> As part of the structure of the deal, Xenon guaranteed I’d take home $3.7m, regardless of what came up during due diligence
Interesting, I wonder how this is structured - surely there are items that can come up during due diligence that are deal-breakers for Xenon, and surely due-diligence is performed before the contract is closed?
> But they were incredibly gracious and both agreed to write off their investment. General Catalyst’s (who had the lion’s share of that $800k) response showed just how classy they are: “We recognize the work that’s gone into the past 7 years and it sounds like this is a great landing spot for the team. We’re grateful for the opportunity to have supported you along the way.”
I have no idea how they managed to get the investors to walk with nothing, when the founders walked away with so much.
> Interesting, I wonder how this is structured - surely there are items that can come up during due diligence that are deal-breakers for Xenon, and surely due-diligence is performed before the contract is closed?
The company was inherently transparent with everything. A big part of DD is QoE and there wasn't much to audit there. This was a deal term that reduced any walkaway risk.
> I have no idea how they managed to get the investors to walk with nothing, when the founders walked away with so much.
Deal flow and it's not worth their time. Be nice to successfully exited founders and they'll speak your praises for eternity. General Catalyst wants $1B exits. If the founder leads to dealflow that brings that in, the $800k will be an easy ROI.
Now if (theoretically) some founder reading this thread ever has to choose between General Catalyst and another VC, they will ALMOST ALWAYS choose General Catalyst
Over time it will lead to General Catalyst finding a non zero number of 10X or 100X companies because of that
Or its the cost of a lesson to stay away.
I only know what's on that Wikipedia page, but it doesn't look like it's as simple as the investor owning a stake, rather there are events that have to be triggered first which were perhaps very unlikely to be triggered.
I'm wondering if the math worked out that the firm would end up with less than half their investment, it's in their best interest to have a write-off and the founder benefits and potentially comes back to them with a new business later, instead of squeezing the founder for a few dollars.
If you're not going to make any money and the amount you'll lose won't piss of your LPs then the goodwill from an entrepreneur you like working with is worth more than the cash.
Keep in mind it’s a relatively small purchase price.
It must be tough though to bear your soul like this and take the heat he's no doubt been getting (including here).
>>>General Catalyst’s (who had the lion’s share of that $800k) response showed just how classy they are: “We recognize the work that’s gone into the past 7 years and it sounds like this is a great landing spot for the team. We’re grateful for the opportunity to have supported you along the way.”
It also goes to the heart of how messed up our economic system can be. I can be mollified by saying that he worked hard and earned his ~$4 million by building a business. But I can't internally justify the VCs gifting him $800k for AFAICT nothing. I'm going to have to work for the next 4-5 years for that but he gets it basically on the whim of some person at a VC.
Supporting the founder (and earning goodwill for it) is probably worth a lot more.
And here is the problem. Take VC money and now you are forced to run company at breakeven point.
This company would be perfectly fine operating with half the staff and generating for the CEO half a million in profits per year - every year.
He could have met his family financial goals long ago and still keep the company.
This is what folks at 37signals figured out years ago and good on them. Do not take VC money unless you are already a millionaire and aiming for the moon.
I've taken the profit optimization route for my own business, and often wonder how much money I'm leaving on the table by not hiring a larger team and chasing (profitable) growth.
For a lot of other people, a half mil a year profit from a successful small company they'll own pretty much in perpetuity might be what they'd choose. I can see why he didn't. (I'd almost certainly have made the same choice myself.)
You're comparing apples and oranges - 500K/year of profits first needs to get taxed. Then distributed to shareholders pro-rata, then taxed again at the personal level. Also, you're assuming he could have made 500K year in profit from the very beginning.
But 37signals/Basecamp DID take investment money.
They took money from Jeff Bezos investment company named Bezos Expeditions - back in 2006 (14 years ago).
https://signalvnoise.com/archives2/bezos_expeditions_invests...
My guess is that this wasn't all luck.
The VC's in this case knew how transparent this founder was being in reporting his startup journey. They knew that this decision would get publicity.
With this knowledge, the VC firm probably made a calculated decision to forego their liquid pref in return for the good will generated by the founder's transparent PR.
It's cool to see the founder being financially rewarded for his transparency.
They are investing $1B over all their funds.
Will the impact a founder-friendly reputation has on deal flow and close rate increase their fund's ROI by 0.8%? Almost certainly.
This is _brilliantly_ targeted PR. (To the extent that I suspect part of the deal with General Catalyst was that he blog about it and do his best to get it on the front page here...)
I can't think of a better advertisement for these VC's. Calculated or not, it is a great move
Years ago Jonathan was in a position where we needed to buy back his shares in a company in which he invested early. He could have asked for a much higher price, and instead he graciously agreed to a different outcome - he understood the situation and did the right thing.
Glad to see that General Catalyst did the same in relation to Baremetrics, writing off their investment. These things don't go unnoticed. Sometimes reputation is way more important than a few more bucks for your LPs.
Folks, this is a founder who's openly sharing the kinds of things we usually keep hidden. I doubt there's been a startup exit in the last decade where a healthy skeptical HN'er couldn't find some wrongs being done, if the details had been available. It's extremely hard to get everything right, from every perspective. The only difference here is that the details are actually available.
Please go easy. We want more posts like these, not fewer.
What surprises me most is the lack of understanding of founder risk. Most negative comments are related to employees not walking away from this exit. It feels to me that many here seem to conflate the inner workings of heavily VC-backed businesses with a slowly and sustainably growing company like Baremetrics. I see a lot of assumptions all over the comments.
I appreciate the discussion, though. It's nice to see people sticking up for employees. But a sub-10-people SaaS that's ALMOST self-funded is not the same as a prospective unicorn.
- General Catalyst: $2.5B+ in Assets Under Management
- Bessemer: $4B in Assets Under Management
DISCLAIMER: If you take venture capital, you should obviously always do it as a responsible fiduciary of both the company and the capital.
With that said, I'm positive both of those firms will be fine. They're looking for 100x returns, a $400k write-down from a seed investment is nothing. If anything, it's worth doing that on the off-chance Josh goes on to create the next Uber or Salesforce and they want to invest again. SV runs on relationships.
However, no matter how much money General Catalyst or Bessemer made last year, I would not want to invest with them going forward. I get that this is only money on the margins, and they get a benefit from a write off. Still, how hard would they have had to fight to get some of their money back? It sends a disturbing signal to me to write the whole thing off.
Someone will reply: "But they made $10b last year! You don't understand the business." And I am sure I don't. But the world is full of people who made a lot of money or were in the process of making a lot of money and then get careless.
Or reply: "It's part of the model! If they don't get 10x-100x they just want to write it off as fast as possible. That's what there investors want." Sure, but if you are careless people will take advantage of you. Also, I just don't buy that all institutional investors that back VCs are that savvy. A lot of them are just following a trend and over funding an asset class.
Tell me I am wrong. I am no expert.
Of course, some posters here are talking about employees getting a raw deal, but it was there for all to see that the company had decided long back to prioritize profit more than growth. Any employee that would have expected a unicorn like exit would have known it wouldn't be the case and would have left long ago. Blaming Josh for that doesn't feel right to me.
My own personal takeaway is crystal clear: if you want to benefit from the sale of something, you need to be the owner!
Much like a gardener or builder who doesn't get paid out when the house gets sold, unless you have a LOT of equity as an early employee, you will not be getting founder-type payouts (and rightly so as you took little to no risk)
Of course we were a traditional SV startup -- people are different these days.
We may also interrogate this arrangement.
Deleted the production database and customer data? You could apologize and move on. There should have been backups to restore from but clearly there weren't.
The gitlab way: Go in great details about how there is no automated backup and the last one that was done manually 3 months ago doesn't work... and how there was no testing/staging environment to try the change before production... and how any intern could delete it the same way by accident on their first day.
There's a reason companies don't publish gory details and internal discussion. At best there's nothing to gain from it and at worst it's highlighting incompetence and wrongdoing.
$4mm after tax (hopefully Josh is getting the QSBS tax break) for a decade of extremely high risk high effort contribution to our economy is not a good risk-adjusted return, but it's at least a decent exit at the end of the day.
We don't know how much the employees are paid, for all we know they could be paid the prevailing wage for their location.
However, over the years, I've learned that facing critics and doing impactful work goes hand in hand.
Put another way, if you don't have critics, you're likely not doing anything very impactful.
In my experience, the key to maintaining equanimity in the face of harsh criticism is to:
1) Have a strongly held mission and set of core values. Commit to this mission/core values regardless of what anyone says.
2) Recognize that it's sort of funny how pretty much any action can and will be twisted and criticized by critics online. There was an article a few months back about Bezos dedicating $10B to fighting climate change, and the entire comment section was negative. Lol!
Prefer just "good job" comments, or what?
Then I checked General Catalyst, they manage multiple funds in the $500M - $1B range[1]. In that context the $800K really is a rounding error, around 0.1% of a single fund's size.
It never ceases to amaze me how money stops being money past a certain amount (which would be life-changing for most people), and just becomes numbers to move around.
[1] https://www.crunchbase.com/organization/general-catalyst-par...
It's not common for investors to write off $800k out of good will (doesn't seem like something in the best interest of their LPs).
Edit:
> It’s a really exciting day here at Baremetrics! I’m stoked to announce that General Catalyst has invested $500,000 in Baremetrics, as part of a new fund they’ve created for businesses on Stripe.
Turns out there is more to the story.
Baremetrics got their cash from a fund specifically intended to promote companies integrating with Stripe. In other words, the goal of the fund was to promote Stripe moreso than to generate returns for LPs
That makes a bit more sense now.
https://www.gyford.com/phil/writing/2013/02/27/our-incredibl...
See also the recent example of https://www.slingbox.com/discontinued, which makes this funny pair of claims:
Q: Why is Slingbox being discontinued?
A: We’ve had to make room for new innovative products so that we can continue to serve our customers in the best way possible.
Q: Will Slingbox be releasing any new products?
A: No.
So the investors just accepted to lose $800k while the founder was getting $3.7M?
Can someone explain the logic here?
$500k came from a fund General Catalyst set up specifically to encourage startups to build new businesses that integrate with Stripe. [0]
The goal for the money was to enrich the Stripe ecosystem. Not generating returns for investors.
If the money came from a regular fund without the Stripe affiliation, General Catalyst 100% would not have accepted the $800k loss.
[0] https://www.prnewswire.com/news-releases/general-catalyst-in...
It's pretty obvious the business didn't pan out as well as intended. It's not really worth their time anymore.
Still. They could have caused troubles and tried to recoup their $800k out of the $4M. They were nice not to.
The money will be written as a loss and go through some accounting/tax trick to minimize the effective loss.
Something doesn't make sense. $800k is not a small enough amount for any responsible investment fund to walk away from.
I wonder if maybe it was actually worth way less. I think he said they walked away from their $800k investment, but maybe that was at a much higher valuation. If it was only worth $80k I can see them not bothering.
If it went to the existing employees (they have 7 of them on the About Us page), that's ~$42k per employee.
If the business is >1 year old, it's treated as capital gains. Since the company is >5 years old, he can likely take advantage of the Qualified Small Business Exemption up to $10m and pay no federal taxes.
https://www.investopedia.com/terms/q/qsbs-qualified-small-bu...
So I am super happy to see some real transparency with real numbers and a real talk about the earn out.
I’m unsure which exact BVP and GC funds Baremetrics raised from, but that $800K likely doesn’t matter to either of their returns with funds of that size. Even at $100M, it probably doesn’t matter to a fund. VCs expect over half of their investments to outright fail.
What’s much more important to the VCs is the good will they just built with that founder. Most founders will give back door reference checks to other founders about investors. Josh is likely to say good things about BVP and GC now. Also, they got that mention in his blog post too. It’s likely they knew Josh would write a post like this and chose to just write it off for the “we’re founder friendly” story vs. looking founder unfriendly.
As a founder, I don’t think there’s anything wrong with what happened here for the investors given their fund sizes. They’re professionals investing other people’s money and expect this type of thing to happen. In fact, most VCs likely expect you to fail. If these were angel investors putting in their own money, I’d have a different opinion.
Did they get anything? It doesn’t sound like it.
What are we missing here?
1. At the end of the day, investors are people too. They may care that the team ends up whole.
2. 800k is non-trivial money, but it’s a small percentage of, say, a $100MM VC seed fund. The economics of VC are that some investments will net zero return. While they could have tried to claim back something here, letting go with grace gives them a lot of goodwill to be first to invest in the founder’s next project (assuming there is one).
Some investors are gonna be ruthless sharks. Others are not.
Other startups looking into them will see this. And breaking even might be about the same as taking the thing as a loss in the grand scheme of the VC model to them. I do wonder if other lower profile companies would have gotten the same deal.
I enjoyed even my first impressions at the interview process and I'm happy Josh got a nice payout, congrats!
I do hope Baremetrics transparency continues in some fomr as its a big inspiration.
EDIT: saw that the founder lives in Birmingham, Alabama. So yes, $3.7 million IS a lot of money.
Unless you're doing infrastructure stuff at Netflix, ad work at FB or Google, or some high level stuff at Microsoft you're not making half a million a year, and you're not doing it at a mid-level anything, anywhere.
Addendum: it's very rare to make more than twice the average wage in Belgium as an employee. It's a different matter if you're self employed.
If you're talking finances, Google/Facebook will pay you more, with less risk, and better work life balance than pretty much all startups. There are entirely justifiable reasons to prefer a startup, but you should take a second look at your calculations if you think finances come out favorable on the startup side.
There was a little bit of “pick the rocket ship” gamble - I had an Uber offer that probably would have been ended more like $250k/year, but it’s not unreasonable to get half a mill joining a late stage pre-IPO startup, and base salary is high enough you do it with little risk.
Hell, I know some mid-level post-IPO folks at Square making $700k due to it 10xing in share price.
I was told FAANG-ers make even more than him, so yeah I tend to believe these numbers.
Josh seems to be extremely entrepreneurial and independent (https://joshpigford.com/projects) and maybe being a part of a trillion dollar machine isn't worth the $ to him. He succeeded doing what he wanted to do and that's fantastic.
Admittedly, people's attitudes to work differ immensely and being able to live the entrepreneurial life is a privilege, but from my POV, you only live once, so $3.7m made from several years of doing things your own way would handily beat even $10m made from several years of employment (and neither are guaranteed).
For those who have gone through an acquisition, how much more Josh could have netted if he accepted to stay 2-4 years?
The company could have potentially netted more overall, but I’d say Josh’s take would remain about the same. If nothing else, he’d take on a lot of risk... the potential package could seem higher, but a lot can go wrong over 2-4 years (both personally and with the acquiring company).
If the investors insisted on recouping that 800k, leaving Josh with ~3M, it sounds like it wouldn't have hit his number, he wouldn't have sold, and.... the investors would be in the exact same place. Effectively, it sounds like they just chose to not block the sale for something that, in the end, would have made no difference to them (but would have prevented the founder from leaving).
Josh ended up better, the employees ended up better, and the investors _really_ didn't end up in a worse place (in actuality, they probably now get to write this off as a loss and not worry about it anymore, so maybe a bit of a pro?).
It wasn’t a growth story, so from that point of view it was dead money for the VCs anyway. But why would they agree to the founder’s payout at their expense?
Either the VCs are very impressed with this founder and plan to participate in his next company, or they’re fed up and just wanted to be rid of him.
It's been repeated a couple times in this thread, but VC make money by 10x-100x their original investment. They invested 800k expecting to make back 8M-80M. Anything less than that isn't worth the additional time, especially for a seed stage investment where they might have 50-60 of these per year.
I think, for anyone trying to start a company and take VC funding to understand how the VC business model works. A VC incentives are much different than a founder's much of the time. In this case, the best case for the VC is for the founder to continue working on the company.
There would be zero negative PR fallout from that.
This founder basically ripped off his investors, it's completely unethical - and he'll never get a dime of VC money again.
If VC firms didn't care about getting their 1x money out then the terms wouldn't be there in the first place.
It's normal to do that, and a $500M firm returning 10% a year takes 20% of that, so 2% which is not really a huge amount of money for a team of people.
I thought this was a key insight, and I'm happy the author is frank about it. Some people enjoy building things from scratch, others enjoy taking a good idea and scaling it. IMO, both are hard problems and its good that he bailed before trying to go down that route.
Multiples of trailing 12 months net profit would be more common for a smaller entity.
Curious about this one; are the acquirers not bothered about the possibility of everyone jumping ship? They have a new CEO and generalists on hand to take over the business immediately? And/or the business is basically in “runs itself” mode, with most of the work being done on growth opportunities?
Normally I think of the golden handcuffs as a necessity to stop the business from imploding and being worth zero, but interested to know why this wouldn’t apply.
Seems to me that with a small team, you're more likely to have N=1 bus-count processes which would be sensitive to someone leaving.
Josh gets the exit he really seems to need for his personal and financial well-being.
Xenon gets one heck of a product for honestly quite cheap. Better marketing will actually go a long way here.
Conrad Black literally went to jail for selling newspapers and taking a personal commission on the side. [1]
When you're selling company value, but taking the money yourself in the form of some kind of arbitrary comp, that's defrauding investors, it's a form of embezzlement.
That the investors 'didn't care' is fine, but I don't see how it could have been arranged in the first place - the acquirer does not get to decide how much the 'founder' is going to get.
Also - the $800K write off seems odd. A million dollars is not nothing, and there would definitely not have been $800K in lawyers fees, far from it.
Something here doesn't seem quite right.
Also - folks - if he is negotiating comp outside of share value, that's not only hosing the investors - but any employee equity as well.
A small team where some other guy has 5% of the company, that's $150, not a lot, but not nothing. If the package was dealt outside of equity, those equity holders were screwed, if in fact there were other shareholders/equity holders.
That is incredible and, as the author says, classy. If I ever find myself actually doing the investment rounds for anything I create or help create, I hope that people like General Catalyst take an interest.
This is an excellent insight
For those curious, more here: https://www.brownadvisory.com/us/qsbs-tax-exemption-valuable...
I've worked with a mobile analytics company in the past and it was pretty much the same story. Only, they weren't as transparent and couldn't walk away with a profitable exit.
So this really looks like the best way he could exit without burning himself out.
Do anybody know how much Xenon Partners (te same buyer) paid recently for UXPin.com? I think that UXPin is 5-10x times bigger, but saw that their CEO after selling the company instantly joined Google as a senior manager.
UXPin had a few investors and 3-4 cofounders. So probably different outcome?
I respect the soul searching that you went through and the decision that you took.
Thanks again. Wish you the very best in whatever you _start_ next.
I have never seen this before. Guaranteed outcome regardless of DD. Is this an outlier company?
4M is a lot, but an amount I can wrap my head around.
What about gross profit (or more precisely, EBIDTA)?
> I wanted them to at least get their money back, but ultimately, for the $4m purchase price to work, we’d need to ask them to walk on their [$800,000] investment.
He clearly didn't want it very badly, then. Nearly $3 million wasn't enough? That's about $420k per year for the time he put in, not counting anything he already took out. Keeping the extra money only increases that to about $530k/yr.
And it sounds like the early employees get nothing, other than not getting fired immediately.
I like the Baremetrics product but man this really leaves a bad taste in my mouth about Josh personally.
If you wanted to say how it seemed to you and raise the questions you felt were unanswered, that's of course fine. But jumping to psychological interpretation and personal denunciation based on a handful of beans in a blog post is not the kind of magic beanstalk we want here.
I mean, in this example Baremetrics actually had a pretty good outcome, better than most, and the employee's basically got very, very little for their overall equity. Even the founder probably got less than a mid/senior level FAANG employee would get (and the FAANG employee had no risk).
Of course, not everyone can get an offer at a FAANG, but again, if you could get an offer, startups basically never make sense anymore. You almost always will get more even if the startup hits, which is rare.
Note that this is true for many reasons, not all of which are related to technical ability. Not everyone should try to get a FAANG job, either.
Factors candidates may consider:
* how much time they want to spend interviewing/prepping
* what their previous experience has been
* where they went to school
* where they are willing to live
* what type of work they like to do
* what type of organizations they enjoy being part of (largeco, smallco)
* how much control they want over their work
* what kind of impact they want to have
* how much they want to learn (and what type of knowledge--general vs specific)
In addition to salary, all of these play a role in determining whether a startup, small biz, other software company or FAANG make sense for an individual.
And most importantly, the company can afford to pay well. Not quite FAANG level, but plenty for you to reasonably plan to retire (in a FIRE way) at 50 instead of 65.
And heck if it does hit, you’re early enough for a nice cushy bonus.
edit: yes the difference in comp is easily 100k+, but making 180k+ cash to not be a small cog in a gigantic machine, to me, doesn’t sound that bad
If the company sold for $10 million, I would have ended up with about one years worth of the lower end salary...which was about 1/2 of what I could make from an average offer in rural parts of the US.
Ten years later, the company finally sold.
And you're kinda simultaneously arguing it's a good outcome and a bad one, in both cases the reason is the founder owned most of it. The net is that it's a mediocre outcome, just that in this case one guy did ok. If you can get nine other people to contribute towards building up your side project to sell for an average market price of the technology and business, you can get more, sure. But it's not "successful startup" more.
Not really... he's been working on the startup for 7 years. Let's assume he had an average salary of 150K during those years. Plus he got $3.7M on the acquisition (it's not clear from his post if that's what he takes home or if it's pre-tax). That's 4.75M.
Now let's assume a senior engineer in FAANG with a an average salary of $350K for 7 years. That's 2.45M. That's a very rough comparison and not taking into account taxes (the FAANG engineer is likely to pay more money in taxes overall).
But the bigger difference is how he spent those 7 years. He spent it building and managing his own company with all the freedom in the world. Compare that to a senior engineer in FAANG...
Update: someone in the comments mentioned he'll likely not need to pay any federal tax on the acquisition money. That makes a huge difference and the take home gap is much larger than my initial estimate.
I don't even like VCs and I feel like what was pulled here was pretty galling. How does someone rationalize calling up an early investor and telling them to eat their investment because...more money for me?
Of course plenty of people prefer to work at startups because the environment is more fun and you have direct influence on what ships and often direct contact with customers.
Remember when Google suddenly gave an across-the-board 10% raise to every employee to try to stave off defections to startups? Sure, there are certain jobs that are fun (depending on your interests) and of course it's easy to find "phone it in" positions at FB and Google, but most of my friends avoid FAANG or are glad they left.
Once your comp hits $X there's more to life than money.
Why do you deem it immoral for a founder to do what is best for himself within the bounds of the agreements he has made?
This kind of calling-out is common in HN and quite distasteful. Comments like this all amount to saying "X is immoral because they refused to give a charitable donation to Y". Charity is not a moral requirement and arguably it's not even a moral good.
On what planet are "business decisions" not bound to moral judgements? That's one of the craziest things I've ever heard.
Frankly there's nothing distateful about recognising that in a hierarchical system such as a corporation those higher up the tree have a duty of responsibility to protect the interests of those below them.
Quite how modern capitalists have managed to convince people that this shouldn't be the case I'm not quite sure, but the results are hostile to a functioning society.
Why early employees should get anything from an acquisition ? If they don't have stocks, they shouldn't, that's how it works, a company belongs to its shareholders, not its employees.
VC startups don’t generally pay dividends due to the cost of capital requiring reinvestment of profits (if any) to make the growth targets work.
Yes, a founder gets compensated significantly more than early employees. Massive shocker. If those early employees were talented enough, they’d be founders getting compensated.
I don’t know when this dramatic shift happened to Americans to believe building a successful company is mostly luck, but it’s depressing.
Shame on you, HN.
Have curious conversation; don't cross-examine.
We detached this subthread from https://news.ycombinator.com/item?id=25045906.
A VC leaving money on the table out of the goodness of their hearts just seems inexplicable.
If it don't make dollars it don't make sense.
This is the flipside of all of the VC deals that completely fuck over the founders.
There is what is for them a teeny tiny pie, and rather than demanding their small slice back they said "you know what? Go ahead without us. Bon Appetit :)"
So, did something go wrong here? What is it about this analytics business that makes it so expensive to operate? Were all the employees necessary? Was the pricing or marketing wrong? Or is this just the reality of most SaaS?
I gotta say, this really puts a damper on what I always thought was a fairly lucrative business model, if you could make it past the early bootstrap/product-market-fit period.
The median and modal ARR for SaaS businesses 7 years after founding is zero.
>practically speaking, never need to work again
Yikes, does someone want to tell him?
Assuming he keeps ~$3M after taxes and can earn a conservative return of 4%/yr in investments, that's $120k/yr just from his investments. Many Americans live on far less. Also, he lives in Alabama, where cost of living is quite low.
So yes, he can retire for life.
Someone should tell you that $85k/yr NET is top earnings in some parts of the country.
Average household income in my state is $50k/yr.
