Snapchat, a popular photo sharing and messaging app, recently raised $60 million at a pre-money valuation for $800 million. With 200 million photos being shared daily, Snapchat is now more valuable than Instagram was when Facebook purchased it last year.
One significant detail left out of the SEC filing: each Snapchat founder reportedly swapped personal stock for $10 million in a secondary funding in addition to the $60 million investment. That means both 20-something founders, Evan Spiegel and Bobby Murphy, are rich now regardless of whether or not their company succeeds.
Taking money off the table in a secondary funding is common among hot startups. Dennis Crowley and Naveen Selvadurai were able to take $4.6 million each off the table when they raised Foursquare’s $20 million round in 2010. Groupon’s Andrew Mason also made himself rich in a secondary funding prior to Groupon’s IPO. So did Zynga’s CEO Mark Pincus.
The move is meant to motivate founders to take a bigger risk and really swing for the fences rather than sell their startups early. But sometimes it has the opposite effect. Each company mentioned above has floundered since the secondary fundings.
But when you’re in Spiegel’s and Murphy’s shoes, running the hottest startup of the moment, your demands for $10 million can get met. One of the reasons IVP* said it led the $60 million round: “Because they let us.”
IVP is an investor in Business Insider.
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