Who Gets Rich in the Tumblr-Yahoo Dealby
Tumblr’s $1.1 billion exit has minted a number of new millionaires—and made some rich folks even richer.
Here’s who made what, according to PrivCo, which studies private companies. These are the revised figures corrected by PrivCo after initial numbers showed even more lavish returns for several venture-capital firms, setting off a Twitter war.
|Union Square Ventures||18||198|
|Other Series A individual investors||8.8||96.8|
|Series E venture capital firms (Greylock, Insight, CrunchFund, DFJ)||10.4||114.4|
|The 178 employees of Tumblr||6||66|
Some of the biggest winners, of course, are the venture capitalists who got in the earliest. Union Square Ventures and Spark Capital, for instance, are each pocketing a 1,423 percent return on their investments.
But a few millionaires are definitely coming from within Tumblr’s ranks as well. According to PrivCo’s data, 178 employees will take in six percent of the $1.1 billion purchase price, for an average payout of $370,787. PrivCo calculates that fully vested employees who were among the first 10 to join Tumblr would make $6.2 million each, while those within the first 30 would make $3.6 million.
“Sure, companies went public or sold for staggering sums, but companies have been going public or selling out for generations without creating tens of thousands of millionaires along the way.The defining difference between Silicon Valley companies and almost every other industry in the U.S. is the virtually universal practice among tech companies of distributing meaningful equity (usually in the form of stock options) to ordinary employees. Before companies like Fairchild and Hewlett-Packard began the practice fifty years ago, distributing stock options to anyone other than top management was virtually unheard of. But the engineering tradition that spawned Silicon Valley was much more egalitarian than traditional corporate culture.
It is not just startups that follow this credo. Citing In the Company of Owners, a book from 2003 about stock options, Johnson points out that the top 100 technology companies granted 19 percent of their total ownership to nonsenior executive employees, compared with 2 percent for the rest of corporate America. Johnson’s essay does not address the Tumblr acquisition directly; he was responding to George Packer’s article about the politics of Silicon Valley in this week’s New Yorker, which lamented the rising inequality of northern California, where growing ranks of poor live near startup millionaries. One solution to widespread inequality, Johnson suggests, would be “to make the rest of corporate America act more like Silicon Valley.”
Skeptics will question whether the creation of more millionaires can really be held up as a sign of progressive policy (in part, that’s what Packer’s article is all about). But it sure has proven to be a powerful way to create new tech companies. The lifecycle goes like this: Young engineer joins or founds a startup, gets equity, cashes out, and begins investing in or starting new companies that pay young engineers with equity. The PayPal Mafia and Facebook’s early generation of employees are two cases in point.
Tumblr’s employees are getting a relatively modest return by comparison. In part, Tumblr became so valuable with so few employees that many people came on after the stock options were worth relatively little; Tumblr had no more than a dozen employees for its first three years. A similar dynamic could mark the eventual exits of companies such as Twitter and Pinterest. Also, Tumblr raised a lot of money from investors. Several people involved in the venture capital world cited a rule of thumb that about 20 percent of the option pool would be set aside for employees. But that goes down with each subsequent investment, and Tumblr raised a lot of money.
“When you raise a lot of money, folks who came on earlier get diluted down,” says Anand Sanwal, the co-founder of CB Insights, which studies the venture capital world. “The flip side of that is when you raise a lot of money, you’re not worried about your job every day.”
Marco Arment, who worked with Karp from the beginning on Tumblr, said that he won’t make “yacht-and-helicopter money” from the acquisition. “But as long as I manage investments properly and don’t spend recklessly, Tumblr has given my family a strong safety net and given me the freedom to work on whatever I want. And that’s exactly what I plan to do,” he wrote in a post on his blog.
So Tumblr may well spawn its own diaspora of new startups and investors seeded with proceeds from the sale to Yahoo!, even if it’s a group that doesn’t quite have the resources and reach of those who came before it.