How Do Startup Founders Make Money

How You Make Money From Building A Startup

The founder of Genius annotated rap lyrics and Everipedia is one of the top-rated users of both sites. He started both of these companies when they were nothing when he got involved. He has written an article explaining the financial details of launching a startup, raising money, and getting an exit. He also discusses some concepts about startup finance that he thinks everyone should know: Vesting and Vesting can come with a "cliff" – this means that if you don't make it through at least one year, you get zero.

Mahbod Moghadam Hacker Noon profile picture

Last month, I resigned from the 2nd huge company I founded. I started both of these companies when they were nothing — neither had even launched when I got involved. Over time, I worked with my cofounders to build a full product, get traction, and raise substantial venture capital funding.

Although I am not an engineer and I didn't build either of my apps, I like to think that I was a crucial element in building both of them. I was an addicted — albeit shitty — user of both platforms and I got other like-minded people to use them as well. On both Genius (which annotates rap lyrics) and Everipedia (which is wikipedia with cryptocurrency rewards), I am still one of the top-rated users based on "IQ score", the points you get for making contributions.

One thing I find extremely frustrating is when folks don't seem to understand my relationship to my companies after I resign. I have found that most people — even most startup founders — don't seem to understand a founder's relationship to their company or how founders get rewarded for a company's success. I thought it would be useful to write an article explaining the financial details of launching a startup, raising money, and getting an exit.

I get really sick of it when people think that, after resigning, I won't be getting any rewards if my companies succeed. That's not how it works — founders can still be owners after resigning. I'm writing this article to inform — but furthermore, I want everyone reading it to know how much of a baller I am. It is basically a humble brag article I am writing…

But then, there are also people who think because my companies are famous, I'm already a billionaire. They are going overboard too — so I thought it would be good to write something to get everyone to chill.

Below, I discuss some concepts about startup finance that I think everyone should know:

Vesting

One of the weirdest, most messed up things about startups is: Eduardo has a shit ton of money — he's in the same ballpark as Mark Zuckerberg! Eduardo has 10 billion dollars, Zuck has 60. One big difference between these guys is that Zuck built Facebook, whereas Eduardo didn't do shit.

The reason Eduardo got so handsomely rewarded is: VESTING. When you found a startup — or if you're an early employee — you usually get your stock over the course of 4 years. This means that you can work at a company for 4 years, or for 20 years, and you still get the same reward. Only your salary changes, not your stock. This means that Eduardo stuck around Facebook from 2004 to 2008, he didn't do shit, but he got rewarded the same as if he had been the CEO and actually built the company.

Basically, I am the "Persian Eduardo". I stayed at both of my companies for 3 ½ years — JUST ENOUGH to get my sugar and then bone out. I could have stuck around for decades, and the only difference would be me comping my Whole Foods, which doesn't even cost that much since I steal and Bezos lowered their prices.

Vesting can come with a "cliff" — this means that if you don't make it through at least one year, you get zero. One of my friends was the 6th employee at Facebook! He was there for 9 months and then he angered Zuck and he got kicked out. He didn't get shit! If he had made it 3 more months he would have hundreds of millions of dollars of fb stock. (Don't worry he got rich anyway tho..) I wish I was as smart as Zuck! One of the sob stories of my life is that Everipedia had a shady early employee who stuck with us for 9 months before returning to college to devote his life to smoking weed at frat houses. He didn't have a cliff, so he's going to be a multi-millionaire off of Everipedia — and he never did shit. SHOULD OF GIVEN THE CLIFF! Lesson learned.

The most fucked up thing is: our stoner employee doesn't even care about the company anymore. He never makes pages — he never even tweets anything about Everipedia. He doesn't seem to understand that he still OWNS the company! His fortune follows our fortune. I certainly understand this concept, which is why I am still one of the top contributors to both of my sites even after I resigned. Iown it! It doesn't matter if I work for it…

Taking Secondary

Startup equity cannot be freely bought and sold — maybe cryptocurrency will change that but I don't know — I think investors want to see their money being used to build the company, not to enrich the founders before they produce results. Founders and early employees do not typically get to "Exit" unless there is an acquisition or IPO.

BUT… there is this thing called "secondary" which means that founders (and sometimes early employees — but this is rare) can use around 5–10% of a raise to sell their own stock and put the money in their pockets. The logic behind selling secondary is that the founders will no longer have to worry about material wants and will be able to more fully dedicate themselves to the company.

For some reason, secondary is a very dirty secret. When we took secondary for our raises at Genius, my cofounders FORBADE me from talking to anyone about it. And look! Now I'm writing an article about it. HAHA SORRY SUCKERS!!

I think one of the reasons my Genius cofounders wanted to keep quiet about secondary is because we didn't share any of the money with early employees, so we didn't want them to get pissed.

Luckily, at Everipedia we are GIVERS/HOMIES, so we shared our secondary sale with early employees and everyone got a taste. So I can talk about it as much as I want! I used mine to buy EOS…

Secondary Markets / ROFRs

Even though investors will give you 5–10% of your raise as secondary, you will really have to beg. Investorshatethe idea of making founders rich before the company makes money — they want you hungry! And they have a good point.

The guys who built Secret kind of ruined it for all of us. Secret was a "disappearing message" platform that got traction amongst SF nerds and college students for like a month. It raised $25 million from top VCs. But the founders of Secret were HUSTLERS — they somehow got investors to let them sell $6 MILLION in secondary — wayyyy more than 5–10%. Immediately after they took their secondary, Secret started to get boring, lost traction, and the founders shut it down. They already had $3 million each of secondary so they were chilling.

Secret kind of ruined it for the rest of us. That was 2015, and it made investors a lot more wary of giving too much secondary.

The website SecondMarket was very popular around the same time, after NASDAQ acquired it in 2015. SecondMarket allowed founders and early employees to sell shares pre-IPO — lots of Uber employees used SecondMarket to sell. But investors responded to this trend by including ROFRs (Right of First Refusal) in investment contracts. The ROFR means that if you want to sell your equity pre-IPO, you have to offer it to the investor first. In effect, investors just use the ROFR to make it impossible to use websites like SecondMarket. I guess you'll just have to wait for acquisition/IPO — SORRY!!

Acquisition/IPO

The two ways founders, early employees and investors usually exit are acquisitions and initial public offerings. Although IPO is much more baller, it seems more complicated so I think acquisition is better.

After your company IPOs, founders and employees cannot sell their stock for a year. There are other legal restrictions too — I would be scared to go to jail IPOing! Last year, Google reportedly tried to buy my company for $700 million and my cofounder refused. Why did he do that?!! I could have been so rich.

If you sell for cheap, you probably won't get any money. When you raise money, most VC's ask for "liquidation preferences", which means that if you sell the company at a valuation lower than you raised money, the investors get all of their money back before founders and employees get any money. But at least you'll have a job at your acquiring company so that's chill…

Acquisitions for less than $50 million are called "acquihires" because tech companies are usually just paying to hire the developers, not paying for the product. If you get acquihired, your company usually gets shut down.

However, $700 million is not an acquihire. Google would never shut down Genius — it's the best site on the internet. It has my fingerprints all over it and I'm the best. Google is very good at acquiring companies because they usually leave the company alone. Their acquisition of Youtube was the first successful tech acquisition, and part of this was because they let Youtube keep their own offices in SF, rather than moving to Mountain View.

Overall, selling is much better than IPO. Just think about your life. Would you rather be Tom from Myspace, or Zuck? Tom sold his company for a modest fortune, and went on to live the live of an exotic baller. Zuck IPO'd, became a billionaire, and he's miserable and the whole world hates him.

Those are my ideas. If you want to learn how to build a unicorn startup, read this other article I wrote on how to do that (TL;DR: you will fail unless you know how to code). But this is how you make money from your startup once it blows up!