Legal Pyramid Scheme, nothing more.<p>The founders and early stage investors build something semi-viable, then spend all their efforts on marketing. Some of helps to grow the product, but most to convince bigger investors to buy them out and assume the risk.<p>Why on earth would investors do this, you ask? Well, because they know that given the marketing, there will be other investors that will allow them to exit.<p>Repeat until IPO, then ride the wave until the explosion. Time it right you make a fortune.<p>Unfortunately, a minimum of effort goes into creating a lasting product with a proper valuation, so the moment that most investors realize that they aren't going to make their money back, ka-boom.<p>Dot bomb all over again. Groupon is not a billion dollar company.
When people saw Groupon, Twitter and Facebook taking those huge rounds did everyone think they were going to invest back in the business? I'm pretty sure most thought that founders and early investors were taking money off the table.<p>Though, the degree to which Groupon did is amazing. I can't believe any investor would have agreed to those terms. In the Groupon case as well, with 3000+ employees (which is, frankly insane), I don't know how anyone looking at the numbers, the terms, the business and the structure would have agreed to invest. Marketing be damned, unless someone blows this up it won't make money.<p>I'll never understand why they turned down $6B from Google.
It is completely insane how much investor money went to founders and not the company in both the G round and the previous round. How could investors agree to that? Kudos to Mason & Co. for getting out while the going was good.
One of the differences between now and the last dot com bubble is that these days, founders and early stage investors get their big paybacks before the IPO so have even more incentive to pump up unsustainable business models.
There is nothing wrong with taking money off of the table. In fact, if you want to strike it big... it's important to make sure that your management team is financially secure:
<a href="http://learntoduck.com/startups/it-all-changes-when-the-founder-drives-a-porsche" rel="nofollow">http://learntoduck.com/startups/it-all-changes-when-the-foun...</a><p>Andrew Mason was fairly explicit that taking a recent huge round was designed to "permanently solve the money problem":<p>(from the article linked below)<p>“For me, the reason to do this was to solve a binary life problem,” he explained.<p>In life, Andrew says, “You either have enough [money] or you don’t.”<p>“When people came with a lot of money to buy a very small percentage of Groupon and it was enough to permanently solve the money problem, why would I not want to do that?<p>“Now I can focus on making Groupon great.”<p><a href="http://blogs.forbes.com/velocity/2010/04/19/groupon-ceo-andrew-mason-sold-stock-to-dst-to-solve-the-money-problem/" rel="nofollow">http://blogs.forbes.com/velocity/2010/04/19/groupon-ceo-andr...</a>
Isn't this a fairly common practice? Admittedly, Groupon's enormous employee base means they're going to burn through the remaining funds faster than an ordinary startup. Aside from that, this doesn't seem all that outrageous, at least not outrageous enough for the overall level of indignation in the comments here (accusations of it being a pyramid scheme, etc.).
Agreed it looks totally bat shit insane!<p>BUT ... other than those who directly benefit, who else would invest in something that might never pay a decent return on investment ???? To me it looks like throwing piles of $100 notes on a bonfire, nice flames, lovely crinkling sound.
Contrast this with what a bootstrapped business does with all its money:<p><i>After the inventory sold, it was a matter of repeating the process. “You take all the money you make and buy more inventory with it,” Seidle says. “You continue to do this until either you have enough inventory to cover the number of incoming orders or you want to eat. I think it was more than 3 years before I was able to buy a new winter jacket. A growing, bootstrapped business is a cash devouring machine.”</i><p>From the Sparkfun founder Nathan Seidle's interview - <a href="http://37signals.com/svn/posts/2896-bootstrapped-profitable-proud-sparkfun-/" rel="nofollow">http://37signals.com/svn/posts/2896-bootstrapped-profitable-...</a>
Kinda insane how much Mason seems to being shafted on this one.<p>He got 10M from the 950M raised. That just seems wrong. Lefkowsky & his wife got at least $310M.<p>Wow....talk about being shafted.
"Co-founders Eric P. Lefkofsky, Bradley Keywell and Andrew Mason will control the company even if their ownership stake in Groupon drops below 50%"<p>Why the hell would I buy into the company and still not own it?