This is eerily similar to what happened at Twitter. I just finished reading the book Hatching Twitter by Nick Bilton and the parallels are frightening. Now I'm not sure how much of that book is true or fabricated, but the book claims that first Jack Dorsey was kicked out as CEO and replaced by Ev Williams. Then Williams was kicked out as CEO and replaced by Dick Costolo. Just like with Tinder, Twitter was a giant success (by any measure) when the CEOs were pushed out against their volition.
According to the book, the fatal flaw is board control. Even though Ev Williams was the largest shareholder (an assumption), he didn't have board control. He only had 3 out of 7 seats. And so he was forced out against his will.
Now Zuckerberg (at Facebook) never lost board control and hence was not pushed out by the VC board. The major conclusion seems to be it's imperative to maintain board control or you'll most likely be vulnerable to being replaced by professional management - even if you create a successful company.
The other interesting parallel is Benchmark. According to the book, Benchmark was one of the vcs to push out Ev Williams. It's been reported that Benchmark is now on Tinder's board.
Not sure how similar this is, since the majority of Tinder is owned and controlled by IAC. The founders never really had a chance to control it since it was an incubated project.
The IAC thing makes me wonder whether these stories can even be read normally. Given that this is a very large company that is closely managing the creation of a startup-shaped thing, do things like "founder" and "CEO" and "investment" mean what we usually think they mean? And if not, is there at all a meaningful parallel in the story of Twitter or any other actually-independent startup?
"""I spent a short and intense two weeks last summer reporting out a Tinder feature for Bloomberg Businessweek. What I found was a meteoric startup that wasn’t really a startup, owing to the fact that Tinder was born in an IAC incubator, and IAC owned and controlled the company. Rad and [former Chief Marketing Officer Justin] Mateen seemed to be playing make-believe in a lot of ways. They were keen to hide the IAC arrangement (“They’re sort of our partner in this”) and pretend that they were living the dream of being wined and dined by Silicon Valley moneymen (“We are being bombarded by venture capitalists … it’s very overwhelming”). When I talked to their minders at IAC and the incubator, executives were often dismissive of the two youngsters—happy to let them spin grand visions and soak up founder acclaim, while telling grownups, i.e. Wall Street analysts and investors, that Tinder was simply a lure to get millennials to pay later in life for IAC’s profitable dating service Match.com."""
>Just like with Tinder, Twitter was a giant success (by any measure) when the CEOs were pushed out against their volition.
Isn't this a core operating tenet of VC investment and one of the key reasons for taking a board seat? It is pretty well known that "founders" are generally not very good managers/executives and the investors know that and plan on bringing in new management ASAP.
Its very telling of IAC what they are pulling. I have spoken to Sean a few times (way in the past) and its insulting what they are doing. Hes created a great company (and has done so several times- orgoo, adly, etc.) He has proven his worth and IAC is getting greedy. Yes, there appears to have been slight mistakes lately, but this is a guy who has created a company worth over a billion- Give him some slack. The fact they are pulling this shit is ridiculous, when tinder likely has more value than IAC itself if it wasnt for the public market. If tinder was private, its valuation would likely trump that of IAC. I only wish him the best- Honestly my advice to him would be to drop it and move on. Hes a talented dude (obviously) who should focus on creating his next big win. I am rooting for him.
Tinder has made 0 revenue since it's inception in 2012. That's not a company, that's a product. (a great product mind you)
> If tinder was private, its valuation would likely trump that of IAC.
IAC makes a lot of money ($3bil) and has a high market cap ($6bil). Given it's ownership of every large dating site, it's it conceivable that IAC has set the precedence for the total addressable market for online dating. Or at the very least, has an indication of such. I'm curious as to the rationale that would make Tinder worth more than IAC given that (1) Tinder hasn't made a single dime (2) the sites that do make money already have a large market share and continue to grow despite a free contender like Tinder existing and (3) a company "worth over a billion" needs to theoretically have a trajectory to not only bring in $150mil in revenue but exceed that in the foreseeable future in order for a billion dollar price tag to be realistic (on that same note - "billion dollar" valuations only make sense when their is a buyer who can foot that bill or the company has a trajectory to make those kind of profits. to my knowledge IAC would be the only company in existence to do such a thing).
Lastly, I'm genuinely curious about the history and terms setup between IAC and Tinder. If Tinder is such a darly of the tech world and is a "billion dollar business" then why did it chose to be so restricted by IAC when it's valuation "would likely trump that of IAC"? I curiously ask not because I have any sort of knowledge of their history, but rather the current arrangement suggests a story entirely different than the prescribed narrative that you suggest.
no. it's a company. It's valued on future potential. Same as Whatsapp can be valued at $19billion, despite only having $10 million in revenue. Many examples; there is future monetization potential, that they're already discussing.
Oh how remarks like this make me think it's 1999 again. The valuation per registered user is also starting to get to that level (I had friends with business plans calling out values of $500 per user at that time). See what happens this time.
IAC is a tightly managed group, which tends to issue hard objectives and demand large returns. Call it capitalism, call it old-style management, call it whatever you like. It has been that way since the beginning.
I am surprised that Tinder hasn't been monetized, as profits heavily drive management decisions. I've no idea what happened, but I wouldn't be surprised if a major target was missed.
IAC is a very rewarding company for those that deliver results as promised. I enjoyed working at a couple of IAC jobs many years ago, but it can certainly be an adjustment!
Honest question - was Sean Rad ever the "CEO?" That is, given that Tinder was an IAC unit, does the concept of a "singular" chief executive have any meaning? Or was his position more akin to that of a vice president of a business unit of a larger corporation, subject to the whims and direction of the IAC CEO, Gregory Blatt?
The article brought up the point that he's an employee.
You're right. And it's funny people fight over the title "Founder" when that word doesn't mean anything on paper. Articles of Incorporation don't contain any mention of "Founder". Only CEO, Manager, etc. Founder seems to be an ego thing.
In reality Rad is not a Founder/CEO but was a General Manager or something.
Did he take risk? No. It was funded by IAC.
Did he innovate with the product? Yes.
He was a great employee and tool for Diller. And Diller got rewarded for his risk.
Sucks for Rad in that he didn't want to believe he was just an employee on paper. On paper he was like a General Manager of Quiznos. But look, he gets to drive his $115k mercedes around with Justin, retain equity and still cling to the notion that he was the Founder/CEO of Tinder. Whatever that means.
> It's a big difference. A CEO answers to the board, and the board only.
>
> Sean Rad sounds something more like a President in this scenario.
Let's think this through. The board represents the owners of the company. A President is different from a CEO how? Because there are other employees of the company who can fire them? Okay, what employees of Tinder can fire Sean Rad? None. Who can fire him? Hatch Labs, because with 100% ownership they completely control the board of Tinder...
Which all goes to show that in many, many ways, a CEO who doesn't have an ownership stake in a company is very much an employee.
The moral of this story is that you don't support a high-level executive that calls your users "sluts" and still keep your job as CEO. It was immensely bad judgment that made Rad a bigger liability for the company than whatever value he could provide going forward.
> The moral of this story is that you don't support a high-level executive that calls your users "sluts" and still keep your job as CEO.
That's an interesting conclusion to draw from this.
Because, as others have pointed out, he still would have had his job if he had control of enough seats on the board, like Zuckerberg did. Indeed Zuckerberg still has a job after calling FB users "dumb fucks" and offering his friend private information of anyone at Harvard (including private photos, private messages, etc. etc.) http://www.businessinsider.com/well-these-new-zuckerberg-ims...
Sure, if you're a sole founder with control of the board, you can do that. If you're someone like Rad, selected to head up what is essentially a subsidiary of a public corporation. Most CEO's have the favor of the board, but don't have so much pull that they won't be replaced if they become a liability.
Right, I only brought it up in light of rayiner's comment -- that saying misogynistic, shitty things makes you lose your job as CEO. It doesn't, at least not when you control the board.
There seem to be a preponderance of founders under the illusion that a) this is practical in their circumstance and b) that this is desirable in their circumstance. While it was true for Zuckerberg, it is hardly true for most.
Particularly if you are an inexperienced founder, there comes a point where you and everyone else is better off with some checks and balances on your judgement. Having to hold yourself accounting to some other parties, assuming they the best interests of the company at heart, is a good thing.
The dust hasn't settled yet, and based on the article, Benchmark didn't come in as a normal VC (didn't put in any money). If Benchmark hadn't come in, Sean was just as fired. They clearly came in to find the replacement CEO, and I suspect are a big part of why Sean is still there. Cohler may yet prove to be Sean's biggest ally.
How does one monetize a 10% ownership of an entity that is majority owned by a public company? Unless there is a spinoff, or the public company sells that particular asset, I don't see how Sean makes his money on this. IAC can just continue to use Tinder to grow their own market cap, which in turn helps IAC shareholders but not Tinder shareholders or 'founders'
Occupying a keynote slot at the Forbes 30 Under 30 Summit
That in and of itself may highlight part of the problem. I've known a handful of people on those lists, and it rarely ends well. I don't know if reversion to the mean, or a shift in focus, but the success hasn't lasted for them.
Once Rad is out, will he end up with 10% equity? I'm asking to figure out whether he'll get rich from Tinder's meteoric success, assuming the company continues to do well.
(Is it even possible for Rad or any other founder to cash out their shares before a liquidity event like IPO or acquisition? I know the answer used to be "no," but Airbnb seems to have changed that in recent years, and I'm quite unsure how it works now.)
From what I understand Tinder was never actually a startup, just a side project at IAC, and IAC has owned the company from the start. I'm not sure there are actually any legitimate "founders" or if the early engineers on the project ever had any equity beyond just employee based stock compensation.
There's many ways for private stockholders to liquidate shares:
- Founders can often sell shares during fundraising events, either through a pre-allocated block of shares called Series FF, or by having the company use a portion of the raised capital to buy back some of their shares at the same price.
- Any private stockholder can simply sell shares on the secondary market. However, most often, the company has the "right of first refusal." That means that the sale must be presented to the company before going through, and the company has the option to buy back those shares at the same price instead of letting the sale happen.
- Stockholders can also cash out by building derivative contracts where they "sell the upside" on their shares at a specific price. Think of it kind of like selling a stock option. ESO & Equidate are examples of companies / funds that facilitate this.
As a shareholder who would very much like to liquidate some shares in 3 different private companies, I'll say this has not been my experience. Maybe if your company is 99th percentile you can pull these tricks, but for the remaining 99% unregistered shares are completely illiquid due to a combination of SEC regulations and lack of ability to obtain/share the key data any potential buyer would require.
One of the biggest problems with bootstrapping startups is even after there's revenue, growth, and value, there's just no liquidity.
Email me (find it in my profile), I'd love to chat about your situation. I'm pretty involved in the field, so I'm curious if I could hook you up with any avenues to liquidate.
How common are mid-stage small software companies with co-founders looking to sell some shares? I'm not talking about anything near large enough to warrant registration. It doesn't seem like a lot written about this topic, because the focus is always on acquisition.
Obviously there's strong pressure from many directions to keep the cap table simple, keep the shares closely held, etc. But after many years of bootstrapping it can't be that uncommon to want to capture some of that value.
And to answer the first question, he probably has all of his equity.
If there was no vesting schedule for his shares, he would already own them regardless of when he left.
In the case he did have a vesting schedule (which is a best practice), it was likely 4 years. So assuming the company was founded 2 years ago, then he'd have vested half his stock, which would mean that is his regardless of when he left. Then, when leaving he probably made an agreement with the company to accelerate the vesting of rest of the stock in exchange for any or all of the following: maintaining his board position, agreeing not to sue the company, helping future guidance for the company, or other stuff.
It is also possible that he had a previous agreement with the company that if he was fired from his job that all of his stock would automatically vest (this is a fairly common provision a founder will want when they allow outsiders onto the board).
"Altogether, $946.8 million, or roughly 86% of the funds raised across the three investments, was paid out to Groupon directors, officers and stockholders. Just $151.4 million was retained by the company to use as working capital and for general corporate purposes."
Downvote me at will, but frankly i'd be more interested if it was the CEO of the local liquor store. Since when are dating sites relevant to the technology sector?
They've been relevant in the technology sector ever since they became "sites" and stopped being mnemonics in the back of tabloid and local newspapers. Like it or not, Tinder is more relevant than your local liquor store.
According to the book, the fatal flaw is board control. Even though Ev Williams was the largest shareholder (an assumption), he didn't have board control. He only had 3 out of 7 seats. And so he was forced out against his will.
Now Zuckerberg (at Facebook) never lost board control and hence was not pushed out by the VC board. The major conclusion seems to be it's imperative to maintain board control or you'll most likely be vulnerable to being replaced by professional management - even if you create a successful company.
The other interesting parallel is Benchmark. According to the book, Benchmark was one of the vcs to push out Ev Williams. It's been reported that Benchmark is now on Tinder's board.