[SwellJoe]

I have very limited knowledge of this situation, but, I'm gonna pile on anyway:

With that kind of money raised, the founders didn't get "nothing". They got a salary, probably a decent one, for however long they were running the thing. Which is more than many startup founders get out of businesses that fail. If they don't have personal debt, or didn't lose relationships or friendships, they came out ahead of many startup founders who started a business that failed.

They raised more money than the business was worth. I don't blame them for doing so; many people have done it, and no amount of seeing other people make that mistake will necessarily prepare a founder to turn down several million dollars of extra runway to try for the big exit. But, it sounds like there is simply less money on the table than there are people wanting that money (and that have contractual rights to it).

Given the interests of GetSatisfaction were always misaligned with the interests of their customers (i.e. the business model was effectively a shakedown, in the same vein as Yelp), it shouldn't be surprising that eventually their dreams didn't align with the reality of how many people wanted to pay for it. No matter how good the product is, if you have to extort people to buy it, you're not building a sustainable business.

I'm all for ranting about VCs being assholes, because sometimes they are. But, as far as I can tell, that's not the case here. Founders made some bad calls, probably some other people did, too. The business failed. It happens. If I were them, I'd take this as a valuable lesson...and probably wouldn't burn bridges with the people who invested in me in the past, because history indicates they'll be the same people to invest in me in the future (a failed business is not a death sentence in the valley, and many investors have invested in the same team for multiple businesses).

[gojomo]

We'll see! The founders of GetSatisfaction weren't spring chickens, unaware of the costs-of-capital raised. But sometimes later management and investors do engage in shenanigans. Some will remember Naval Ravikant et al's suit against a cofounder and VCs back in 2005:

http://www.nytimes.com/2005/01/26/technology/26iht-dotcom.ht...

http://venturebeat.com/2005/12/09/epinions-settlement-a-blac...

Though I'm not sure it's the case here, I'm of the epinion that occasionally, you need to sue to getsatisfaction.

[codinghorror]

Epinion? I see what you did there! :)

More seriously, I remember bringing up Get Satisfaction at a VC meeting and the VC said "Don't talk to me about Get Satisfaction." I guess now we see why.

[username223]

> prepare a founder to turn down several million dollars of extra runway to try for the big exit.

Every huckster thinks he can pull off the big pump-n-dump. Most don't.

> the business model was effectively a shakedown,

Sure sounds like it. Protection rackets only work if you can beat people up and burn their stuff, and GetSatisfaction failed to do either. Too bad, so sad.

[MCRed]

VCs aren't assholes, generally, but their standard terms are a bad deal for founders, generally. I've thought about this a lot over the past 25 years. In the past I've seen VCs do really bad things (like force decisions that set the company back 18 months bad.) The problem is, when you get a "good" VC that doesn't force bad decisions on you ,the cost of the money, mostly in deal terms, is too damn high.

And when you push back on them about this the response is you get are generally:

"This is a standard term" eg: everybody else is doing it. Well, tough. I'm actually reading before signing.

"If we don't have this method of double dipping [one of the four different ways they are doing so], then you could take the company and sell it for the money we put into it and that would be a bad deal for us." You mean your share of the company in such a situation isn't equal to the amount of money you put in? First off, I don't believe you because this valuation is kind of a joke and you've spent weeks telling us scary stories to try and keep it down, and secondly, your inability to get the equity you want for your money is your problem, not mine. That is like saying you think you're getting a bad deal so you want to cheat me to get a better deal? So let me get this straight, I took real risk and built up sweat equity, but you want my shares to be discounted effectively because you don't trust me? Ok, how about we discount your shares because I don't trust you? (I don't trust anyone who doesn't trust me. Usually they're projecting their own intentions.) Also, all you're doing-- at best-- is putting money in. Money can be acquired from any number of places and methods. The expertise we gained while building the company is irreplaceable and the knowledge of our own product and the risk we took getting it to here is far more valuable than your money. So, we have a split of the shares that accounts for that. The shares you get account for all of that.

"trust us". Nope, if you don't trust me, don't do a deal with me.

Don't even get me started on founders vesting their shares. You build a company, you have sweat equity, but the VC wants to reset the vesting? Why ? You can't vote unvested shares. They will give you a song and dance about "what if a founder leaves?" Well, we covered that in our articles of incorporation because we're not idiots, but they will ignore that and insist that "all founders must vest all their shares". (this is more common on early VC deals.) That's straight up taking paid for (with equity) and earn shares and turning them into a class of potential shares. Nope Nope Nope. Give founders part of the option pool as an incentive, fine. But reseting is just setting you up to be sucker punched when they want to replace a founder (because they don't like how things are going and need a scapegoat, no matter that it's the worst thing for the business at that point. But Tada! All your shares you already earned are now vesting again! Look at that! Even thought the other founders don't want you out, you don't have enough votes!

I think that the culture of "startups" over the past decade has become a bit cargo cult where there's a specific plane you build to get the money to rain from the sky.

This is: Go to accelerator, do VC deal, take the VC money and buy growth, use that to do another VC deal, rinse and repeat until you either stumble onto a working business (Uber, AirBnB) or you go bust (get Satisfaction)

The problem with this is that the cost of those VC deals are not in the founders interests. Far too often they hit base hits and build viable fast growing companies and then get taken out and don't get adequately compensated (and all the non-founder employees really get screwed.)

The other problems with this is once you take money from a VC you're locked into trying, and repeatedly betting the company, on being the next Uber. Being 37 Signals is not sufficient. Being Github (before the A18Z investment) is not sufficient.... even though both of those are obviously great fast growing companies that would make their founders and employees a lot of money at a liquidation event. And such event is far less likely under VCs because they want a $1B valuation (in fact their fund NEEDS a $1B valuation to cover all the losers)... whereas a $50M, $100M, $250M or $500M valuation (with no dilution from taking VC money) even though it's drastically smaller would result in the founders and early employees getting rich, and even the later employees getting a nice bonus.

Take angel money on good, clean, simple terms. If you need that to get going, go for it.

I think the age of the VCs is past. They just haven't realized it yet.

Ok, whenever I say things that are critical of VCs I get a lot of responses that are sorta knee jerk defenses of VCs. I've been working for startups and founding startups for over 25 years. I've seen it back when it was much worse and it cost a lot more to do a company. I've ridden this industry from BEFORE the dotcom bubble started to inflate. I'm speaking form experience here. Even when the VCs are "good" - in the top %10 of the VCs I've had direct experience with-- the deal isn't good for the founders in the end. They paid too much for their money.

You want VC money. Ok, why? Because that's your dream? Your dream should be to build a company.

Your plan should be to build a compelling product or service that really makes people go crazy with desire to throw money at you for it. I'm talking about CUSTOMERS.

All the time you spend dealign with VCs takes away from that and the deals aren't good.

You need money? Ok, go on Angel.co, get backed by a syndicate. Find Angels in your community. Charge for your product from day one. If github can do it, you can do it. Plow your profits into growth and product development. Take as little money as you can to get top product market fit. VC money is wasted before that point anyway. Even angel money should just be used to keep the lights on until you get to product market fit. Once you haver that, you have revenue, maybe take some more angel money to jumpstart marketing, but plow your operational profits int growing the business.

Don't delude yourself into thinking your pokemon website is a billion dollar business. It isn't.

Don't even waste time chasing VCs. By definition that are bad at picking and they will try to force you to bet it all only our pokemon wiki being a billion dollar business.

GS may have made a bunch of mistakes, but I'm using decades of experience here to reach my conclusions.

If you go thru YC or TechStars (but not any other accelerator) then maybe you might have a real business that could be a billion dollar business, but even then why not raise angel money instead of VC money? And I mean angel money on terms like the YC deferred-valuation deal that replaces convertible notes. (can't remember the name at the moment.)

Don't do any deal with liquidation preferences or any other kind of shenanigans. (And don't wave your hands about why VCs need LP in front of me. Your math doesn't add up, it can't add up.)

The model will never change until VCs realize they are dinosaurs. Or let VCs fund late stage deals, I'm sure their terms are not so terrible (unless the company is dying.)

But VCs for startups are obsolete.

drops mike

[danbmil99]

Nicely done.

One problem that arises with the bootstrap-off-revenue model (assuming of course you are lucky enough to find product/market fit quickly, before you run through your seed money) is that you become vulnerable to company B that was willing to take crappy VC $$$ and is now able to kick your ass on price, right down to the freemium, eyeballs-are-value goose-egg giveaway.

Free markets are always prone to a race to the bottom. Just because you insist on reading the fine print and haggling over the downside scenarios, doesn't mean the 23 yr old recent grad no expenses (family fallback) guy won't take that deal. He damn well will.

serious 1st world problems, eh?

[tlogan]

But there will be company C raising even more money and beating company B. And then comes Google and beats company C.

In short, if you are building a company you need to built it based on some "secret sauce". That could be your team. That could be your patent. That could be just customer base. That could be your unique understand of the market. But money is never "secret sauce".

And please do not take me wrong here: raising investment is very important to make your company big. But first thing first.

[mcguire]

"...you become vulnerable to company B that was willing to take crappy VC $$$ and is now able to kick your ass on price, right down to the freemium, eyeballs-are-value goose-egg giveaway."

If that's physically possible, if price is the differentiator, you probably don't need to be in the business anyway. (Now, I'm not saying that you're wrong, in most cases, but....)

[Rambunctious]

> Don't even get me started on founders vesting their shares.

As an average Joe angel (not blessed with any inherited wealth), I personally think it's fair ask to ask founders to vest a "majority" of their shares. IMHO, if angels take 10% for a company in its infancy and leave founders with 90% vested equity, there is simply too much risk if one of the founders decides to leave! Especially so when the business itself hasn't really been properly built.

[dwhly]

This.

As someone who started the first travel site on the web (GetThere) and built it to 600 employees, an IPO and later sale to Sabre, and who debated this with my co-founders and myself, there is a most definitely a happy medium (we started with 18 months of vesting on a 48 month plan).

If founders start 100% vested then the pre-money will simply be a different calculation, and founders will earn additional shares to continue to provide incentive post-funding. Don't delude yourself that somehow your equity will provide sufficient incentive for you to continue to perform. This might be somewhat true in startups with one founder, but it's considerably less true when there are 2 or 3. And it's also protection for you as a founder. Why let one of your co-founders be able to cut out early on and get the same deal you did when you still have to put in the time in order for the opportunity to truly prove its potential. It's important for the founders to continue to vest-- and also, when things take longer than 4 years, as they did for us, more shares are appropriate for founders that remain essential to the business.

[AndrewKemendo]

Great, great writeup.

There is definitely a need for a response cheat sheet to the most typical term sheet bullshit and while I get not all deals are equal, there are accordingly only so many stages of startup where the range of responses are necessary.

[SandB0x]

> Don't even get me started on founders vesting their shares. You build a company, you have sweat equity, but the VC wants to reset the vesting? Why ? You can't vote unvested shares. They will give you a song and dance about "what if a founder leaves?" Well, we covered that in our articles of incorporation because we're not idiots, but they will ignore that and insist that "all founders must vest all their shares". (this is more common on early VC deals.) That's straight up taking paid for (with equity) and earn shares and turning them into a class of potential shares. Nope Nope Nope. Give founders part of the option pool as an incentive, fine. But reseting is just setting you up to be sucker punched when they want to replace a founder (because they don't like how things are going and need a scapegoat, no matter that it's the worst thing for the business at that point. But Tada! All your shares you already earned are now vesting again! Look at that! Even thought the other founders don't want you out, you don't have enough votes!

I'm really interested in what you're saying but I can't understand what you mean in this paragraph. I'm not sure what part is your position and what part is meant as sarcasm. Can anyone spell it out for me? Thanks :)

[adventured]

The parent is, basically, disagreeing with the practice of making founders vest their shares when a VC comes on board.

They're saying that VCs use that approach as an additional means to control the company in case things aren't going the way they want.

The parent's position is that the founder shouldn't have to vest their shares like that, because they built the company and their shares should be regarded as fully vested since the founders put in sweat equity to start it all (essentially saying that the shares are fully paid up from the process of starting the business, and that vesting the shares takes those shares back from the founder, sort of like taking away that sweat equity effort).

[carrotleads]

Vesting should be fine if the VC's are willing to pay the founders for the sweat that was already dropped in... most of this sweat would have been at Zero pay to boot.

Asking founders to re-vest nullifies the effort they have put until now and makes it unattractive for founders to seek VC money.

Generally whoever has the greater need makes the bigger compromises...

[rebelidealist]

Many people don't realize that 37Signals / Basecamp is a multi-billion dollar business. https://medium.com/@hungrycharles/basecamp-the-small-bootstr...

[look_lookatme]

Additionally, they had the opportunity to capitalize on Campfire in a way that they could have closed the market for realtime collaboration before Slack. Obviously Slack is a superior product (and given 37signals opinionated product philosophy I don't think they would have ever built something so comprehensive) but still... they had a 7 year head start on Slack. A lot of orgs used Campfire every day, and probably plenty still do.

But I appreciate their commitment to focusing on one thing.

[slowernet]

Basecamp's revenue and efficiency is of course impressive, but I'm not sure a multiple like Atlassian's would apply. Investors could reasonably assume (or know, if they're privy to their plans) that Atlassian is planning to use those 1100 employees to go after a number of markets, whereas Basecamp has shown their preference for focus and managed growth.

[cpach]

”And I mean angel money on terms like the YC deferred-valuation deal that replaces convertible notes. (can't remember the name at the moment.)”

Do you mean safes? (Simple Agreement for Future Equity)

[AtmaScout]

Thanks for posting this. Very interesting.

[seivan]

Sounds like the premise of the latest episode of Silicon Valley (season 2) The raised more than they they needed, sold for less. Founders got nothing. Literally the same :)

[shadowcaster]

"They got a salary, probably a decent one, for however long they were running the thing." - I want to second this. I worked for a startup that the C level's made huge bucks (we were paid really well too) and they would wine/dine on the companies $$ all the time. They sold the company for a little more then the funding they got, but spun a new company off where investors got little and they cashed out.

[orenbarzilai]

"With that kind of money raised, the founders didn't get "nothing". They got a salary, probably a decent one, for however long they were running the thing. Which is more than many startup founders get out of businesses that fail. If they don't have personal debt, or didn't lose relationships or friendships, they came out ahead of many startup founders who started a business that failed."

Well, you should always consider the alternative cost. I don't know the founders but I can assume that if they would have work somewhere else they had much higher salary/ benefits etc

[SwellJoe]

"I don't know the founders but I can assume that if they would have work somewhere else they had much higher salary/ benefits etc"

I think you'd be surprised. The A-round term sheets I've had come my way over the years specified a salary for founders bigger than any I've ever received working for other companies. It was more of a suggestion than a requirement of the deal, I think, but it gave some clues about the salaries the investors would be comfortable with the founders being paid. It was always generous. Not "C-level at Google" high, but certainly better than "low or mid-level developer at almost any company in the US, including good ones".

By the time you are raising millions of dollars, you are drawing a decent salary. Maybe you could make more somewhere else, but I believe it's more likely you'd make less.