Startup horror stories, whispered around the campfire late at night….
There are some great takeaways here, if you are an innovator. The landscape is changing, perhaps not for the good, if you are a creator needing support to progress and scale.
VC’s, called for decades “Vulture Capitalists” in jest, can be T-Rex Capitalists if they wish to be, with the evolution of complex structures.
It’s not “Chess” anymore, but “Go” — or “Go Home” in the funding world.
And it’s hard to imagine that’s actually good for innovation. And what’s not good for innovation, is not good for the future of drawing on the inherent value of “the Genius of Crowds.” Free thinkers and innovators need to be unleashed, not bridled by legal, regulatory, and financial complexity and recourse in fast-growing economies and advancing technologies.
– – – – –
Gerald Duran
Imagine building a billion-dollar company, raising millions
→ and then walking away with nothing
→ it’s the story of FanDuel’s founders
FanDuel, a fantasy sports company, was co-founded with a vision to revolutionize the sports betting industry.
Over the years, the company raised $416 million and achieved a staggering valuation of $1.3 billion. But when FanDuel was sold for $465 million, the founders received $0 from the exit.
How did this happen?
𝗟𝗶𝗾𝘂𝗶𝗱𝗮𝘁𝗶𝗼𝗻 𝗣𝗿𝗲𝗳𝗲𝗿𝗲𝗻𝗰𝗲𝘀: Investors who poured money into FanDuel had agreements in place ensuring they were paid first in any sale scenario. These liquidation preferences meant that investors’ money was prioritized over common shareholders, which included the founders.
𝗗𝗲𝗯𝘁 𝗢𝗯𝗹𝗶𝗴𝗮𝘁𝗶𝗼𝗻𝘀: Like many startups, FanDuel accumulated debt over time. This debt had to be repaid before any equity holders could receive proceeds from the sale, further reducing the pool of money available for distribution.
𝗗𝗶𝗹𝘂𝘁𝗶𝗼𝗻: With each funding round, the founders’ ownership stakes were diluted. By the time of the exit, their shares represented a smaller piece of the pie, significantly reducing their payout.
𝗙𝗶𝗻𝗮𝗻𝗰𝗶𝗮𝗹 𝗣𝗲𝗿𝗳𝗼𝗿𝗺𝗮𝗻𝗰𝗲: The sale price of $465 million, although substantial, did not meet the expectations set during previous high-valuation funding rounds. This discrepancy meant that the total investment and debt obligations exceeded the sale proceeds.
𝗘𝘅𝗶𝘁 𝗦𝘁𝗿𝘂𝗰𝘁𝘂𝗿𝗲: The specific terms of the sale deal favored investors who had negotiated protections and priority payouts over the years.
Interestingly, the management team did receive $30 million as part of a retention bonus package designed to keep key personnel on board through the transition and sale process.
𝗟𝗲𝘀𝘀𝗼𝗻𝘀 𝗟𝗲𝗮𝗿𝗻𝗲𝗱
→ Understand Liquidation Preferences
→ Be Mindful of Debt
→ Anticipate Dilution
→ Align Financial Expectations
→ Negotiate Exit Terms
This sorry story is a powerful reminder that building a successful company involves more than just raising capital and achieving high valuations.
It’s about understanding the financial intricacies and making informed decisions to protect your interests and those of your team.
