Wednesday, December 24, 2014

Newly Printed Federal Reserve Mad Money in Action in the Silicon Corridor

I tell you, it is almost Crazy Eddie insane out here.

WSJ reports:
In July, David Byttow and Chrys Bader won the startup lottery, reaping millions of dollars in cash from the company they founded.

But they didn’t sell their San Francisco company, stage an IPO or generate any revenue—the typical route to technology riches. The pair had only launched their startup, maker of a messaging app called Secret, seven months earlier.

Rather, the co-founders together made about $6 million from selling some of their shares in the startup to venture capitalists as part of a $25 million, early round of financing, according to people with knowledge of the deal. Even if the business flops—and research shows most startups fail to return investors’ capital—Messrs. Byttow, 32 years old, and Bader, 30, will still be millionaires.

Founders typically hold onto their shares for at least a few years until their company has gained traction, or wait for an IPO or outright sale. But venture capitalists are so eager to get into the deals they are allowing some funding to be used to cash out the founders rather than build the business...

For years, it has been relatively easy for founders to sell stock before an initial public offering. However, shares are typically sold late in the startup’s life cycle, well after the company was clearing tens of millions of dollars, if not hundreds of millions in revenue. In 2010, a boom in so-called secondary shares gave rise to robust brokerages, where buyers and sellers traded stock in then-private companies like Facebook Inc. and Groupon Inc.

Nowadays, however, investors say there is so much money chasing deals that the action has trickled down to earlier rounds. As soon as a startup has the markings of a hit—no matter how young—everyone pours in, scrambling for their percentage points.

Investors “are fighting like drunken sailors,” says Gil Penchina, one of the most active investors on AngelList, a marketplace for investments that is open to established venture capitalists and well-heeled startup enthusiasts. Mr. Penchina says he isn’t concerned if an entrepreneur wants to take a couple hundred thousand dollars off the table, but several million can spell trouble. He notes, however, that often, it isn’t even the founders’ desire.

Instead, investors will lean on entrepreneurs to sell personal shares because they want to own more than 20% of the startup and a founder will do it to “keep the peace.”...

Joel Gascoigne, CEO of Buffer, recently raised a $3.5 million “Series A” round, of which $1 million went to the company’s coffers and $2.5 million went to Mr. Gascoigne, his co-founder and a handful of early employees. Mr. Gascoigne, who pays himself about $170,000 a year, said he wasn’t desperate for the money but it will help focus on building the company in the long-term.

In a blog post he and his co-founder wrote: “At times we thought ‘are we being greedy and just want money in the bank?’ In some ways that might be true. At the same time, we think it could be increasingly difficult for us to say no to future offers, especially since we still have so much equity in the company.”

Mr. Gascoigne said in an interview he has no plans to buy lavish goods with his cut, though he might use it to make investments in other startups. He also says he doesn’t feel guilty about selling shares because his company actually makes revenue and has been profitable for several months.

“So now I can go grocery shopping and not think about things too much,” he said.

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