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Ask HN: How do VCs behave when you fail?
50 points by mobl on Sept 2, 2010 | hide | past | favorite | 26 comments
They treat you like you're the best man on the planet when you're making them money right. But what what do they do when things go south? What is the best way to deal with them?

Do they force you to sell every asset? What about IP? What about virtual assets? source code? Will they make you take pennies on the dollar?

I have heard horrible stories about this, so I am curious about your stories.




You're probably not going to care about the (likely negligible) value of your "IP" and source code if you've failed after taking an A-round, since liquidation preferences will dwarf them.

If you reach a point where you can sell your IP at a number where you actually net some cash, I'd call that a "success".

In the one VC-funded failure I was closely associated with (as a true cofounder), nobody gave a shit about the physical assets.


As far as monetary value of the IP/source-code I agree, but I know one failed company whose founders are now extremely regretful of the whole situation, because they produced a bunch of interesting stuff that's now locked up. They'd like to open-source it so what they spent 7 years of their life on can at least influence other software, get them some recognition, and maybe be used by someone, but the investors aren't willing to, and aren't willing to sell it for anything close to the market value (which is pretty close to zero). There isn't really any prospect of a buyer, but from the investors' point of view, if they keep ownership of the IP of failed companies, they might get lucky with one of the IP bundles turning out to be valuable. Even if the chance is very small, it's at least a better chance than the guaranteed zero chance they'd have if they open-sourced it or sold it for peanuts today.


At Sonicity, we built a content distribution network in a box, optimized for RTP-style streaming delivery and FEC file transfers with FLID/DL-style congestion control (we did this before there was a FLID/DL, so I'm kind of proud of it). I owned the "router" component, which was tens of thousands of lines of Quantify-optimized asynchronous C++ and ran multicast routing over an IS-IS-style link state routing protocol (the product started out as "IRC without netsplits" and, uh, metastasized).

In the last 6 months at the company, we managed to refactor the design so that the hairiest routing and group management code could get hoisted out of C++, and most CDN participant hosts could just run a tiny stub forwarder that was simple enough to be kernel-resident (a design I awesomely rejected when one of my cofounders proposed it at the start of the company).

The whole source tree was many hundreds of thousands of lines; it was cross-platform Win32 and Linux with graphical clients on each platform and IE integration. There was a lot of good stuff there. My friends Danny, Kneel, Andy, and Tim all worked on it at various times and they are, unlike me, ridiculously good.

Poof. All gone.

This is what happens when you take VC and your company fails. What's better is that by taking VC, you drastically increase your chances of failing; VCs need you to shoot the moon. Our VCs decided what we should do with all that code was to go head to head against Akamai.

You may get lucky with a very, very cool investor who gifts your IP back to you. But you're not entitled to that and you probably won't get it.


I hope those guys aren't still VCs. I've never heard of something so stupid.

VCs aren't in the business of holding onto IP.


They don't think they're in that business either. That doesn't mean the founders get the company's IP when it fails, though.


My experience and of those around me is quite different. Maybe Silicon Valley is different. It's quite easy to liberate IP from a worthless company.


This is a good argument (from the hacker-founder point of view) for open-sourcing all the non-`secret sauce' parts of the code from the beginning (i.e. from before you have any investors with the power to stop you from doing this).


What if its a company with over 4 years, some sucesses but now into bankrupcy?


Once the company is considered a loss they want to get as much of their money back as quickly as possible. What else would you expect from them?


What if a product that costed us to develop was over $100,000, and I am getting an offer to buy it for $1,000? And we have many products like this example (close to 20)

Is it normal they will literally force you to sell it for pennies on the dollar? I understand that it was their money, how would you handle it? Just sell it and move over to the next thing?


It doesn't matter how much you spent to develop it. All that matters is how much it's worth. So if the highest offer you can get is $1,000, then offer to buy it for more ($1500).

If you can't afford to buy the assets yourself maybe you can find a new investor to buy the assets on your behalf.

Otherwise: yes, you should just move on.


What staunch said. If you can't afford $1500 to buy your code back, you're not serious enough to be arguing with your VC's anyways. I'm embarrased that I wrote 100 words up there and didn't just say this myself.


Or heck, offer to buy it for a little less, since I imagine selling it to a member of the company would be less complicated and you can extract that in the price. (Though perhaps I'm wrong and it's easier to sell out of the company?)


What's there to handle? You owe a fiduciary duty to your shareholders to notify them of the offer. If you're in a tailspin, presumably the VC is going to control the board decision, and you can safely expect them to act in their own interests. $1000 is irrelevant to the VC, but if you're being forced to entertain $1000 offers for $100k investments, your BATNA isn't great, everyone knows it, nobody's ever going to give you a good deal, and the VCs are pretty much paid to understand that.


look up 'fiduciary duty'

if it's a vc it's not their money (99%) and they have a fiduciary duty to their investors to get as much of their investment back as possible.

that's why...

you could always offer $1,001 of your own money to buy it personally, etc.


Their business model assumes most of their investment doesn't take off, with a few rock stars that make up for the losses.

Incidentally, which is one reason cash flow positive startups should really think before accepting VC money. VC's are happy with a 10% success rate. You on the other hand, need a 100% success rate. Interests are not wholly aligned.


So you're saying that the founders should be wary that VC's aren't as risk-averse in this sense?


No, he's saying the VCs are much less risk-averse.


Agreed 100%. VCs aren't in the risk game. They're in the risk-mitigation game.


In addition to risk-mitigation, VCs are also in the "find things that are much less risky than they appear" game.


VC's are diversified… you aren't.


I've been apart of two failed (or mostly failed) startups.

Wesabe closed down recently and they did open source almost all of their code. I think that speaks well for their main backers, OATV and Union Square.

Odeo struggled for five of the seven months I was there. I think it was pretty clear we were a bit lost and the board was very kind about it, i.e. they knew they weren't going to come up with the the innovation that was going to turn into a big success. George Zachary from CRV was the primary guy there. I like him personally a lot.

For some reason I feel like the board gets crazier the more success you have, in other words they're not going to fight with you over how you lose your last $100k, but they're damn well going to fight you to make sure you don't blow your $100M valuation. I don't have much more than anecdotal evidence for that though.


> Odeo struggled for five of the seven months I was there. I think it was pretty clear we were a bit lost and the board was very kind about it, i.e. they knew they weren't going to come up with the the innovation that was going to turn into a big success.

Humorous considering Twitter was launched by Odeo (though I'm not sure how the IP ended up, I know there was a clever spin off fairly quickly). When were you there?


It supports the idea that boards should be easy going before "product market fit". I think if the board had pushed for milestones we would have locked ourselves into podcasting. I was there for the last seven months of Odeo, which included the first two or three months of Twitter (it was a simple product but we had to wait for the SMS application process).


Sounds about right: http://en.wikipedia.org/wiki/Loss_aversion


He who has the gold makes the rules. You don't like how VCs operate, then don't take their money. The choice is yours.




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