Dark side of startups

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I thought I knew how to leverage AI. Then I took Zapier’s SDK for a spin and had to rethink everything.

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Last week Airtable agreed to be acquired by Bending Spoons for $1.285B.

On the surface, most people looking at that headline would think it was a sick billion dollar exit where the founders, investors, and employees are sending it straight to St. Tropez this weekend. And while I don't have all of the details of the deal, I can pretty confidently tell you that's not what happened.

Why? Because Airtable's last round in 2021 valued them at $11.7B. Meaning they sold the business at just 11% of their previous valuation.

This actually happens quite often for startups: the headline tells one story, and reality tells another. Here's a handful of recent examples:

Again, I don't know the exact details of each of these deals outside of what was publicly reported… but I would assume that most people saw the headline acquisition number and sent their congratulations to anyone working at those companies.

That's not how venture capital works.

I've been wanting to write about this topic forever, and the Airtable acquisition last week brought it top of mind.

My thesis: I don't think many founders understand the risk of raising capital at higher and higher valuations. And I don't think employees understand the risk they are taking with their equity packages when joining a high-flying startup. Spoiler alert: timing matters (a lot).

Before digging in, I want to acknowledge three quick things:

Word. Let's start with a super simple example.

You launch your own company as a single founder and raise no outside capital. You scale the company for several years and get acquired for $100M in cash. Let's say you granted 10% of equity to employees — that means you as the founder would take home $90M (pre-tax) and the employees would split the remaining $10M.

The equation is just ownership times price. An early engineer who was granted 1% equity would earn $1M in this transaction.

Now let's do another example: this time where the founder takes some outside capital. Let's say you raise a $2M seed round at a $10M post-money valuation. That means you and your team own 80% of the company and the investors own 20% ($2M invested divided by the $10M post-money valuation).

When you take outside investment, that introduces the concept of preferred stock. Investors get preferred stock, which comes with a liquidation preference (they get paid back first before anyone holding common stock). Founders and employees hold common.

When an exit occurs, each investor gets whichever is bigger:

In the above example, if your company sells for $100M, then investors receive whichever is bigger:

In this case, they take the $20M, and the common shareholders (founders and employees) split the remaining $80M. Because you sold 10x above the most recent post-money valuation, all of the preference stuff is irrelevant and everyone's happy.

That early engineer takes home $800K in this case, because she was diluted 20% from the investors.

Now take that same company, but this time it sells for $5M instead of $100M. Remember, the investors put in $2M at a $10M post-money valuation, and as preferred shareholders, will receive whichever is higher:

This is where the preference kicks in. Because you sold the company below your most recent valuation, the investors actually exercise their preference and get $2M off the top (40% of the overall exit price), leaving just $3M for the common shareholders. That's $1M less than their ownership percentage alone would have paid them.

That early engineer in this outcome takes home just $30,000.

And if the company sold for $2M or less? The employees and founders walk away with absolutely nothing.

Hopefully you're still following. Let me interject with a quick story…

About two years after launching, we were exploring raising a Series A. It was shaping up to be a $12.5M round with a $65M post-money valuation. Coincidentally around the same time, a potential acquirer verbally expressed interest in buying us for $30M.

As I was weighing the decision, one of my friends gave me a piece of advice that I had genuinely never considered before. I'm paraphrasing:

I had never thought about raising capital like that before. I just naively figured you raise money, valuation go up, and you keep doing that until someone drops a few billion to purchase you or you take the company public. But over time, the former becomes harder and harder. At a certain scale, how many companies actually exist capable of parting ways with a few billion dollars?

Not many. Software deals above $10B happen just a few times per year, from a pool of roughly the same names: Microsoft, Google, Salesforce, Adobe, Broadcom, Cisco, IBM, Oracle, and a handful of financial sponsors.

Which brings us all the way back to Airtable. When you raise at an $11.7B valuation, realistically there aren't many acquirers left (for a "successful" exit). At that point, you are either on the path towards an IPO or to eventually sell below the valuation of your last round. Those are really the only two doors left.

Here's the publicly available funding history for Airtable.

This cap table is more complex than our earlier examples, but it operates just the same. The preference stack typically pays in reverse order of when the money came in — so Series F gets paid first, and the seed investors who wrote the first check wait at the back of the line.

If we were to take the headline acquisition number ($1.285B) and do the waterfall, it paints a pretty bleak picture. Investors from the Series D, E, and F would get their money back, Series C investors would get 95 cents on the dollar, and all earlier investors, employees, and founders would get nothing.

Let that sink in for a minute. Despite building a wildly impressive business, the founders and early investors would walk away with nothing in this example. That is the consequence of raising venture capital at absurd valuations.

Fortunately for them, the 6-K prices the deal at a $1.285B enterprise value but an equity value of roughly $2.25B — implying Airtable was sitting on about $965M of cash. Assuming all of it was distributed in the transaction, that changes the outcomes pretty considerably:

Now Series C, D, E, and F all take their money back, while the earliest investors convert to common and earn a blended multiple of roughly 5.5x. Common shareholders (founders and employees) split the remaining ~$624M. That's a 43% haircut versus what their ownership percentage alone would have paid.

But many of the employees who joined in 2021 around their peak $11.7B valuation likely walked away with nothing. Their strike was set at $11.7B and their options are worth legitimately zero.

That's the dark side of startups that no one talks about.

The Silicon Valley promise to employees: you work hard and earn equity in the company… and one day that equity could be life changing. But a lot of those employees unknowingly took a huge risk joining a startup with such a lofty valuation, thinking that the music would never stop.

Just for the sake of argument — let's say that beehiiv received an equivalent offer to be acquired for $1.285B. Because our last round was at a $225M post-money valuation, the waterfall looks quite different.

Nobody exercises a preference. Rather, every round clears it by ~6x or more, so the stack never activates and the whole thing reduces to ownership times price. Seed investors see an 88x return (you're welcome), and there's $655M leftover for me, my cofounders, and our employees.

Granted, that is entirely a hypothetical. But it shows why discipline matters when you're raising venture capital.

As I've matured as a founder, I've begun to realize that raising capital is actually the easy way out. It's easy to raise a big round, take a victory lap on X, and keep the music going.

Because Airtable had nearly $1B sitting in the bank, they avoided what would otherwise have been catastrophic for common shareholders and the earliest investors. Their employees were rescued by the fact that the company never spent most of what it raised.

Most companies aren't so lucky. For every Airtable, there are thousands of startups that raised too much money at too high a price...

and their chickens are coming home to roost.

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