Gumroad is an interesting cautionary tale for employee equity compensation.
The company was declared to have failed several years ago. Employees were laid off and the investors released the IP (built by the early employees) to the founder as a token of goodwill. Presumably, they thought he might use it to start a new company. Story here: https://www.businessinsider.com/startup-failure-gumroad-why-...
However, he continued running the company with new part-time employees, minus original investors and minus the early employees who built the company. Apparently the company succeeded enough that it’s now worth $100 million. Early employees who built the original site presumably don’t have equity because they were laid off and their options expired worthless as they were told the company had failed.
On one hand, it’s great to see a founder persevere and rise from the ashes. On the other hand, watching the early employees lose out on their equity because they were told the company was a failure is not cool.
I’ve made some money from startup options through my career so I won’t agree that they’re worthless as often claimed. However, this is a good reminder that the game is very stacked against the employees.
> However, he continued running the company with new part-time employees, minus original investors and minus the early employees who built the company. Apparently the company succeeded enough that it's now worth $100 million. Early employees who built the original site presumably don’t have equity because they were laid off and their options expired worthless as they were told the company had failed.
Let me start off by saying that I think most startup compensation is downright bad for employees, compared to FANG alternatives. I would like to be a startup founder one day, but I realistically can't see myself as a startup employee.
That said, I don't think Gumroad did anything morally wrong here. The layoffs were absolutely necessary, because the company would have gone bankrupt without them. But it's false to say that this caused employees to have no equity. Even if you get laid off as a startup employee, you can still choose to exercise your options and hold on to the company's equity, if you think that they will eventually be worth $100M. No one misled the employees about the company's future. They saw that the investors were pulling out. They saw that the engineering team was getting shredded. And they made the very reasonable assessment that the company's equity isn't worth the cost of exercising their options.
Blaming Gumroad for employees not having equity, is like blaming AMD for their previous employees selling off their stock during their near-bankruptcy days. Any company can and will go through dramatic reversals of fortune. And whenever there's such a turnaround, there is bound to be people who missed out on the upside, because they didn't continue holding through the dark times.
I've seen similar sentiment being repeated about Sahil, even by other successful founders like Nathan Berry.
It is a bit unfair to look at everything in hindsight and assume Sahil acted maliciously. He did what he could to scrap together the resources to save a failing company. It's not like he ran some sort of shell game to rob the original contributors of their equity. People always view the past in this way and it is incredibly biased. You have to go back and step forward in time with each piece of information as it was available, and at the time it appeared the company was surely going to fail.
In any case, I'd be curious to hear from some of the original contributors as to how they felt they were treated or how Sahil behaved.
Frankly, the investors who set the initial valuation (presumably used to set the strike price of the employee options) and later the $0 valuation (rendering the options worthless) and then giving away the IP that they declared worthless (despite the company not fundamentally changing) deserve a lot of the scrutiny.
If the company had simply been left to make their own choices like laying off the employees and buying out investors, this would have been a different story.
I mean strike prices are usually unrealistically LOW, as low as they can be without being fraud. There's a whole industry of 409a valuations that is used to legally say "we're selling preferred stock to investors as a 50MM valuation, but the common stock which represents 80% of the company is only worth 2MM". Founders want strike prices to be low because options are free compensation to employees.
The issue is the out-going employees thought that a stake in the business was literally worthless, which turned out not to be true. Very similar to the Blogger story actually.
>, he continued running the company with new part-time employees,
I think he continued with part-time contractors instead of employees if I read his blog post correctly: https://sahillavingia.com/work
> Instead, I found an Indian firm called BigBinary and hired a few engineers as contractors.
>These contractors saved the company. They fixed bugs and maintained the site while I answered support tickets, designed features, and wrote about new initatives.
Disclosure - I don't know Sahil and have never had any interaction with him or Gumroad except as an ocassional Gumroad customer.
I find this take to be disingenuous at best and outright misinformed at worst. Sahil has been very public with what happened [1]. Gumroad turned out to be a lifestyle business and not a VC funded boom or bust rocket.
He could have easily shut down Gumroad and gone on to bigger and better things. He persevered and today Gumroad has risen from the ashes and creators are better off for it. Kudos to him and his motley crew. He has extensively blogged about it and been public about Gumroad's finances. Maybe one day Gumroad will be worth $1B but it is a long road ahead and I wish the new investors the best.
Back to Sahil's actions, unless you have actual instances of wrongdoing by him, I feel you are just flinging innuendo.
This is why you want stock/equity instead. Everything else is just toilet paper until it becomes stock/equity.
Usually countries have lots of laws and regulations protecting small shareholders, but not really anything to protect people who might become shareholders one day.
I wish companies had easy ways to give out real stock instead of options... it's up to regulators to make this smoother, easier, cheaper.
The problem is that the employee would have to pay taxes on the value of the stack at the time it was issued. Given how high valuations can be and still never pan out, giving employees stock directly would cost them significant amounts of money in most cases.
The employees didn't pay for their options because the options were "out of the money" and the employees had various confirmations that the shares would not be worth anything, but they still had the choice to.
Yeah I guess cautionary tale is the good word here.
> watching the early employees lose out on their equity because they were told the company was a failure is not cool
eh, they had the choice, this isn't a story of the share class changing or the entity being changed, and you had to write presumably because you don't know and are relying on the financial unsophistication of many tech employees
can be a tough choice to both earn below market salary and then be expected to use that income to buy your shares. sadly this is due to various tax law changes over the last few decades.
but yeah this isn't "egregious enough" for me to garner anything from it.
its a case study about how much you can do with contractors and that you don't need venture capital or the employee structure if you know what you actually want to build
> The employees didn't pay for their options because the options were "out of the money" and the employees had various confirmations that the shares would not be worth anything, but they still had the choice to.
That’s a side effect of the problem, not the cause of the problem.
Why did the employee options expire worthless? Because they were issued at one valuation, then the investors changed the valuation to $0. Yet the company and technology didn’t change. In fact, it kept operating with the same brand, same customers, and website.
The investors and founder both dipped the valuation to zero because it was in their best personal interests, dropping employees with options in the process.
That’s why I framed this as a cautionary tale for employees looking to help startups. This wouldn’t have been a big deal if the company simply went through the normal failure process where the IP was sold on the open market in the normal process. Even if the founder had bought the company IP back for $1 if no one else wanted it, that would have at least persevered some appearance of fairness.
I like the idea that a startup that fails to be a unicorn can still be something. The alternative are these companies vanish because they're not worth an enormous amount in a short time..
I'd argue the first issue is not being more direct / everyone understanding what it means to be an employee at a start up as it is equity wise.
I'm not sure some token Grumroad tidbits thrown old employees way really would change much / I'd argue obligations like that would complicate any such resurrections.
> I like the idea that a startup that fails to be a unicorn can still be something.
The problem isn’t that the company failed to be a unicorn. The problem is that the company was declared to be worthless and was given away to the founder (but not employees who built it), but it obviously wasn’t worthless as it’s currently valued at $100 million. Early employee equity was wiped out in the process.
The point is that you can work for a $100mm company, build the foundation of a $100mm company, yet walk away with nothing because the investors and founders can play games with your equity. Unlikely to happen again given how this played out. However it must hurt to be an early Gumroad employee doing the math on what their equity would have been worth today after being told the company was worthless.
The alternative was to close down the company completely, I'm not sure how that would help the employees equity.
Besides, options are by nature expiratory unless certain milestones are reached, which obviously wasn't the case. And if the employees did have real equity there is no way the founder could have gotten that without their consent.
I'm a little confused about how this works in a sort of mechanical function.
At the time it was deemed worthless or whatever term we want to call it, the owners were the initial investors. They sold it (well some of them) back to the initial founder.
It's their ownership to sell....
I go back to my point that we need to be honest about what the equity and rights of individual contributors really IS more than some ephemeral expectation that someone should get equity ... after most everyone has given up... or after others work to resurrect it.
Dropping the price to exercise the options to zero dollars seems like it would be an equitable solution. If the company is really worth nothing then why should an option to buy a share of the company cost more than that?
Do we know for a fact that the investors sold the equity back to the founder and not the company (like a stock buyback)? The investors just wanted to get out, so tracking down former employees, deciding how much equity each one deserves, and selling them equity probably isn't what they want to spend time doing. So the only real options would be selling to the company, or to the founder.
I disagree, there's nothing obvious about it. On the contrary, I argue that it WAS worthless (in the same vein that "ideas are worthless" - not that they lack anything of value, but that without sustained effort & dedication to extract said value, they're really not worth much).
Also, it's entirely possible that the value of the company was actually _negative_ for the investors. Happens with other stuff too - sometimes you throw out junk that others recondition & sell for large sums of money. Were you tricked by those who resold your junk?
The founder might've earned more at a FAANG or different companies, just like the other early employees presumably did. He didn't contact the investors to buy them out for $1 - the investors did, because the tax cut was worth more to them by that point.
The investment is being done on a SAFE with a $100M valuation cap, not a $100M valuation with equity grants. That means theoretically Gumroad could never have a qualifying event by selling, going public, or raising a properly priced round by accredited investors. And therefore, investors never get an ROI. Dividends also require actual equity, not promissory notes. I’d imagine even if all investors did convert, paying dividends would be a non-starter given their company size and the number of investors.
Using a SEAL or the Indie.VC V3 terms seems more inline with how they want to run the company because it includes an instrument for investors to get an ROI with a payback clause if you choose never to sell.
I’d imagine there will be almost no pressure to sell because to my knowledge, no past employees or current contractors have equity, nor do they have outside institutional investors that want a return for LPs. I’d be curious to hear what the board structure is for oversight as well around important topics like salary comp, potential acquisitions, etc. There isn’t much stopping the founder or a group of people from pulling out all the profits for themselves or just paying outsized salaries.
Anyways, not dunking on it and just stating how some of the structures work from what I understand. The Gumroad story is an interesting one and I appreciate how they publicly share the experiments about how they’re running too. Will be interesting to follow over the years.
> Using a SEAL or the Indie.VC V3 terms seems more inline with how they want to run the company because it includes an instrument for investors to get an ROI with a payback clause if you choose never to sell.
My thoughts as well, though apparently it was unnecessary as they filled the round in 24 hours despite the relatively unfavorable terms for investors.
> I’d imagine there will be almost no pressure to sell because to my knowledge, no past employees or current contractors have equity, nor do they have outside institutional investors that want a return for LPs
They did wipe out early employee equity, but this funding round does have $1mm of institutional VC investment leading it. That’s a curiously small number given the high valuation (effectively 1%) so I wonder if the VCs were more interested in leading the first big public startup investing round than the company itself. This raise is all over headlines today.
> despite the relatively unfavorable terms for investors
This is a concern that I have around equity crowdfunding in general, and I hope this situation doesn't go poorly and ruin it for everyone.
The terms as described here are eerily reminiscent of the Toptal story, where at the time many defending Toptal saying "VCs should have known better". Does that same defense apply to a group of individual investors who were (apparently) limited to a maximum 1k check size?
There was a lot of hype around this investment, which convinced a ton of people to try to get in on it, but I'm legitimately worried that the masses don't understand the actual terms of the round
The $1000 maximum investment will probably mean that it won't be professional investors, but individuals who will likely not understand the risk and the potential for misuse. Nicely sized to fit into the stimulus check.
I'm concerned about the risk there as well, but I feel like you can spin that both ways. There's a weird intersection with opening investment to anyone and concerns about folks making ill informed choices.
I think there's a difference between "open investing for equity", and "open investing for a thing that one day may turn in to equity given a certain set of events".
The majority of people will assume that "start up investing" or "equity crowdfunding" (or whatever you want to call it) is like the stock market, but on a smaller scale. You invest money, and you get shares in the company.
I don't think the concern is around folks making ill informed choices (Robinhood has shown us that that can happen in the public markets as well), but more around start-up companies taking advantage of the lack of sophistication by the every-day investor in order to push horrendous terms.
Probably by keeping the crowdfunding part, but with reglation around the terms that have to be offered, and actions you're allowed to take after equity crowdfunding. But it's a pretty complex problem.
That's true, but I think something like SAFE is very different from crowdfunding for equity (and much more risky and misnamed, it can be neither simple nor safe).
That intersection you mention will be an interesting place in the time to come. I don't think we've found the sweet spot between "only professionals can invest", "the retail investors take on huge risks and aren't aware because of wild models with strange names" and "the company can't raise medium amounts because the regulation surrounding the process would cost much more than they would get", but I'm sure somebody is working on it.
1. gumroad experienced major covid tailwinds. whereas the company's five-year compound annual growth rate is 37%, it grow 94% from 2019 to 2020. they've been profitable since 2017.
2. gumroad's core customer base is creators making less than $10k/yr. gumroad is best positioned as an entry point for novice creators to start selling quickly and easily online. as creators cross the $10k/yr threshold, they become a churn risk because all-in-one products like kajabi and podia offer a more fully-featured product at the same price.
3. at the campaign's $100m pre-money valuation, gumroad will need to grow 40% yoy for 10 years to return double digit IRR.
Something I didn't realise until a while after reading this was that the author of the tweets was previously a large Gumroad customer + now runs a competing business (ConvertKit Commerce). I believe the events he's talking about are also very public (I think the Gumroad founder wrote a blog post about it that was on HN not that long ago).
Worse than feeling overly cynical is then having your cynicism validated.
I recognized this guy's name, so skimming over the twitter thread my cynical thought was "I bet ConvertKit is working on a Gumroad competitor", and sure enough, they already have one.
Good job downvoting instead of doing some self research. It's not hard to find stuff.
The stuff Nathan talks about isn't even the worst. He never mentions Shl's attempt to monetize racial injustice and then telling a black woman she doesn't qualify for the promotion because her skin isn't dark enough, then blocking everyone who says what he did/said was not cool, and instead of acknowledging and fixing his fuckups, he just goes silent until the uproar dies down and then goes on with business.
I'm saying Shl is a shitty person and screwing the original creators of Gumroad out of their equity is just a drop in the bucket for the shitty things he's done, and Nathan creating ConvertKit Commerce in direct competition with Gumroad doesn't negate the things Nathan brings up, and other people have brought up in light of Shl taking peoples money for nothing in return.
People are too quick to just ignore things people point out because gasp he has a competing project!!!
So neither you or Nathan have posted what you would like to happen and why.
What is that? Rebrand Gumroad instead? A lower valuation? Different kind of security issued with more rights? Shi should be shut out from the capital markets and corporate sphere forever? PSA to investors who have already 100% subscribed the max raise?
I'm just grasping, what do you guys want to happen?
Why do we have to want something like that to happen? Why can't we just be like "Hey, just so you know, this stuff happened. Make sure you're not being duped into investing in Gumroad without knowing who you're investing in." Especially considering the terms on Republic not favorable at all for investors.
My only relationship to any of this is as a gumroad customer but this seems like a cheap shot? Nathan alleges mismanagement but doesn’t go into details as far as I can tell.
To me the story seems to be that investors were ready to leave gumroad for dead, Sahil made some hard decisions and managed a very unlikely comeback.
What's up with the references to 'tanking' and 'mismanagement'?
It's like the worst of twitter right there, just a bunch of tweet / word salad and accusations without anything to explain what any of that is / back up the meat of the accusations ...
I think Nathan has put a slightly negative spin on what happened to Gumroad- maybe implying that it was intended all along - but he does have a bit of a point.
Call me crazy but I think the deal between the two is dramatically different up front, even what everyone does.
End customer's don't have any equity... in the end neither did the employees. That's the same, unfortunately. But they're the same that way.
I think those are two dramatically different deals you're making with people, pretending they should be the same seems oblivious to the actual relationships.
Not just you, I've wasted a lot of time with founding teams that don't have access to venture capital due to lack of network, they so often also have a lack of awareness on what a good deal looks like, opting for completely arbitrary sweeteners that just make them look desparate and further uninvestible.
"A SAFE (“Simple Agreement for Future Equity”) is very different from traditional common stock and it is important to understand these differences in order to make an informed investment decision that is right for you.
"A SAFE is an agreement between you, the investor, and the company in which the company generally promises to give you a future equity stake in the company if certain trigger events occur. Not all SAFEs are the same and the very important terms governing when you may get the future equity may vary across the SAFEs being offered in different crowdfunding offerings. Despite its name, a SAFE may not be “simple” or “safe.”
Thanks, that's cool. I see Gumroad capped investments to $1000 once they saw the demand. That's not that interesting. It's great to have the opportunity to invest in private companies. I will keep an eye on it.
they get something slightly above what all your local restuarants asked for on gofundme when they boosted your email from the square point of sale system:
something close to non-dilutive financing and still hilariously opportunistic
This company is a disaster. They are even too stupid to understand the concept of account deletion. "How to delete your Gumroad account: From your Advanced Settings page, scroll to the bottom of the page, then click Delete your Gumroad account? After you've deleted your account, if you try to log back in, Gumroad will make your account "live" once again. Therefore, if you really want to delete your account, click Delete your Gumroad account? and don't log in again. Just... just go." WTF? That's not DELETION, that's SCAM and a GDPR violation. https://help.gumroad.com/article/37-how-to-delete-your-gumro...
The company was declared to have failed several years ago. Employees were laid off and the investors released the IP (built by the early employees) to the founder as a token of goodwill. Presumably, they thought he might use it to start a new company. Story here: https://www.businessinsider.com/startup-failure-gumroad-why-...
However, he continued running the company with new part-time employees, minus original investors and minus the early employees who built the company. Apparently the company succeeded enough that it’s now worth $100 million. Early employees who built the original site presumably don’t have equity because they were laid off and their options expired worthless as they were told the company had failed.
On one hand, it’s great to see a founder persevere and rise from the ashes. On the other hand, watching the early employees lose out on their equity because they were told the company was a failure is not cool.
I’ve made some money from startup options through my career so I won’t agree that they’re worthless as often claimed. However, this is a good reminder that the game is very stacked against the employees.