07
October
2009
|
09:51 AM
America/Los_Angeles

DejaView: Twitter $100m Investment Will Make It Tough On Present And Future Staff

DejaView: Sometimes when a big story breaks it's not easy to see the story because of all the "noise" around it.

It was difficult to find much insightful coverage of the recent Twitter $100m funding and its $1 billion valuation. But Niki Scevak, an Australian entrepreneur living in Paris has produced the best take on the Twitter investment.

Here is Mr Scevak's analysis from Nuances of Twitter Financing | Bronte Media

Are the investors leading the round, T Rowe Price and Insight Venture Partners crazy? Maybe they are but there is likely very little downside for them. That is, it may be extremely hard for them to make money but they probably won't lose it. Shares bought are of the preferred variety and so if Twitter sold for $100m they get their money back and no one else gets anything.
. . .the investment expectation is not so much 'venture capital' but a 'loan with some upside potential'.

What happens to the early investors such as New York's Union Square Ventures (USV) and Spark?

They have a small fund relative to the size of this investment. To keep their pro-rata share they would have to put a decent chunk of their fund into an investment with the risk profile of point 1 - something their limited partners have not asked them to do.
...On the upside, Union Square Ventures, Spark Capital just got a huge valuation validation that would put the respective funds in the money on this investment alone. They can now go out and raise another fund easily.

This investment is likely a perfect opportunity for early employees and angel investors to take their money out of Twitter.

There is limited upside for them with a long line of preferred investors ahead of them in the que. ... No one got poor selling at a $1bn valuation.

Mr Scevak raises a good question. What will Twitter do with $100m? It shuffles text messages around, which doesn't require a heavy IT infrastructure such as Facebook, which needs large IT systems for photo and video storage.

The most important point is what will be the effect of a $1bn valuation on Twitter staff?

With so many preffered stock holders ahead of them getting their payouts first, Twitter staff will be left with very little once everyone cashes out.

One of the commenters to the post, Mike Simonsen wrote:

...Here's how the math works against EVERY employee at an overfunded startup - take the mint deal for example: $170M exit (maybe $70 or so is future perf related so that leaves $100M), even without liquidation prefs, the employees get basically nothing. $40mil VC = maybe 60% of the company, 20% for the founder CEO, 3% each for the next 5 guys. That leaves everyone else sharing $5mil to vest over the next 4 years. And even that's skewed for a few people. So with the biggest VC exit of the year, the employees are basically vesting a $20k annual bonus. gee thanks.

Huge VC rounds are only good for people who own big, early, preferred chunks already.

This means it could be tough for Twitter to recruit staff. However, with the current tough employment market, maybe getting a good salary will be enough reward.