[krampian]

Of course terms matter, but the example she gives seems somewhat contrived. Particularly this part:

>> In the deal, Hooli would invest $200 million for equity while in return the two companies would enter into a business development agreement on the side in which Pied Piper guarantees to spend that money in a massive consumer campaign on Hooli’s ad platform. They float the magic “B” valuation. Richard goes to sleep dreaming of rainbows and unicorns.

If you take all that money in with a massive string like that attached (basically no freedom at all to spend it except on one thing), I would think you have only yourself to blame for the result.

[enjo]

That's the whole point of the article tho isn't? Terms matter.

Terms similar to those do exist btw. Investors who aren't going to be able to wrangle board control often attempt to control their money using absurd up-front strategic requirements.

You are correct. Taking that money is a massive mistake, but founders often do it to protect from bottom-line dilution. After all you can often negotiate a better valuation by taking worse terms on the deal.

I've seen it up close and personal, the cautionary tale in the post is a good one. Valuation is important, but you really have to understand the terms you're entering into.

A mentor described it to me as "always be steering for an optimal outcome for partial success". In other words if I'm valued at $10M today, then I want to make sure I'm going to do OK if we end up selling for $20M, as opposed to getting the best possible outcome at $100M. Ya I might leave a bunch of money on the table in the end, but in the ~$100M case I'm going to be really happy no matter what.

[wpietri]

In retrospect, it's always easy to construct reasons why person X has only themselves to blame. Blame isn't really a useful construct for systemic improvement, because it always lets us say, "Oh, well this won't happen to me." The vast majority of Silicon Valley's failures were made by very smart people while being guided by very smart and experienced investors.

"How could somebody be that dumb" is Silicon Valley's equivalent of "pilot error", a response that explains nothing because it can explain anything.

[jforman]

Sounds like this is roughly based on the Microsoft/Facebook deal. MSFT invested $240M at $15B valuation but won the right to be the ad platform for FB globally for some period of time.

Not the same as forcing the investee into ad spend, but that's what it conjured up in my mind when I read it.

[chetanahuja]

"If you take all that money in with a massive string like that attached.."

Not to mention, this happens when you already have outside board members from your previous round of investment. So it's not just one dumb CEO making the deal, it's aided and abetted by (presumably wiser and cannier) prior investors. Yeah... that part rang the most untrue in that whole scenario.

Take that out, and the rest of the story is basically a parable explaining what liquidation preferences mean. Is there any VC that would do a deal without 1x liquidation pref?

[notahacker]

In fairness, the newish VC needing an apparent success to help raise their next fund back back-story sounds like a worryingly plausible reason for them to be able to overlook the fact that Hoopli should never have been allowed liquidation preferences in addition to a contract guaranteeing they got their funds back through platform spend.

I'd love to know how often this kind of 'instead of giving you free inventory, how about we "invest" conditional on you "buying" from us' shell game actually happens in the Valley though.

[brudgers]

I am not saying that it's happening or has happened or will happen, but Google, Facebook, Yahoo, etc. would certainly be the sort of investors who are in position to benefit from such an arrangement.

[mikekchar]

Here is an interesting real world example that I think not many people know the details about. I don't think any of this information is privileged information. Most of this comes from my (probably faulty) memory with conversations I had with some of Corel's upper management (where I worked). Some of it comes from the public record. There are probably errors since it has been a long time and I didn't not double check the information. It is entirely possible that I was misled right from the beginning anyway, so it might just be fiction. But even if it is, it is entertaining fiction.

In 2000 Microst invested £135 million in Corel. At the time Corel was almost out of cash (if my memory serves they had about $2 million in the bank and with about 1500 employees was going to run into a problem with payroll sooner rather than later). Corel issued new stock to cover the deal and I think it represented about 25% of total equity. This stock was non-voting, but came with a veto over new acquisitions. The rationale was that since Microsoft and Corel were playing in the same office productivity software market, Corel didn't want them to be able to dictate what they were doing, but at the same time Microsoft wanted to protect their investment against acquisitions that they thought were poor judgement.

At that time, growing your business through acquisitions was all the rage and the Corel management team (led by it's relatively inexperienced CEO at the time) was quite keen to use some of the new capital to grow their business. Microsoft encouraged them and even brokered meetings, etc, etc. In the end Corel set up several acquisitions, which of course took some time to go through all the approval processes.

In around 2003 Microsoft sold their Corel stock to the venture capital firm Vector for about £13 million (10% of their original investment). It is possibly not a coincidence that this is a venture capital firm that Paul Allen was involved with, but who knows? According to what the then Corel CEO told me at the time, Vector then threatened to use their acquisition veto if the board did not agree to back a complete buyout by Vector. The problem was that the penalty clauses for backing out of the acquisitions would once again put Corel into a very difficult situation financially. Feeling like they had no choice in the matter, the board approved the buy out and recommended that the investors accept the deal.

Vector bought up all the remaining stock for $133 million, using about $80 million of Corel's remaining cash to finance the deal. Very soon afterwards they laid off a very large number of employees (including me ;-) ) and concentrated on profitability. As far as I know, Vector have managed the company exceptionally well since then.

I heard from trusted sources that Corel's CEO at the time gave up a multi-million dollar parachute to accept a job at Microsoft, so I suspected that there was never really any need to feel particularly sorry for him. But you can see that one seemingly innocuous condition from an investor who is saving your butt can lead to the most unimaginable outcomes.

[Scoundreller]

> As far as I know, Vector have managed the company exceptionally well since then.

I can't say that I've heard anyone mention a Corel office product in over a decade. I see they even own Winzip, DVD/CD-authoring utilities, but again, many of these functions are now built in to the OS.

Are there enough Draw or Wordperfect shops out there to sustain sales? Or am I missing something?

Patents?

[mikekchar]

Microsoft Word does not paginate footnotes properly. There is a legal requirements for footnotes to be paginated in a certain way in legal documents. As far as I know only Word Perfect does it correctly and hence has locked in the US DoJ. I have to admit that it's been many, many years since I talked to anyone at Corel, so I don't know what else they are doing.