But this article is about something new - a dividend that mainly goes only to the founders. It's about entrepreneurs screwing early-employees, entities that until now I've always considered as been in the same bucket. You can rightfully claim that the messenger sucks (which might be well-known) but that doesn't imply anything on the message itself (or its novelty).

There is something "new" here: the fact that founders have so much leverage in this market that they can claw that value back from investors.

The welfare of the "employees" is a total red herring. Venture capital investors have been fucking over employees directly for almost 20 years.

Yes, that surprised me a lot! Especially from founders that are somewhat "famous" and are connected to YC. I expected they don't play these tricks. Greed?

Anyone knows how their employees reacted to this news? If I would have worked 50+ hours for year(s) and then read this... :(

Incidentally, this is one of the best reasons to found a company -- equity is distributed in such a way that those who take the biggest risk will be properly rewarded.

Secondly, founders taking money off the table has become common. As mentioned in this very comment thread: "Zuckerberg, Moskovitz, and Parker each got $1m from Accel when they raised their $12.7m Series A according to David Kirkpatrick's The Facebook Effect."

This is both at a far earlier stage, and far more money on percentage basis compared to the overall valuation of the company. I wasn't party to the deal, but I highly doubt any other early Facebookers got liquidity then. But those same people are definitely not complaining today.

I personally don't think anyone got screwed here.

And if on joining, you were told about 2 classes of stocks - one for the founders and one for the employees then you should have understood that this was a distinct possibility.

This VC is just using this small soapbox to warn Airbnb not to eff with him. And to try to stem the tide in Silicon Valley where successful founders are compensated for getting a company upto a $1 billion valution WITH revenue.

If an employee had written this, I would have been a little (tiny) bit sympathetic but for a VC to act like he cares for the employees -- you HAVE TO BE KIDDING ME!!!

They've only had employees for about 2 years. /pedantic

http://blog.airbnb.com/hiring-really-smart-software-engineer

If there is ever a second class of stock, and it is yours, it is worthless.

$2.4 Million a year sounds like a lot initially, but when you consider local salaries and costs associated with this. You might think that VC's make tons of money, but when you consider that the $2.4 Million has to fund their entire business, and when you look at how the costs break down, it starts to look a bit more reasonable.

Here's how those costs break down:

Office space on Sand Hill Road: 5000 sq ft @ $60sq ft / year = $300,000 3 exec admins @ $ $80k / year = $240,000 2 Associates @ $150k / year = $300,000 2 Analysts @ $100k / year = $200k 4 partners @ $300k / year = $1.2M Marketing / sponsoring events @ $100k / year Legal fees @ $300k / year

Now, when you exclaim that a $300k salary is exorbitant, consider that most engineering managers in Silicon Valley make about that much. $300k will allow you to purchase a house in San Jose ($500k for an average house in the burbs), but it won't let you purchase anything in Palo Alto (over $1M, easy. Monthly payments are around $7k).

Nurses working the night shift in Silicon Valley make around $150k a year without working tons of overtime. Firemen and policemen make about the same. An ER tech at a hospital makes about $70k.

Add to that, that most partners and associates at VC firms will end up working 80 to 100 hours a week. So, partners will end up having an hourly wage of about $75 an hour, which is what PHP contractor will make in the area. A decent Rails contractor will bill about $150.

So, when you break it down, the greedy blood sucking vampire VC's... really don't make as much as it's made out to be. A number of them are actually pretty nice, and great people to have a beer with. And, it's actually a pretty hard job.

Full Disclosure: I haven't made a penny from VC's. I've had a couple sponsor events for Hackers & Founders, and a number of them have been really helpful in teaching me the ropes of Silicon Valley.

Also, a $1M house is affordable if you earn 300k a year. Why would you think it's not? You could probably pay that off in 10 years, far short of the 30 year time span on most mortgages.

Are you suggesting that this VC pattern justifies the actions of founders who take $21M as dividends ? (to be more precise - founders of a young private company that is dependent on external investment for financing itself)

I don't think that particularly requires moral justification, any more than an engineer saying "That offer is interesting but I would prefer $5,000 more and an extra week of vacation" requires moral justification. Capitalism happens. Sometimes, it even happens to rich people.

Edit for context: "Capitalism happens" is shorthand I frequently use for "Sometimes one party in honest negotiation with another has leverage, perhaps because of how supply and demand for the product being sold shake out, and this is natural and not particularly noteworthy." I usually say it when rich people complain how much money they are paying for things like e.g. engineers or shares in a hot startup.

My reading is that the VCs for this round are not getting screwed in any way, they know exactly what they're getting (X% of the company for $Y, with $Z ending up in the company's accounts). For them it doesn't really matter whether all the shares they buy are newly issued or whether some are sold by existing shareholders, as long as X/Y/Z are the same.

Any possible investors in earlier rounds are not particularly getting screwed, since they have shares that will now receive a dividend.

But the employees with options are getting shafted, as they have been dilutied more than if the founders' cash-out had happened by them selling shares.

The delta between this deal and every other deal is that the founders are getting treated in a way typical for VCs, not in the way typical for employees.

Here's some numbers about a hypothetical company FooCorp to make a point: assume that the employee option pool is 20% of the pre-market valuation of FooCorp when FooCorp raises $1 million on a $5 million valuation. (That pre-market bit is significant because putting it pre-market rather than post-market is a easy way for VCs to change the price of the deal without changing the price of the deal, which is a theme we will be returning to shortly.) Prior to the first round, employees (present and future) own or will eventually own 20% of the company, and the founders own or will eventually own 80% of the company. (We'll pretend there are no angels to keep the math easy.)

After the first round, employees own 16% of the company. Wait, didn't we say 20% literally on the piece of paper we signed the deal on? Yes, but some 20%s are better than others, for example 20%s which are written by people who do this for a living. This is garden-variety VC screwage and only tangentially related to the point.

Anyhow, say we raise $3 million on a $15 post for Series B. Employees get diluted again, with the founders, and they now own 12.8%.

We'll stipulate that the company goes red hot and the numbers around Series C are getting thrown about in the neighborhood of a billion dollars. They want to raise $80 million for business use. If the founders negotiate a post-money valuation of a billion, the employees get diluted to about 11.8%. If the founders instead raise $100 million and return $20 million of it to themselves, the employees are instead diluted to about 11.5%.

But wait. That is exactly equivalent to the founders raising $80 million (i.e. taking no money) but just not negotiating quite as well: if the VCs wheedle them down to $800 post, then employees end up with 11.5% anyhow. (That's a perfectly reasonable outcome for the negotiation because valuations for non-public companies are set by slicing opening a goat's entrails and successfully arguing that they look more or less auspicious than the other guy thinks while insinuating that if he doesn't like it he can go cut a different goat with other people.)

This (the OP) is a discussion about the price of the deal (and, secondarily, about the diminished leverage a hypothetical VC would have for subsequent deals if he had to deal with a counterparty who was already rich). It just doesn't sound like one, because we have invented a rich vocabulary under which people who understand money can manipulate the price paid to people who understand computers without ever saying the word "price."

Returning back to tangible reality of possible interest to HN readers, an early engineer promised .5% of the company when he joined waaaay back before they were famous is looking at this discussion and going "Honestly, guys, why do you care?", because the differential is between him ending up with 0.295% of the company (that's 2.95 million per billion if they should take no money and then exit) and 0.2875% of the company (that's 2.875 million per billion if they should take no money and exit). i.e. In the still-quite-unlikely event that he receives a pot of gold at the end of his rainbow, it is not a meaningfully different pot of gold than he would have otherwise gotten.

In most cases, that is the most unethical action a company can take against its employees.

I will agree that dividends should generally be used when the investors are able to invest the money better than the company can.

eg. If an putting the cash into ops will generate a 6% return and investors are able to earn 8% then a dividend should be issued.

If you can fill out your round, get cash and not have to dilute as a CEO why wouldn't you? That would be like a VC turning down free equity.

It is generally accepted that a vast majority of a VC partner's income comes from their share of the fund's return, not from the management fee. It is not unheard of for a VC firm's costs exceed the management fee, such that the partners loose money unless the fund has a positive return.

Industry standard practice is that startups pay for costs associated with deals, not capitalists. That one is virtually universal. The grapevine tells me that it is not uncommon to see VCs travelling as board members. Some of them don't exactly fly coach.

And fees are not necessarily split equally across partners. One senior partner might take 20-50% in some cases.

As a founder, I'm delighted the AirBNB guys are charging for admission to their equity sale. Call the payout back wages paid at market rates and call it a day. And if investors are reacting in shock to the sticker price they can get out of the showroom. Sorry you won't be joining us - perhaps there is a cheaper model you can lease somewhere else?

This guy is getting skittish that 1/100th of the valuation of the company is going in a payout to the founders? That's only 100k over a 10 million round. Seems pretty conservative to me.

If the deal doesn't make sense, it doesn't make sense because the company is overvalued. But for a VC to agree that a company is worth X and then complain when 2% of that is used to de-risk founders is hypocrisy: the payout constitutes a smaller percentage of deal value than the VCs charge for allocating capital.

Any VC that finds these compensation figures absurd should have balked at the proposed valuation LONG before this point. This is in principle no different than de-risking founders 100k each out of a round valuing their company at over 10 million.

The point of investment is that the money is supposed to allow the company to grow. When 1/6 of that investment isn't even invested in the company, but rather given as a no-strings gift, it's not an investment anymore.

Doesn't that seem reasonable? With the huge potential upside, shouldn't there be an associated risk?

A VC arguing the ethics of this deal with respect to early employees is more than a bit disingenuous, at first glance it looks as if they are doing this to protect the little guy but that is only because for once they are treated the same as the little guy.