Comments on: Snapchat’s early cash-out A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: realist50 Fri, 28 Jun 2013 04:35:27 +0000 I’m surprised that Primack is so concerned about money for the founders because he also covers buyouts. It’s routine in buyout deals that executives are taking some dollars off the table while also maintaining a go-forward equity position. It’s not just top execs for large go-private deals who are pocketing meaningful amounts. That’s also very common in relatively small middle-market deals, because so many of those companies are family-owned businesses who are maintaining a minority ownership stake going forward. Overall, I’d say it’s common – perhaps even the norm – that the CEO of a private equity backed company has more wealth in outside investments than in company stock.

As an LP, what would scare me is to see a VC putting my money into (pre-revenue) Snapchat at an $800 million valuation. (In fairness to Primack, he also makes this point.) Maybe I’m too old to appreciate Snapchat, but it sounds more like one feature of a social network or mobile OS than a standalone platform, so I view the valuation upside as limited. Tough to see how Snapchat generates major advertising revenue because the whole point of it is to look at photos that quickly disappear. I’d also think some advertisers wouldn’t want their ads showing up next to sexts.

By: GregHao Thu, 27 Jun 2013 22:52:08 +0000 @ckm5 – if I were an entrepreneur and my VC came to me and said, “hey, as a part of the latest round, we’re going to also make it a liquidity event for you at a stupid* valuation.” There is no way in hell I wouldn’t say yes. Of course I would and I don’t begrudge the founders of Snapchat for doing the same thing. And that’s why I am sympathetic to Felix’s view. But if I were an LP whose VC is throwing around cash like that, I would be worried. That, I believe is Dan Primack’s point and one that I agree with.

By: GregHao Thu, 27 Jun 2013 22:48:57 +0000 we seem to have gone kind of off topic and I just want to point out that Snapchat is actually based in Venice Beach. That’s in Southern California where houses are expensive but nowhere near the levels we’re talking about. And I just want to reiterate my point above, which QCIC also touches on, by any objective standard, $5MM post tax is a lot of money.

By: QCIC Thu, 27 Jun 2013 20:38:47 +0000 ckm5-

No one has to live in San Francisco. There are plenty of less expensive communities all around the Bay Area. Despite that I know people of relatively modest means who have apartments right in town (film grad student and girlfriend who is a manager at a small theatre, or two graphic artists who share a studio apt.).

The idea that you need 5 or even 1 million dollars to be “comfortable” in SF, just shows how puffed up your conception of comfortable is.

By: ckm5 Thu, 27 Jun 2013 18:15:14 +0000 @greghao

I live in SF and it’s insane expensive. The median income may be $72k/year, but the city considers you eligible for subsidies if you make less than $70k/year. Coupled with a 30% increase in rents in the last year (a 1-bedroom now averages around $2500/mo) and the median apt costing $750k, you need at least $150k just to live here if you are new. Even just a simple room costs $750-$1000/month. If you’ve been here for a while, it’s a different story as you have either a low cost rent-controlled apt or bought your house for cheap(er).

The reality is that to buy a place here, you need $1m – preferably in cash as you are competing with all the money fleeing China and the 58k Apple employees with options. And that’s for an average apt, never mind if you want something really nice or an actual house in a nice neighborhood.

If you count what you need to live for a few years after you leave your startup (and have spent $1m+ on a place to live) and are trying to figure out what to do next, then $5m doesn’t sound like much (BTDT). And let’s not even talk about retirement savings.

The other reality is that a lot founders never get big dollars at exit – they are often subject to cramdown & liquidation preferences that leave them with peanuts (see term-sheet-liquidation-preference.html). Cashing out while you have leverage is not only smart, it’s really the only way you can assure a decent payout.

Most founders don’t know enough to follow this through and when they realize what they should have done, it’s often too late and someone else is getting the big dollars…

By: QCIC Thu, 27 Jun 2013 17:56:15 +0000 Wow does this whole discussion reek of envy and smart people with too much time on their hands. Why not do something actually productive with your lives rather than dissecting the actions of people who are?

Primack and Salmon sound like the worst kind of busybody idiots. Pearl-clutchers tutt-tutting at the bedroom companions of their favorite TV actresses.

KenG’s first comment is the only thing here that is sensible.

By: Ballman Thu, 27 Jun 2013 16:22:28 +0000 I think Dan has some good points but I wonder if the amount of money going to the founder’s in one lump sum is part of the issue. What if the founder’s were able to vest with say just $1mil to kick off the investment and large(r) valuation that they built giving them the ability to live comfortably and participate in the start up community in a much more validated way and then have an on-going vesting opportunity, say quarterly, to build their wealth as they go which would also entice them to continue to build the wealth and success of the company they created.

$10mil is a lot of dough by any standard and I can’t believe it’s not being acknowledged that way here!

By: KenG_CA Thu, 27 Jun 2013 04:54:39 +0000 GregHao, I didn’t say that Primack shouldn’t have been mad at the founders, I just said there was no justification for anger. There was ** absolutely nothing ** wrong with investors buying $20M worth of shares from the founders. The founders are also early stage investors in the company, and early stage investors often sell some or all of their stake in companies before there is an exit.

By: GregHao Thu, 27 Jun 2013 04:44:46 +0000 @ckm5 –

couple things, not everybody enjoys or believes in the benefits of owning a house. I know many people who don’t buy.

the median income for San Francisco is $72,947 (  /06/0667000.html), I daresay most CEO/Founders or even CTO/Founder are making more than that. Even if they are relatively slumming it.

you’re both right that compared to other “successful” entrepreneur CEOs, $5MM is not a lot of money. But this is like someone earning $400K a year complaining that after sending their kids to private school, put away money for retirement, new cars every two years, and a 5,000 sq ft house that they are poor. By any objective measures and standards, this $5MM liquidity event will represent the most money these founders will have made up to this point in their career and _is_ a significant amount of money.

I also agree that money is usually not the primary motivating factor, and don’t believe that is what I wrote, but it is certainly part of the consideration. Hell, we have startups in New York (and in the valley) who are competing on fringe benefits like what kind of yogurt they stock in the company pantry! ( on/the-calorie-packed-perk.html?pagewant ed=all&_r=0)

Again, if we are talking about guys who’re in their 30s, have a family, and have toiled at their startup for a few years then I certainly agree that a liquidity event for the founders isn’t out of order and is often warranted. That is in fact also Primack’s position. But that’s not what we’re talking about here.

By: ckm5 Thu, 27 Jun 2013 03:47:41 +0000 @gregHao

Yeah, god forbid anyone buying a house – they should be sleeping in their offices….

As @dmcdougall points out, it’s not like $5m is a lot of money in SV. It would barely buy you a nice size house in most desirable SV neighborhoods. It does, however, take care of the one very large fear a lot of founders have, which is basically having to find a job of sh*t goes south…

Most startup people don’t give a damn about $$$. Sure people talk about what might happen, but the main motivator is doing something interesting, cool and that others find useful. The people who want to get rich are the LPs & VCs and they mostly fail miserably… That said, everyone would like to avoid long term poverty and is fully aware that on average, entrepreneurs make 30% less than if they’d followed a traditional career path…