“A concept known as the ‘Founder’s Dilemma’ reveals the importance of making some hard choices before even approaching VCs for investment. As startups grow, entrepreneurs face a dilemma. On the one hand, they must raise resources to grow their business. If they choose the right investors, they can outperform.

In fact, HBS research shows that founders who gives up more equity to attract good people and investors, build a more valuable company than ones who part with less equity. The founder ends up with a more valuable slice, too.

On the other hand, in order to attract investors and executives, founders must give up a degree of control over decision-making as a quid pro quo.”

Chris Corbishley

Have you noticed ?

This is the only male blog in the world where we incorporate music and or playlists into the posts.

There are a lot a cautionary red flags for you VCs and investors, and as I’ve been saying for some time: there’s a lot of them like that.

How many red flags ? Too many…

“The founders openly favored signing up the most physically attractive designers, saying they would be more appealing to clients.”

Courtney Rubin

“What had more important ramifications for the company’s future was Santos’ singular focus on press, with nearly all profits — at least in the early days — going to marketing.

CR

Yep…”design for all ethos.“

How “secretly” they get…

“Several months after the [VC] funding, Santos also stopped sharing details about the company’s health. According to five former employees, stats like how many hours were sold and how many designers they had signed up had been shared at weekly all-hands meetings. (In one of the company’s early offices, they had even been written on the wall, near the company’s core values: “Be the Solution,” “Dream Smart,” and “Keep It Fun.”) But according to ex-employees, this stopped suddenly in 2016, and the all-hands meetings themselves became much less frequent. “Everything got a lot more secretive,” says one ex-employee.

CR

Sure, seniority counts…backwards.

“Soon, not a single staffer from the early days remained.

…By employee estimates, 75% of the leadership team that started in 2018 didn’t end 2018 with the company.”

CR

Nothing wrong with laying off staff while you’re living large…

“On June 21, Santos — sitting alone under a crystal-accented chandelier in the office — put three-quarters of the company on what was supposed to be temporary unpaid leave, maybe two weeks, he said, according to former employees who were there at the time. (The other quarter of the company stayed on for minimum wage.)

By July 22 [2019], most employees had gone a full month without pay — meanwhile, Santos’ husband Instagrammed a photo: A six-bedroom, $1.6 million home the couple had just bought in East Hampton, complete with two ponds, a tennis court, and a Jacuzzi.”

CR

“Design for a client’s workspace,” [Santos] wrote, adding that he always did his best thinking in nature. “For all my obsessive planning, preparing and orchestrating, life unfolds as it will,” he wrote. “Almost entirely out of my control.”

CR

WWID ? What Will the fleeced Investors Do ? That money ain’t coming back…

In response, Scott Kupor of A16Z published a rebuttal outlining valuation methods used in the industry. Kupor differentiates between the “marks” (quarterly snapshot of realized and unrealized gains ) from the actual cash and stock distibutions (which constitute the returns). Generally speaking, VCs require companies to get an independent 409A FMV valuation. A 409(A) Primer is available at Axiom Valuation. Accordingly the methods used to value investments are:

1. Last Round Valuation Waterfall.
2. Comparable Company Analysis. For example, if a portfolio company is generating $100 million of revenue and its “comparable” set of companies are valued in the public markets at 5x revenue, a venture firm would then value the company at $500 million ($100 million*5x) “. A  firm will then also apply what’s known as a DLOM (a discount for lack of marketability) to reduce the carrying value of the company described as often 20-30%.
3. Option Pricing Model. OPM uses Black-Scholes to value a portfolio company as a set of “call options  whose strike prices are the different valuation points at which employee options and preferred shares all convert into common stock.” Kupor points out Black-Scholes is the method his firm widely uses. If a firm has raised Series C at $5.00/share, OPM using Black-Scholes will assign a value to the Series A and B that is a substantial discount to the $5 per share price assigned to the Series C. Adding those up gives the company value. ” (Kupor).  The strike price of an option here corresponds to the other(s) equity values reached (but it could have been the liquidation preferences on each preferred series). Calculate the incremental value of each option based on the option’s strike prices. Of course the common class participation percentage would be multiplied by the incremental value of the call options, them sum them all up.
   

             To those three¹ we could add:
         4. VC Method (needed: exit price estimation).
         5. Risk adjusted NPV -ex.:pharma licensing valuation at Torreya Partners.

On the trails of A16Z post. Marck Suster of Upfront Ventures points out the uncertainty of the outcome for funds that generally make it out great, but may yet have a trailing fund.  IRR may be the method used to gauge investments but the money returned to investors can only be the cash on cash (realized returns).

We’ve seen the largest players in private equity (KKR)making a play for the Venture Capital class attracted to potential outsize returns. KKR recently invested in Ping, AcuFocus, Darktrace and others.
Will that ultimately pay off ?

Four #termsheet #provisions that protect #VC interests https://t.co/NxsAXOmMm2 via @PitchBook #venturecapital basics #funding #startups pic.twitter.com/u4jiWthjmn

— Financier Guru (@FinancierGuru) October 20, 2016

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