Maybe It's Not Such A Great Idea To Give Founders Like Kevin Rose Millions Before They Do Anything

Kevin Rose Businessweek

Photo: Businessweek

Over the past couple years, a trend emerged in startups: startup investors began agreeing to buy stock from founders and CEOs – providing them with a rich pay day before their companies actually sold or IPO’d.Maybe this has been a mistake.

Three examples:

  • In the fall of 2008,  when Digg raised $29 million at a $164 million valuation, cofounder and eventual CEO Kevin Rose sold part of his stake for millions of dollars. Last week, New York holding company Betaworks bought Digg for $500,000.
  • In 2010, when Foursquare raised $20 million from Andreessen Horowitz at a $100 million valuation, cofounders Dennis Crowley and Naveen Selvadurai took home $4.64 million. Today, Foursquare user growth is flat, Selvadurai is gone, and the service looks like it will remain a niche product – not become the next Twitter or Facebook.
  • When Groupon filed for its 2011 IPO, it revealed that during its time as a private company, Groupon’s founders sold $870 million worth of their stock to investors. Today, Groupon’s market cap is $5 billion; far less than the $30 billion bankers whispered about when the company first filed.

To be fair: in the case of Digg and Groupon, the investors were offering the CEOs liquidity because the CEOs had, at the urging of their boards, recently turned down acquisitions that would have made them rich.

Digg turned down a $60 million offer from News Corp; Groupon said no to $5 billion+ from Google.

The CEOs and founders were allowed to take something off the table as an inducement to go for a larger goal.

It just turns out those goals were not reached.

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