Ask HN: WWYD? Built a company valued at $1B and may walk away with nothing
Financial Overview
- At our peak (Series C) we were valued at $1B post money - $187M raised by the company - $250M preference stack (liquidation prefs + debt) - I own ~27% of the business, and so does my co-founder. My co-founder is no longer part of the business day-to-day, he's on the board - We will end the year at $130M in annual revenues and burning ~$925K/month, we are a low gross profit margin business ~15-20%
Personal Overview - I live in New York City, it's been ~ 10 years that I have been on this journey, bootstrapped with no salary for about 2.5 years and pretty modest salary for most of the years, up until a couple years ago when I started getting "market rate" - I have not taken any chips off the table via any secondary sale up to this point, never really got the chance - Today, my base salary is $175K, no bonus, no stock refresh since the founder grant, fully vested stock, no severance, no indemnification. (Mainly because I just haven't asked for new comp b.c company is in a difficult spot) - In comparison, I hired a critical new C-Suite exec (COO) and gave her $285K/year, 75-150% annual target bonus, $150K sign on bonus, $200K funding closed bonus, 1-year severance, and a 4% equity stake in the business - I am starting to see some worrying signs of real burnout now (for myself)
State of the Union - We have < 6 months of runway based on our current burn, but majority of the money left is debt now - I am about to close on $30M of additional financing this month but the terms will decimate common stock holders (my 27% stake is likely going to go down to < 10%) - Still negotiating, but will likely have to give up board control so I could get fired immediately after financing is closed - We are in parallel exploring strategic M&A alternatives this year, but in the current market condition our business is likely worth less than the preference stack, in which case common stock is wiped out anyways and I get nothing. - Lastly, I'm not confident on the current strategy to grow out of the current problem over the next couple years, so there's a lot of risk in our growth for 2024 and beyond. The strategy I would want to run as CEO is likely not something my COO or board will want to get behind and frankly I don't know if I have the energy to do it myself. It would require 24-36 months to transition the business to the new world while watching old revenue decline and waiting for new higher margin revenue build up in parallel to offset the declining revenues in the core business.
My #1 priority is to get the financing closed for the business. But from there, I'm really confused and don't know what to do next. Doesn't seem to make sense for me to work my ass off just to return money to investors and have nothing for myself. But I do understand that it is my fiduciary obligation as the Founder/CEO, but maybe for the first time in 10 years I'm asking the question "What's in it for me?"
WWYD?
93 comments
[ 3.7 ms ] story [ 210 ms ] threadIf you're going to be wiped out anyway then maybe that's a better bet?
In all cases, you have to sit on your losses. What you need to think about is how much you're still wanting to risk for future profit.
I guess the point of the parent comment, is that one way to make sure you end with something is bring the business to profitability by cutting expenses right now to almost zero, and see how much revenue remains.
That profitable business would be:
1. making money for YOU, 2. and give you a much better view of how much you can sell it for.
In a world where money is no longer cheap and available, that may be a good idea to consider this option.
Losing control of the board and getting fired means you put that business in the hands of people who may not care about losing it all (and yours with it).
Something is wrong here. If your gross margin is positive this is a bad move, surely? Are you losing money on sales somehow or not including customer acquisition in that margin?
- Cutting costs so you're burning 0 per month AND keep the 27%+ of the stock?
- Accepting 30M and all strings attached?
> And cutting revenue while you are also trying to sell the company is going impact valuation.
For you personally, which is worse?, the valuation drop or the stock dilution from extra money?, negotiate from there with everyone else, it's really not your company, you're a shareholder and employee, you should make sure you're properly compensated as well both as employee and as shareholder.
Also, it seems like even with the extra money, you're still going to need to address costs at some point?, but from a weaker position?
The new money only has a say if you take it, and if you can get your burn rate to zero, then you may survive without new money.
So you might be able to choose what’s better for you and/or the existing investors: take the new money on its terms or make unpleasant cuts and keep going without new money. (And, of course, you personally can exit if that’s best for you.)
I can feel with you.
Your story sound similar to mine, only that I could cash out some of my shares when a PE company took over, so I don't lose everything. I had to roll over some of my shares though, and these are close to worthless now. It's still painful getting more and more diluted in extreme down rounds, as business is running out of cash and debt is too high.
From my experience, it's inevitable that you will get diluted, you can't change that. It also does not matter what you have done for the business before, the investor persons won't care. What matters is the now and the future.
So focus on the future. You should align your salary and package with that of the COO. Your new shares could also have similar conditions as the new investor will etc. Discuss it with your current investors and the new ones. They don't want to write off their investment too, and certainly want to keep you on board?
I don't understand your fear that they will fire you? You will still keep your shares, and are free to do something new (and will probably earn much more).
You can only change the future. You seem to be a technical person (nothing wrong about that, I'm too :-)), a business person would have negotiated this a long time ago already, and multiple times.
Sorry, I am confused. Is there a definition of "burning" that's different from "expense"? Cause based on those numbers, you guys are making a sound profit...
But they have trouble doing that, given the remark “I am about to close on $30M of additional financing this month but the terms will decimate common stock holders”.
My guess would be that part of the reason is “~ 10 years that I have been on this journey”.
For many markets, that’s a long time for a company to become profitable.
I know nothing of this life path, but I think I would up my own salary to what I am worth, if I feel it is too low. What is your role? CEO?
Say you doubled your salary to $350k, then over 2 years that is $350k, or 10 days burn. Doubt anyone will notice.
Probably need to downsize a bit to get costs under control too?
Yes this sounds like an asshole move but I think it is an asshole "relative" to the very humble choices you have made so far, so a reversion to the mean, and I think the right thing to do.
Take care of yourself and your health especially.
Maybe ask your employees? I'm sure they also don't want someone to come in and take control. And quite often, employees can think of creative ways to save money that the CEO doesn't know of.
As you describe your situation, your COO would be the perfect candidate to find that money.
Is product actually good (i.e. your customers love it)?
Is it a want (vitamin) or a need (painkiller)?
If B2B, does it save money or generate money?
> The strategy I would want to run as CEO is likely not something my COO or board will want to get behind
I'd argue that your #1 priority as a CEO is building alignment between all stakeholders -yourself included- on the direction to move forward; everything else is downstream from that. If you close financing at terms you're not aligned with, with boardmembers who are signing up for a strat you are not aligned with, the business will be pushed into different directions, and shatter at these cross-forces.
I've seen this before, and the deterministic outcome from it is you parting ways with the company in 6-12 months' time, at which point it will be in a significantly worse shape / position than it is now.
Presently you have some level of movement freedom. I'd start by sketching out a strategy you think have a high expected value X probability of working, and a roadmap to getting there. I'd look for investors who are okay with signing up for that plan, at valuation that reflects the business's true value given that strategy is successful. Get people aligned with that goal, and execute on that.
The second issue, "What's in it for me?" flows downstream from above. If your own expected value for a successful outcome is no longer motivating for you, your incentives are at odds with the company. To align these, one useful question is: "Okay, you fire me today, find a competent CEO. What would that CEO ask for to drive this?". Sell your board on this question, and take that specific package -with the advantage of the company being that they don't have to go through the C-level search process. Operationally, this can include: a bonus for achieving milestones on the strategic roadmap, and market-level salary.
In short, I'd start with alignment. Everything else -including what's in it for you- flows from there.
If you have done and are doing a good job then everyone should want to put the right incentive plan in front of you.
Maybe you have to own the fact that valuations are down and the financing structure isn’t optimal, there is not really anyone to blame for that and a drop from the 20s to the 10s might be something you need to take on the chin. It’s still a good chunk of change.
Could you also look at pulling a some liquidity out during the next fund raise, with the above context set out. Most investors would appreciate the value of giving you some liquidity if you are still the guy to run it.
And you have to cut costs too. It’s not fun but you have to do it. Renegotiate every contract, and just stop paying for things that you don’t 100% need.
Why are you really raising money -- to make capital investments that will actually make the company profitable (operating basis)? If the first $187 million didn't do the trick, how & why will this extra $30 million do it? Or are you raising money just to keep the hamster wheel going a little longer?
Are your revenues growing? Or flatlined? 925k/month loss is an awfully specific number, is that better or worse than a year ago, or 6 months ago?
The funding is to keep the hamster wheel going and the new amount will allow us to get to profitability.
Burn was and is much much higher than where we will end the year. (I'm learning) there's a lot of work that goes into getting cost out of the business while preserving as much revenue as possible. We just unfortunately haven't been able to cut cost our fast enough without having to be dependent on this next round of funding.
Sounds like you want to buy yourself some runway, and the only way to do that is to let go of staff. Alternatively offer people equity-for-salary, because your equity ought to be cheap now.
Sounds pretty stressful, don't beat yourself up over it. Wanting to do well for the investors is good, but everyone knows about the principal-agent problem, and they could have aligned your incentives better. It's exactly this case they should have thought about, what do I do if the founder is in a position where they want to drop everything, blowing up the business, because they won't get anything out of it?
The critical question is "what is your path to profitability?" You have seemingly a positive gross margin but negative net margin? What does the gap consist of?
> The strategy I would want to run as CEO is likely not something my COO or board will want to get behind and frankly I don't know if I have the energy to do it myself. It would require 24-36 months to transition the business to the new world while watching old revenue decline and waiting for new higher margin revenue build up in parallel to offset the declining revenues in the core business.
Are you familiar with the Nokia "burning platform" memo?
You have roughly four choices:
1) make the old pre-pivot business work (have positive net margin)
2) make the new post-pivot business work
3) raise more money through investor storytime, which is going to require a good answer to #1 or #2 and as you say carries risk of being diluted out
4) give up
5) a miracle occurs
I can feel that you're very tempted to do #4, which makes #3 harder as a very high level of self-belief is necessary. It seems there are problems with #2, and #1 hasn't made it after all this time.
Perhaps this is the time to get a bit confrontational with people to insist they get behind either #1 or #2 100%.
> maybe for the first time in 10 years I'm asking the question "What's in it for me?"
Bit late for that, sadly. "Selfless CEO" is just self-exploitation.
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The challenge is that you’ve invested $250M to produce a business that sounds like it’s worth $100+M today (if $30M in debt is going to wipe out half your equity).
As much as the ride has been thrilling and you’ve worked your tail off, from a performance perspective, investors look at the $250M in and $100ish M in current value and say “meh, not that great an entrepreneur, turns every buck I give them into fifty cents.”
The reason your COO and Board are skeptical of your plan is that your actual business that you have has proven to be low margin, which means you produce relatively low value over your cost of goods for your customers. So a fantastical plan where in the future you’ll provide LOTS of value to your customers seems speculative at best, foolhardy at worst.
From a personal perspective, your value as an entrepreneur / founder, will never again go up at your current company, only down. There is no scenario in which five years from now people are more impressed with what you’ve built than they are today.
Your personal best outcome, IMHO, is to sell as much as you can and take the personal exit. Hand the keys over to the COO for them to do the grinding turnaround over next five years. Take six months to recharge and come back into the market with something new. You’ll be able to raise at a higher valuation for a new business, and actually get paid a higher comp.
Why would you want to keep a COO that isn't aligned with you?
> Still negotiating, but will likely have to give up board control
Then don't take it. You have control. Tell the investors / board this isn't a viable option. We all want to survive.
As others have said - cut cost or look for different types of financing where you'll do fine. If the investors really disagree they can get nothing out of it too so everyone needs to compromise.
> But I do understand that it is my fiduciary obligation as the Founder/CEO
As 1 of the largest shareholders it's your "fiduciary obligation" to make yourself happy. Why do you discount the shareholder side of you?
Not trying to sound cold but that’s the reality of the market now. Probably no consolation, but there are a lot of startups in this position now. If you have IP that’s valuable you could explore an M&A exit. That typically won’t end in a giant cheque but will make folks whole and provide a graceful exit.
You have 130M ARR and are only ~10% short of break-even at ~1M burn/mo, just tighten up the business and clean house a bit?
Here is your problem.
Some founders milk company directly on bonuses and pay, there is no "grand exit" when they go public. I think you may be subconsciously aware of that, maybe there is some hidden regret or self-hate etc... Continuing with this frugality may not be way forward.
I would suggest:
- get out of NY, some nice environment near sea or forest, work remotely
- prepare for your exit. Move out of NY to minimize income tax etc..
- can you actually become CEO? If not, it is not your business anymore, not your problem
- find way to increase your take-home money. For start you could pay yourself for overtimes. Maybe if you move out of NY, you may need office there and so on...
- personal brand is worth quite a lot. Maybe there is way to use this startup to build your own.
130M in ARR and you can't save 1M a month in burn? what is holding you back from letting go ~60 people and/or trimming other costs?
Raising on those terms, that dilution and no board seat, I would not do it.
Sounds like ARR is the wrong term since it’s probably not a business operating on recurring revenue — probably an example of the bananas valuations of the last few years, based on revenue not viability.
If you don't figure this out within the next few weeks, you will find yourself without any options and will need to either close the company or take whatever lowball offer you can get.
Even if you don't believe in god, you have an unconscious that keeps a track of these things so act in a way where you might get/deserve chance to rebuild yourself after all of it.
P.S. I've been in a similar situation (smaller level) and the way I handled myself resulted in a downward spiral for years, never truly trusting myself to fully commit to anything while also not fully giving up. Basically running around in circles, each time losing a little bit of heart/spirit.
It sucks but they’re no longer contributing and are a massive drag on the cap table.
I’d also get some generous equity for the COO if you’re going to hand it off to them. Tie it to the performance incentives you know the company needs to hit to be a success.