My mouth fell open, literally, as I read the extremely private email from investor Chamath Palihapitiya (pictured) to Airbnb CEO Brian Chesky. The message in the email was fine, even reasonable. But the fact that it was leaked to the press, and contained so many incredibly sensitive confidential financial details about Airbnb and its founders, amazed me.
Disclosure: CrunchFund is an investor in Airbnb.
The face that the email was between just two people (meaning very low chance of a random leak) and was written way more carefully than quick communications normally are, led me to immediately assume that Palihapitiya has some kind of crazy agenda to hurt the company.
Mouth still open, I was preparing to write a story about how suicidal this was for Palihapitiya – clearly no startup would ever trust him with confidential information again. They’d fear that if he didn’t like the deal he’d just publish all those details.
Luckily Palihapitiya picked up the phone when I called. He insists it wasn’t a purposeful leak, and he’s horrified that it’s now public.
He says that he believes that his assistant forwarded the email to her boyfriend and that it was forwarded from there, directly or indirectly, to Kara Swisher. (we just spoke again, he says he’s fairly certain it wasn’t a leak from his team). He’s still trying to understand exactly what happened, he says. In the meantime, he gave me this statement:
I believe we know the source of the leak and are taking decisive action to address it. I’m very sorry this is being publicly dragged out right now. This really was just an attempt to give Brian private feedback on how to think about these things.
Here’s the original email. Which, again, has reasonable points. But it contained information that Palihapitiya only knew because he was evaluating an investment. The fact that it was made public is a serious problem for him.
Update: It’s worth noting that Swisher has edited the email. In her original post the email showed a “Cc Marc, Reid, my deal team” – I assume that’s Marc Andreessen, Reid Hoffman, etc. It’s interesting that she removed that without noting it. I wonder why…
Update 2: From Chamath’s Facebook profile:
From: Chamath Palihapitiya
Date: Sat, 1 Oct 2011 11:16:05 -0700
To: Brian Chesky
Subject: Airbnb financing…
Thanks again for giving me the chance to participate in your latest financing. I had a chance to review the docs at length yesterday and I wanted to follow up as, quite honestly, I’ve never seen a deal like this over ~60 investments I’ve done and I’m pretty concerned.
I’m all for getting the best valuation you can, minimizing dilution and maximizing control. We did this brilliantly at Facebook…all of our financings (except our first $$$ from Peter Thiel) were done not out of necessity but opportunity. As such, our investors had virtually no control and it resulted in a much better outcome. As we’ve discussed, I generally don’t believe investors add much to a success story and so minimizing their impact is a great strategy when you are onto something that is working.
This said, while several of these concepts are reflected in the current deal, there is one big thing that I am fundamentally against and violates my principles and will prevent me from participating in your round. When I saw that you guys were taking $31M out of the company, I didn’t think much of it as I just assumed it would entirely be via a secondary sale.
But as I understand the deal, it seems that you are doing only $9.6M in secondary and $22.5M as a dividend to common (of which $21M goes to you and your co-founders). I am really uncomfortable with this and don’t think its in the spirit of building a good, long term business. Effectively, it is a strategy that allows you guys to take money out of the business and not dilute yourself — I’m not sure why this is such a big deal when you guys are almost 90% vested and the financing is at $1.2B where your dilution is marginal. Further, it excludes many of the employees that probably have helped you and your co–founders get the company to this place as most of these folks probably don’t have any stock but have unexercised stock options and thus won’t get a dividend.
My basic principle on this stuff is that if you want liquidity, that’s fine, but you should make it available to everyone. Otherwise, no one should get it. Your current deal is the farthest away from this principle that I’ve seen in a while…this strategy has been done once before — at Groupon. We can see how “well” they are doing and how short term the investor community is now viewing their motives. I really think you can do better than this…and that you are better than this.
Separately, when you look at successful tech companies, it seems that dividends are an approach used by cash rich operations to distribute excess earnings — in fact, the most successful, cash rich tech company in the world, Apple, hasn’t issued a dividend and they have more than $75B in cash! Again, while I think Airbnb will be a good company, this is nowhere near the truth now — you guys still need to scale and build this thing for the future.
I really think you are onto something but I would implore you to not take the easy way out. Treat your employees the same as you’d treat yourself. Do things that you will be proud of and can defend to anyone including your Board, employees, prospective hires etc. In such a competitive hiring market, you are competing with not just your obvious competitors, but also any successful tech company who is also looking for great talent. A principle that treats your employees as well as you’d treat yourself is a huge strategy for differentiation, retention and long term happiness of the exact types of people you will need to be successful. In contrast, if you are viewed as self-dealing and shady, it will only hurt your long term prospects…
In summary, I’m passing on this financing because I strongly disagree with what’s going on. I’m not sure who advocated this approach but I did mention this to Reid [Hoffman, another Airbnb investor via Greylock Partners] last night and he was of a similar mind to myself and surprised this was the approach being taken. If you want some good advice — I would ask that you consider pinging him about different ways to think about going about the liquidity portion.
If you change your mind on how to close this financing, let me know and I’d love to reconsider. Otherwise, good luck and lets keep in touch.