price per share would jump to exactly this new clearing price. Since Airbnb is a hot company, it's reasonable to think that buyers would be willing to pay a market price for common that's not far below preferred. And that would mean less upside for all future employees. A dividend-to-common avoids this.

Because Airbnb is so young and fast growing, they still need the allure of the upside of stock options to recruit and retain talent. Any sophisticated investor should understand this dynamic. And yet this dividend annoys them because it means there's a wealth transfer occurring that doesn't increase their ownership.

Let's assume for a second that I'm right and that all vested/exercised common shareholders will see some of the dividend. As food for thought, what if Airbnb had instead said they were going to spend $21M of their newly raised capital for cash bonuses for anyone who had worked for them more than a year -- distributed per employee via this equation: total hours worked * total value created... would the Valley's response have been less uproarious?

VC Decries Airbnb’s Recent Funding for Founder Control and Cashout

Related Stories