Location based service Gowalla is going to shut down at the end of January. The two founders, Josh Williams and Scott Raymond, will be heading off to Facebook. Loyal Gowalla users will be stranded as the service shuts down. And some of the investors have told me that they’re pretty angry over the whole thing.
Is it an acquisition? Or rather a shutdown with the founders taking new jobs?
There’s no clear answer to that. Williams’ blog post is intentionally vague on that point. An email sent to investors, though, suggests that some kind of deal between the companies is happening.
Some investors seem to know the terms of the deal – they’ll be getting twenty or thirty cents back for every dollar invested (the company has raised a little more than $10 million). But most of the investors I spoke with had no idea what was going on, and what if anything they’d be receiving back for their dollars in.
This is a tricky topic for me to write about, since I’m now an investor. But in 2010 I dove into the topic, noting a trend of startups being acquired for not much money, but founders and key employees were being given rich stock deals on the side.
This goes way back to Parakey, acquired by Facebook in 2007. Parakey investors got their money back and a little more, but stock grants were given to the founders that are probably worth hundreds of millions of dollars today.
I was more blunt in 2010 when Facebook acquired Hot Potato – and noted that there’s a real issue of breach of fiduciary duty when a founder takes a side deal but doesn’t cut investors in.
Two Ways To Look At This
When a startup gets acquired in this way – where investors get very little compensation and founders get a whole lot of compensation – it can be seen in two ways.
The first way is this: Investors see themselves as being taken advantage of, providing capital for founders to essentially buff up their resume to get their dream job. When a company is acquired, they say, the value of stock grants should be considered acquisition value and divided up among all stockholders. If a founder leaves stockholders behind to take a lucrative side deal, they’re not acting ethically. I’ve mostly taken this position in the past, before becoming a VC.
But there’s another way to look at this, too. Some investors, particularly Ron Conway and David Lee at SV Angel, have told me for years that they aren’t bothered by these types of deals. The argument is that the company (whatever company was being acquired at the time) was clearly not going anywhere and would eventually shut down, so who cares if the founders cut themselves a nice deal going forward. The investment was already a write-off. Investors in this group tend to focus their attention on the winners in their portfolio, the companies that will eventually provide a 10x – 1000x return. There’s little chance the founders will bail out in those companies to take middle management positions at Facebook, they say.
In this case, Gowalla was a goner anyway, so there’s no real harm done with the pennies-on-the-dollar acquisition. Clearly the founders could have communicated a little more effectively to investors, rather than just thank them in the blog post for “playing a special role in seeing us to this day.” That feels like gloating and condescension, said one investor.
Also, Facebook and other companies doing these deals aren’t to blame. They want the employees and not the other assets, and they’re doing deals that make sense to them. It’s not their job to protect the shareholder rights of the companies they’re acquiring.
These deals will continue to happen, and investors will continue to be frustrated. But there’s very little they can really do to fight it without looking anti-entrepreneur. And I mostly agree that there isn’t anything to really fix, anyway, given that these startups were all on life support.
Focus on the winners, and don’t lose sleep over the losers. Seems like a good investment philosophy to me. And yes, I’d probably want to invest in Josh Williams and Scott Raymond the next time they start a company. They fought long and hard for a win. Next time they may get there.
Uncrunched 