Why Founder Lane Becker Was "Washed Out" of the Get Satisfaction Sale
Apr 30th, 2015
Lane Becker, co-founder of Get Satisfaction, a community building platform between companies and customers, made waves on Twitter a few weeks back when he reacted candidly to congratulatory tweets about Get Satisfaction's acquisition by Sprinklr. As you see from the tweet above, he didn't see any financial return on the deal. This despite the fact that Get Satisfaction had raised a $10 million Series B round from leading VCs at a $50 million valuation in 2011. Why did he get washed out?
Lane opened up to Business Insider and cited two main reasons: giving up too much control to VCs and a lack of self-awareness among management about where their business was when taking so much money at a lofty valuation. As Lane put it in an interview with Business Insider:
We took a $10 million investment very prematurely.... At the time we were entertaining some acquisition offers. In hindsight, they would have been wise acquisition offers to take. The executive team got stars in their eyes about the money and took the investment. When you raise $10 million at a $50 million valuation, that is a serious promise you're making with your business.Poignantly, Becker noted, "I understand venture capital is a game and we lost. Although I admit I thought it was more a game of chess and it's more a 'Game of Thrones.'"
While Becker's qualitative points should be heeded by founders, let's break down the technical aspects of the game and why he lost. One Twitter exchange in response to Lane's tweet above sheds some light.
What Lane is alluding to in the response above is liquidation preference overhang. While Lane calls it a "Game of Thrones" we likened this aspect of venture capital to a game of musical chairs, where the chairs are the money, and the VC always gets a chair. Let's unpack this some more.
Liquidation preference is a standard right for VCs which gives them a priority in being paid in the event of a liquidation (including a sale of the company). The market standard these days is a 1X preference, meaning the holder of that right gets paid back the principal of their investment before further distributions are made (for example to common stock holders, like founders and employees). The "overhang" term refers to a situation where the valuation of the company is less than the outside money that has been invested into the company. According to CrunchBase, Get Satisfaction has raised a total of about $21 million dollars. In order for Lane to have been "washed out" it's very likely that the company was sold for less than $21 million, which Lane confirms above.
To dive deeper into the liquidation preference overhang, check out our earlier post All That Glitters Is Not Gold: Startup Valuations and the Liquidation Preference Overhang.
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