Gowalla Founders v. Gowalla Investors

http://uncrunched.com/2011/12/05/gowalla-founders-v-gowalla-investors/

by aaronbrethorst • 15 years ago

107 56 15 years ago

learc83• 15 years ago

What's the problem, it appears the company was dead anyway, and had no real assets so the investors get 30 cents on the dollar instead of nothing.

sturadnidge• 15 years ago

Arrington mentions 2 ways to look at it (both from the investor perspective), but there's a third - entrepreneurs raising a stiff middle finger to investors who have fucked them over (or tried to).

I'm not saying it was the case with Gowalla, nor am I saying all VC's are assholes. Just saying that it it's another motive for deals like this.

kloncks• 15 years ago

One of the highlights of this article was hearing how SV Angel thinks about this. It was sane, pragmatic, intelligent and succinct.

I haven't yet had a chance to work with them, but my opinion of them is constantly increasing.

keeptrying• 15 years ago

Con ways and SV angels marketing strategy is to be extremely pro entrepreneur. It's their inherent differentiation strategy. I love it!

geofflewis• 15 years ago

They're constantly supportive, always helpful, never intrusive. The best.

Shenglong• 15 years ago

Parakey investors got ---they’re--- money back and a little more,

Arrgh. I have nothing constructive to post about this, but this mistake annoys me.

danshapiro• 15 years ago

Here's the right way to behave, in two simple steps:

Step 1

Company management (in this case, the founders) have a fiduciary obligation to get as much money for the company as possible. In the sale negotiation, they should discuss the price of the company first. If the buyer tries to talk about their compensation, they simply decline to engage in the conversation, saying that their obligation is first and foremost to the shareholders, so the company price is the first order of business. They should negotiate as hard as they can to maximize the value returned to the shareholders.

Step 2

Once the company price is set, the management/founders should negotiate the best deal possible for the team - both themselves AND the other employees (don't forget the latter). The company's already locked and loaded. There is no reason for the team to hold the screws to the acquirer at this point for maximum value.

There are two classic mistakes that get made. The founder mistake is easy to make, because the company will encourage it: "How about if we lower the price of the company by $X, and add $X to your retention package?" This is wrong and possibly illegal (but it's hard to get caught). Taking this sells out your shareholders and violates your duties as an officer of the company.

The second classic mistake is an investor one: thinking the employee compensation belongs to the company. Employee comp is for future services rendered, not past. There's no reason the shareholders should get a percentage of the founder-cum-employee's stock grant unless they plan to do part of their work for them.

tl;dr: get the best price for your company, then get the best price for yourself and your team.

pyoung2• 15 years ago

>""How about if we lower the price of the company by $X, and add $X to your retention package?" This is wrong and possibly illegal"

It would be good to clarify if this in fact illegal. If it is not illegal, than saying that it is wrong is subjective. In the case of talent acquisitions, the acquiring company has an incentive to focus more compensation to the 'founder-cum-employee' for retention and incentive purposes. I feel that it would be very reasonable for an acquiring company to use this as a negotiation tool (unless it is illegal, of course) as they are merely looking out for their own, longer-term interests.

jackgavigan2• 15 years ago

> It would be good to clarify if this in fact illegal.

Well, as Dan mentioned - and I believe (IANAL, etc.) that this is enshrined is US law - the directors of a company have a fiduciary duty to the shareholders.

The excuse here seems to be that the company was going nowhere but my gut feeling is that opening negotiations with a potential acq/hirer is only acceptable if you've had discussions with your investors and, ideally reached some kind of agreement/consensus to recognise that the company isn't going anywhere and the founders should explore whatever options are available.

(Afterthought: Given that negotiations with a view to being acq/hired involve a clear conflict of interest for the founders, they should involve at least one non-exec director or investor to ensure that the shareholders' interests are protected.)

Otherwise, founders run the risk of being perceived as having spent millions of other people's dollars to build up their own reputation in order to get hired on a sweet compensation deal by Google or Facebook.

OoTheNigerian2• 15 years ago

No one is taliking about the users.

Maybe it is me but my 'moral antenna' says it wrong to leave users suddenly stranded.

Yes it was a 'free service', but the free users made it possible to get millions in investments. Users investest time and effort into making your service valuable.

Here is how I would do things differently.

Depending on the cost, I will have a shut down period of 3-6 months. Longer if possible.

I will make it easy for users to export AND import their data into a similar service. In this case 4sq. That is the very least they should do. The data from a users Gowalla account is ppractically useless if it is not put in context of a similar app/service. Telling millions of users "take your shit out by next month, thanks for your time" is not cool at all.

FriendFeed did it much better. Etacts is the worst I have come accross.

It is not cool for Gowalla, it will also not be cool for gmail.

ngkabra• 15 years ago

If you're a user in the modern internet, it is not cool for you to keep yourself so much at the mercy of companies whom you don't pay.

I always keep a Thunderbird client running in the background of my laptop, which sucks out all emails from gmail and keeps a local copy. Yes, it would not be cool for gmail to one day suddenly cut me off, and yes, I feel Google, with its "Do no Evil" policy will not do that to me. But still, I prefer to make my copy of important data right now, thank you very much, instead of whining later that this is not cool.

Same with my Flickr pics and Delicious links (downloaded using a script). And my Facebook data I really don't care about.

bravura• 15 years ago

I would pay for a single service that does this across most major internet properties. i.e. pulls my data for me onto, say, an S3 share.

pdelgallego• 15 years ago

>> And my Facebook data I really don't care about.

If you are based in the EU, them the european data-protection laws give you the right to get a copy of all the data Facebook has on you, not just the data you uploaded but everything.

They have up to 40 days to deliver a CD-ROM with all your data.

swang• 15 years ago

They already said they will be providing a way for users to export their data. http://blog.gowalla.com/post/13782997303/gowalla-going-to-fa...

Also Gowalla for the past year has has allowed users to checkin to 4sq, and facebook and share on twitter and tumblr and has moved to be more of a travel/spot info site. http://www.pcworld.com/businesscenter/article/212251/gowalla...

tptacek6• 15 years ago

The operators of free services do not owe their users anything --- apart from safeguarding any data they took from users --- when their companies fail. This "somebody think about the users" meme needs to die. A company offering free service has an overriding first obligation to its own employees.

OoTheNigerian2• 15 years ago

This "users using free services are of no value" meme needs to die.

Twitter is nothing without their users so are many of these web services. Getting traction depends on people using your service. If it becomes the norm that companies built will not exist in 2 years, why then should I invest my time in the service especially the free ones.

I have run a startup that was not financially viable so I know it is not the fault of founders if things do not go according to plan. However, my co founder and I have left the site up since it does not cost much to do. However, if it did, we will be sure to make the transition as easy as possible.

I am not saying users should be paid or compensated but should be thought of.

brk• 15 years ago

Keep in mind that with most of these free services the users are the pawns. If you're not paying, or getting paid, then you are the thing being traded.

Companies exist to make their investors and owners money. Gowalla did not exist so you could check-in to places. It made a check-in service because they thought that was their most exploitable money-making opportunity.

Don't fight this. You won't win and will only frustrate yourself.

pyoung2• 15 years ago

Considering that the founders will be taking positions at facebook, these 'side deals' appear to be closer to salary/compensation negotiations than anything else. Just because you invested in a company, it doesn't mean you own the founders. While the company may not have succeeded, these guys are probably very valuable assets and should be compensated by FB accordingly.

bambax3• 15 years ago

> Parakey investors got they’re money back

How can one write for a living and spell like this? English is not my mother tongue and yet I now the difference between they're and their, it's vs. its.

Or is this the result of poor speech-recognition software?

286c8cb04bda2• 15 years ago

It's an artifact of how native learners acquire language, compared to adult learners. Our native tongues are acquired rather ad hoc, and most people 'think' in speech. (As evidence, watch a slow reader. Often times they will sub-vocalize the text as they read. This is a side effect of their brain turning the text back into sound.)

So, to somebody who learned English as a child -- and is therefore aurally dominant -- the words "they're", "there", and "their" will all basically occupy an overlapping space in their mind. Somebody who learned English later will use textbooks to support the process; Things like contractions will be give special emphasis, etc.

bambax3• 15 years ago

You make an interesting point, and what makes it very interesting is that it's testable: are native speakers worse spellers than non-native speakers? And which words do each group have the most difficulty spelling?

It doesn't seem likely that non-native speakers are better general spellers than native speakers; but it's possible that some words are especially difficult for native speakers and not for non-native ones.

Are you aware of existing studies on that subject?

mikkom• 15 years ago

> If a founder leaves stockholders behind to take a lucrative side deal, they’re not acting ethically. I’ve mostly taken this position in the past, before becoming a VC.

As if VCs are acting "ethically". I have seen many VC cases (and been involved with a few) and be assured, VCs are not "ethical" or think founders AT ALL. All they think about is their money. If they could exchange founders future for a fat pile of cash, they will do it.

If the VCs are minority owners (as it seems in case like this), they can just accept what is decided. This is also the case with founders when VCs have majority. They will always do what they want (what's best for their money) without thinking founders best interest or "ethics" of their actions.

mathattack• 15 years ago

A couple thoughts here: 1) As the article states, Facebook has fiduciary duty to Facebook and nobody else. 2) Same with the VCs. 3) This isn't unique to high tech. Sometimes a CEO will accept a bad merger price to become the CEO of a larger firm. This is called the principal-agent problem and is why boards should be involved in all M and A. 4) Unless there are competing bids it is hard to prove a failure of fiduciary duty. In the end it's reputation. If the Angel and VC feel screwed then the execs won't get money again. If not it is ok. It is lie Prisoners Dilemna - you play nice in a repeated game.

DevX101• 15 years ago

On the most recent TechStars/Bloomberg startup reality show, a couple of investors tongue in cheek talked about investing in the career earnings of one of the entrepreneurs whom they thought had a lot of promise. Although the investors probably weren't too serious about this point, I don't think its a bad idea. If Gowalla investors had struck such a deal with the founders of Gowalla then of course they'd be entitled to some of the stock grants that Facebook offered. But they didn't. They invested in the company which failed, so they get nada.

And I give absolutely no credence to the argument that the investors funds boosted the profile of Gowalla founders so they wouldn't have gotten great deals from Facebook if it weren't for their investment. If that's the case, then limited partners should be entitled to a share of the profits from a VC's second fund if the first one goes bust. Because, you know, it was the limited partners' money that gave you a name in the VC community in the first place. Of course, no one takes such an argument seriously in the finance community, and neither should you entrepreneurs.

Jasber• 15 years ago

FYI this actually happened: http://venturebeat.com/2010/03/03/life-investment/

jrockway• 15 years ago

See also: taxes. The government subsidizes school (in some form) from kindergarten to your PhD, and in return, you pay them back in the form of taxes as soon as you use that knowledge to make money.

tptacek6• 15 years ago

Gowalla lost. This is what happens to investments when companies lose. The "side deals" the team makes after their company fails are irrelevant. Nobody is better off going down with the ship; not the founders, not the employees, and not the investors.

amorphid• 15 years ago

I tend to agree. If the founders shutdown the company and started a new one, there wouldn't be much fuss. So if they shutdown the company and get a nice signing bonus to join Facebook, that seems the same to me.

If I were an investor in Gowalla, I certainly wouldn't be thrilled with it, but I would at least try to own the fact that my investment failed. An investor should be most pissed at Facebook. This is the equivalent of recruiting away Gowalla's employees one at a time with big piles of cash. As the last employee is recruited away, Gowalla effectively becomes an empty shell. How much can investors get for the shell?

vannevar4• 15 years ago

Gowalla lost. This is what happens to investments when companies lose.

Not necessarily. Sometimes they pivot from a failed product to a successful one, in which case the investors are rewarded for sticking with the team (which often requires follow-on investment in such cases). VCs often say that they invest primarily in teams, not ideas. It's not clear that the team really lost here, but the investors obviously did.

tptacek6• 15 years ago

Two responses.

First, when you "pivot" after losing a fight for a market and take an A round of funding, you failed. Not all failures are fatal, but the word "pivot" isn't a magic startup 1-up mushroom.

Second, whatever you want to call it, nobody is better off not selling if Gowalla 2012 was destined to fail anyways. It is among other things (very) hard to retain talent at a company facing (at best) a heavily dilutive future round just to keep the lights on for a (very) uncertain new product.

Ultimately though, I'm just repelled by the idea that people think operators owe it to financiers to go down with the ship. I think the real issue cuts in rather the other direction: founder-operators who kowtow to VC partners to preserve their reputations and future fundability, come what may to the employees they recruited to their doomed company.

gyardley3• 15 years ago

I don't get the reason for this article's existence. Nothing is new or unusual here.

In any acquisition, the CEO and senior staff simultaneously negotiate their compensation packages with the acquiring company.

This always leads to major conflicts of interest, which is why the board gets to approve the acquisition, and why in larger transactions there's often some outside help brought in to negotiate.

If the board doesn't like the proportion of the proceeds going to the employees, they can always block the acquisition. They have that power precisely for situations like this. Since Gowalla's board approved the Facebook acquisition, they're presumably fine with it.

As for the minor investors who've been kept in the dark - I'm sure they agreed to drag-along provisions in their investor rights agreements, which meant they didn't have to be consulted. You have the rights you agree to.

viscanti• 15 years ago

It makes sense from the investor's perspective. They weren't going to get a better, more lucrative exit. Gowalla would probably just whither and die eventually. Instead, now the investors get to talk about how they had a "successful" exit, which might help them get future deals (most startups would prefer to raise money from someone with several exits). It seems like it was the best deal for all involved.

hkarthik• 15 years ago

Those complaining should look back to 2000 when a deadpooled startup left a gaping hole in the economy with lost jobs, bad investments with ordinary Americans, and a negative impact on every other startup in the space.

Given the alternative, I'll take founders selling out and moving on over what we went through 10 years ago.

jackgavigan2• 15 years ago

Just a Point of Information...

There's no actual confirmation that Facebook is acquiring Gowalla as a company. In fact, Facebook's statement (as quoted on various news sites) seems to suggest the opposite:

”While Facebook isn’t acquiring the Gowalla service or technology, we’re sure that the inspiration behind Gowalla will make its way into Facebook over time."

It wouldn't surprise me if it turns out that what's actually happening is that the core Gowalla team is quitting Gowalla to work for Facebook, and Gowalla will be shut down, with the remaining funds being returned to the investors (i.e. the "twenty or thirty cents ... for every dollar invested" that Arrington refers to).

No doubt we'll find out in time.

notbitter• 15 years ago

This is why Gowalla's investors are diversified across multiple startups. For them this is just one setback in a much larger game.

The people getting screwed here are Gowalla's employees, who put years of effort into a single project and whose options are now worth zero.

wavephorm• 15 years ago

Is Arrington essentially saying when he invests in a business he wants a cut of all future salaries and compensation of the founders should the company get liquidated?

Wake up buddy. A VC invests in the business, not the people. A shareholder is insulated from liability and for that privilege they are not entitled to anything outside the scope of the corporation.

bambax3• 15 years ago

Umm, no. He's saying the exact opposite:

> Focus on the winners, and don’t lose sleep over the losers. Seems like a good investment philosophy to me.

kariatx• 15 years ago

I think a more interesting question is what sort of responsibility Gowalla founders had to its employees. I've noticed that a good number of employees aren't staying on with the Facebook transition (by my count, only a small minority are going on to Palo Alto). Maybe they had better offers elsewhere, but considering some people are opting for uncertainty / unemployment, my speculation is that they got the short end of the stick with this one.

rdouble• 15 years ago

Early stage startup employees usually get hosed except in IPOs.

Gowalla Founders v. Gowalla Investors

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