Benner on Tech: Founders Cash Out and North Korean Film Buffs

Katie Benner is a Bloomberg View columnist who writes about technology, innovation, and the cult and culture of Silicon Valley. She lives in San Francisco.
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People are Talking About…

At what point should a startup founder sell his or her shares? A long time ago in a Silicon Valley far, far away, people believed that entrepreneurs should cash out alongside their employees and shareholders. Upon exit -- be that a sale, a public offering or a disastrous meltdown -- everyone would win or lose together.

But startup life has changed. IPOs are happening much later. Private company valuations are skyrocketing well beyond what we’ve seen before. And founders, motivated by a desperate need for cash and/or a desperate desire to be rich, are finding ways to sell their shares before the exit.

This begs the question: Will founders stay motivated and driven now that their financial incentive to succeed has been somewhat blunted? Does cashing out early take economic uncertainty off the table, a potential distraction for entrepreneurs in and of itself, or does it create the illusion and rewards of success without demanding that founders actually succeed? It’s not just a quandary for founders. As the private market boom grinds on, employees are also trying to find ways to sell their equity. I wrote about this when I was at The Information, noting that some employees are resorting to complicated future-sale contracts and other sketchy agreements to circumvent stock sale restrictions and raise some money.

My knee-jerk reaction is that founders should hold onto their stock and stay incentivized -- especially if they expect their employees to do the same. For all his faults, Uber's Travis Kalanick hasn’t cashed out, or so I have been told by many insiders. If true, I respect that he was willing to tie his fortunes to Uber’s. And living on a six figure salary, as many founders do, is hardly poverty making, even in a city as expensive as San Francisco. (Yes of course there are always exceptions … kids and other big-ticket expenses can change a person’s need for liquidity.)

This week the Wall Street Journal profiled David Byttow and Chrys Bader, who founded the anonymous messaging app Secret, and examined their decision to cash out after their startup had existed for only seven months. They sold some of their stake much earlier in the life cycle of a company than other entrepreneurs have in the past. And VCs told the newspaper that these sales are rare, but increasing in frequency because of the boom. All the froth has given entrepreneurs the upper hand in negotiations, and some of them are using that leverage to the full extent. Even if Secret fizzles, as it very well could, the pair will have made about $6 million.

It’s an important trend to watch because it’s a sign of frothy thinking and it might not bode well for the health of the startup ecosystem or the quality of its companies. 

** Unrelated but recommended read: The New York Times’ Jodi Kantor reflects on Stanford’s class of 1994, and talks about why this group represents a turning point for gender equality (or the lack thereof) in Silicon Valley. As entrepreneur and Stanford alum Gina Bianchini, asks: “The Internet was supposed to be the great equalizer. So why hasn’t our generation of women moved the needle?”

Ventureland

Uber Ad Nauseum…

** Buzzfeed says the ride-hailing company is pushing drivers to buy personal auto insurance that leaves them uncovered when they don’t have a passenger in the car, rather than commercial insurance. Insurers have balked at paying drivers with personal insurance when they get into accidents, “effectively leaving them on the hook for medical bills and car repairs.”

** CNET takes a look at the company’s background check process and finds that, "Background checks need to be a lot more detailed than just checking a database. You need to check every place where a person has lived, worked and studied.” Hm, that doesn’t sound super scalable to me.

Confide, the disappearing-messaging app that, unlike Snapchat, might actually make messages disappear, is trying to turn the Sony hack into a marketing opportunity, according to Shira Ovide at the Wall Street Journal. Now your gossip about the minimally talented spoiled brats in your life can remain in the dark where it belongs.

Pinterest has become the anti-celebrity social media site, according to Backchannel, with the popular accounts belonging to people no one has ever heard of.

Raising VC money can destroy your soul… Or just make you suuuper unhappy, writes entrepreneur Francisco Dao at VentureBeat.

I’m sure you’ve heard the horror stories of entrepreneurs getting fired from their companies by their VCs, but most of those stories only tell the tale of the final straw. Have you ever thought about all the intermediate steps and indignities that came before the firing? Before those entrepreneurs signed the first term sheet, whatever they were working on was theirs and theirs alone. If you think about it, it’s a long journey from owning it all to getting fired from your dream. That’s a journey that is rarely discussed and not well understood.

People and Personnel Moves

Vivek Ranadivé, the former chief executive of Tibco, talks to Fortune about investing in data startups, why Tibco went private and what’s happening with the Sacramento Kings, the NBA team that he manages.

Companies

Apple…

** The company pushed out its first ever automatic OS update to a critical security flaw that could let hackers install malicious malware, Venture Beat reports.

** iPhone prices in Russia have risen by 35 percent due to the sharp drop in the value of the ruble. According to Bloomberg, a 16-gigabyte iPhone 6 now costs 53,990 rubles ($956), up from 39,990 rubles. Apple had previously halted online sales in Russia due to the extreme currency fluctuations.

Comcast…

Regulators have (again) pushed back a decision on the company’s proposed $45.2 billion acquisition of Time Warner Cable, Bloomberg reports.

Google…

** YouTube has been threatened with a $1 billion lawsuit if it doesn’t remove 20,000 videos from the site, Time reports. Irving Azoff, an entertainment lawyer who represents stars such as Pharrell Williams, the Eagles, Chris Cornell and John Lennon, says the site doesn’t have the rights to show the content.

** The company is showing the lyrics for some songs in search results, which could ding traffic to lyrics websites, reports Mashable.

** Mississippi attorney general Jim Hood is backing off his crusade against the search company, the Verge reports. Hood said in a statement that he’s “calling a time out, so that cooler heads may prevail.”

** The company released its latest Transparency Report with data on government requests that it received in the second half of 2013. Google received 6,591 requests to remove content for all of 2013, up 60 percent from the previous year. Requests from Russia, Thailand and Italy are on the rise.

** TechCrunch has a story on what the self-driving car looks like now. The Oatmeal also has a story on what it’s like to ride in said car.

Cybercrime Blotter

JPMorgan might not have been breached if the bank had used two-factor authentication for one of its network servers, the New York Times reports.

Sony’s breach matters because it shows that we’ve “likely reached the limits as to how much the existing infrastructure can be protected,” writes Andreessen Horowitz board partner Steve Sinofsky.

North Korea’s Internet access was restored after a 10-hour outage, reports Bloomberg. The outage looked unusual and security experts believe that it was the result of a cyber-attack on the nation’s network.

Media Files

Sony

** Perhaps in an attempt to blow through some of the goodwill built up during the hack fiasco, threatened to sue Twitter unless it bans accounts that are sharing e-mails and other leaked information, Motherboard reports.

** The disastrous hack could push Japan’s Sony Corp. to sell Sony Pictures Entertainment, according to the Hollywood Reporter. That would make activist investor Daniel Loeb happy, as he’s been pushing for a full or partial sale.

North Korea’s secret movie bootleggers are bringing Asian and Western pop culture to the hermit nation, The Daily Beast reports. Defector Yeonmi Park tells the website: “Even though many North Koreans risk their lives to access this information, they do it as a kind of rebellion against the regime.”

Presented without comment: Serial Sucked And Wasted Everyone's Time.

News and Notes

Online retailers are learning that it’s hard to do business in China, reports the Wall Street Journal. Related: the newspaper reports that Alibaba’s Tmall Global, the e-commerce platform that was billed as a “fast track into China” for foreign brands, has been a disappointment.

Coca-Cola has disconnected its voicemail system because, well, no one really uses it anymore.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the editor on this story:
Tobin Harshaw at tharshaw@bloomberg.net