Secondary sales are, anecdotally, getting more common these days, despite the fact that many VCs dislike them. They're so obviously in the best interests of founders and early employees, and the VC arguments against them are frankly odious, that I'd wager we see a realignment on how acceptable this term is seen to be.
The argument advanced against secondaries is, phrased to be maximally charitable to it, that having founders and employees in the same boat as having to wait for an exit to really reap the rewards of the company keeps everyone's interests aligned and avoids causing any bad blood at the company caused by founders getting a very happy outcome prior to employees having gotten one.
Phrased less charitably: rich people (VC partners) think paper-rich-cash-poor people should continue being cash-poor so that rich people have better negotiating leverage over them.
Phrased less charitably: rich people (VC partners) think paper-rich-cash-poor people should continue being cash-poor so that rich people have better negotiating leverage over them.
Doesn't this work against the VCs when the startup with cash-poor founder gets a subpar M&A offer? I thought VCs had become accepting and even encouraging of early founder liquidity.
This is our intention with this new round, to really set a precedent for multiple liquidity events going forward. Different investors will have different stages at which they’d like to get liquidity, and now they’ll be able to cash out at the time which is comfortable for them. New funds which are more focused on later stage capital can invest as we grow more and become more stable and predictable with our growth and revenue. The same applies for team members: if someone wants to put their kids through college or buy a house, they can choose to sell some of their equity. Others might not have as many commitments and may choose to keep their shares.
So basically the Silicon Valley VC ecosystem is reinventing secondary markets for equity shares. This scheme has the same basic purpose as traditional stock markets (i.e. capital formation for companies and liquidity for investors), but is limited to a restricted set of participants, and price formation occurs only during specifically timed liquidity events (rather than continuously). I wonder if investors and founders are really happier this way than they would be on the public markets. If you are an early employee and you want to buy a house (or whatever), would you rather be able to sell your shares at any time to the best bidder or be stuck waiting for the next liquidity event at who knows what price?
I think this is an interesting development for a couple of reasons. First it probably is indicative of the huge regulatory burden involved with going public (Sarbanes Oxley &c). Second it shows how much capital really is available in SV VC these days. There is so much money that founders and early investors don't even care about access to capital available in the public markets because they can get all the cash they want without having to leave the VC world. I wonder if we will see a shift back to the public markets if the VC money ever dries up for whatever reason.
In short, a couple factors have made IPOs less appealing:
1. More regulation and reporting requirements
2. Hyper short term investors
The first incurs great costs, and counterintuitively reduces transparency. The second drives heavy gaming of the market. You can't hold a company accountable to day to day events, you probably can't even hold them accountable to month to month growth, it's an unnecessary burden and short term predictability doesn't correlate to long term value growth.
As a result companies wait longer before going IPO, and individual investors (read: the 99%) are no longer able to invest in the growth stage of companies. The implications of this are interesting:
1. Rich get richer, poor can't. Retirement funds and the likes get no real returns.
2. Things like second market, the JOBS act and more will provide real alternatives to the public market. Extend this out 100 years, the IPO market becomes day to day gambling with 0 connection to real growth. People will write algorithms to play this game, and it will roughly be a zero sum game. Private unregulated markets will replace the public market once individuals have the freedom to invest. They'll look like public markets of the past where there wasn't rapid trading and there were less regulatory requirements.
As a company, I would much rather list on a private market where people were only allowed to buy and sell my stock once per quarter. You could design an auction system that allowed the price to be set based on how many shares were requested to be bought / sold (could be similar to the way IPO prices are originally set). I wouldn't have to deal with short term ebbs and flows of the market, and worries of cascading crashes due to day to day events and rumors. Instead I'd get to release a comprehensive quarterly report explaining how the company is doing and why people should buy into our growth, and give a gameplan for how we plan to deal with crisis. Someone should build this, and figure out a way to let individuals invest.
I think #1 is obviously a huge issue. I am less convinced about #2. A lot of the tech IPOs in the past few years (mod Zynga?) have done well since the IPO. I Andreesen's argument about shorts driving the price to zero is kind of silly. To cash out on a trade, the number of shares you buy has to match the number of shares you sell. So if you start the trade on the short leg and the stock goes down, why wouldn't you expect the price to be driven back up when you buy back to cover your position?
You can look at a tech company like Apple whose shares are some of the most frequently traded shares in the market, and you can see that in the long term, as the company has done better, the share price has gone up. The market still works even in the presence of all the short term trading.
"Smart entrepreneurs have often used this competition / appetite to invest in prorata rights to their advantage. How? Have you noticed the increase of founders selling their personal stock in what is known as a “secondary?” As in – the company may or may not ultimately succeed but I’m going to take $2-5 million off of the table now to derisk my personal situation.
This is a direct result of the prorata shuffle more than just goodwill by investors. Truth lives in subtleties and nuance. Understand trends more intimately and you can use them to your advantage."
Pretty awesome watching these guys grow. I also love how they question the norm in the VC/startup world of being poor until you hit a real homerun. You only get one life. Don't let a VC dictate how you live it just so they can hit their IRR projections.
It's fantastic to see a dividend based model being introduced into early round VC fundraising. It's an alternative to liquidity and something that should/can move upstream. Bravo to Buffer for leading the charge.
> and I hope they gave a similar option to their employees who have been with them a long time.
Looks like they did. Up in the article they say they're splitting $2M among the two founders, and later it says that they're taking in total $2,5M for cashing in founder and employee equity. I assume the $0,5M is the employee part. Seems like a small fraction, but I assume most of it goes to the earlier employees (and then only those who opt for it), so it might be a year's salary right there anyway.
That's right, good eye Egbert and thanks for chiming in with the details! Interestingly, Leo and I have been doing this for almost 4 years, whereas most of the team is much earlier in the journey. We have a couple of the earliest members of the team taking some liquidity, however most chose not to at this stage (we offered it to everyone).
Yup, that's right. I'm an early Buffer employee/cto. I also wanted to confirm that I had the option of receiving some liquidity in this round by giving up some of my options that have vested. I chose not to sell them at this time as did most of the employees that had vested shares. Great thoughts guys!
I think Buffer is creating a third way for startups in general. Everything i've seen and heard these guys do since launch has been unorthodox. They're outliers and I mean that as a big compliment!
My sentiments are: (1) love what they're doing and the path they're trailblazing (2) unsure how replicable it is for other companies (3) hoping for more companies/founders that leverage their initial success (combination of luck and skill) to further push the envelope on what is accepted and possible in this little corner of the world if ours.
The best leverage is to not need the financing, and one you get to that point, all sorts of possibilities open up. Great to see a wildly successful company show us what's possible if you have leverage.
I agree their financing path is unique to the way they've built their product and team, but I think parts of it can still be replicable to other startups. ie not gearing the whole future of the company towards the big exit, but using VC money to create a more organic route..
If one of the founders is reading - why not taking the money in the bank as dividend right before the fund raising (with full disclosure to the future investors, of course). You get a similar amount of money (although sharing it with the early investors), but all the money you're raising goes to the company, which I assume is a simpler model. Wouldn't that be simpler?
Best of luck with completing the round, and with future growth!
Yup, great questions! We considered a number of things: dividends, loans, buying back shares without raising money, debt. Dividends for a c-corp are taxed super high (big fan of paying taxes, but you end up paying something like 60-70% tax, not a good idea!). So raising extra cash with minimal dilution (2.5% for this round) was most efficient.
Right now, all money raised goes to company, then company buys back shares from early team members - investors still get preferred stock. We're not selling our common stock directly to investors - you're right, that'd be too complicated and not in investors interest.
Would love to answer more questions on this, keen to explain our full thinking!
This is an interesting and unusual (but not unprecedented) move that actually aligns interests.
99% of founders have a goal (it may not be the primary or secondary, but trust me it's there) to be "F you" rich. Maybe 99.9%.
This move doesn't make either of the founders remotely close to that. If the founders checked out now, they wouldn't be able to retire - they certainly won't worry about paying for college for their kids, but they're sipping pina coladas on the beach either.
Taking "just enough" money off the table de-risks the whole operation for everybody. The risks in a startup this size are
a) Founder fallout / burnout
b) Running out of enough runway to really scale the biz and make the right long-term product investments (being cash-flow positive doesn't mean you can do this - plenty of breakeven startups out there just treading water who are one bad product cycle or market shift away from biting it)
I've been hearing a lot about Buffer lately. I'm about to release my project and wanted to earn some money with affiliated marketing.
Everywhere I turned, people mentioned Buffer so I grabbed an account a couple of days ago.
Its a great service that falls in that "why didn't I think of that?" category. Really cool.
I'm happy for them and I hope they can go very far with this venture. They have paying customers and as word spreads around more and more about the need to utilize social media to market your online business (There's a CNN article recently released about it http://www.cnn.com/2014/10/01/world/europe/bloggers-six-figu... ), the need to organize content release is essential.
They're doing pretty well for how much little info is on their website. What do they do? Apparently they're the easiest way to publish on social media...but there's not much more info
They make it easy for people to manage multiple accounts, and build a buffer of posts for later release. So your account is always active, even if nobody's on the clock 24/7.
Congrats! Just a comment. Your landing page seems very sparse. I hadn't heard of you before and from that landing page I had no good idea of what your app does or how popular it is.
I feel like adding your blurb from the about page + including something about who uses your website along with a bigger button for businesses would at a minimum be worth A/B testing.
Also it seems a bit awkward to navigate with no navbar at the top and for the business landing page you have to go all the way back to the first landing page to go to any of the other pages.
Great point! We A/B tested a bunch of different ones, we haven't managed to outperform the current one. We'll certainly keep testing it. I like your hypothesis!
FYI: This was all over TechCrunch, so if someone knows the BufferApp team, please tell them they'll need to file a Form D 506(c) exemption with the SEC.
Sorry, forgot to mention. It's going to also force you to to acctedited investor verification on each investor. I'm the CEO of AgFunder (and also a Buffer user) and I can send you a guide to AI verification if you need it.
I've learned about buffer while looking for job. (probably from who is hiring threads) Since then, I've been reading their medium posts.[1] Their values, hiring strategy, salary transparency and managing remote teams seems perfect to me and I really liked reading their posts. (Highly recommended)
The urls were slightly different. The duplicate detector is porous in this way by design, to allow good stories multiple cracks at the bat. We do intend to replace it with something more sophisticated, but in the meantime a small number of reposts is ok.
Secondary sales are, anecdotally, getting more common these days, despite the fact that many VCs dislike them. They're so obviously in the best interests of founders and early employees, and the VC arguments against them are frankly odious, that I'd wager we see a realignment on how acceptable this term is seen to be.
The argument advanced against secondaries is, phrased to be maximally charitable to it, that having founders and employees in the same boat as having to wait for an exit to really reap the rewards of the company keeps everyone's interests aligned and avoids causing any bad blood at the company caused by founders getting a very happy outcome prior to employees having gotten one.
Phrased less charitably: rich people (VC partners) think paper-rich-cash-poor people should continue being cash-poor so that rich people have better negotiating leverage over them.