Michael Arrington has a fantastic story on Parakey and how its investors - including powerhouse VC Sequoia - got fleeced in the sale to Facebook.
To summarize:
When Facebook acquired Parakey in July, everyone assumed the stockholders of that fledgling startup would be popping the champagne bottles. No matter what the acquisition price (it wasn’t disclosed), if the sellers got Facebook stock in return for their Parakey shares, it would likely be worth a fortune down the road.
It turns out that wasn’t the case. The acquisition price, say two sources close to the deal, was paid in cash and was “less than $4 million,” providing investors with just a 2x return on their investment. Meanwhile, Parakey founders Blake Ross and Joe Hewitt were rewarded handsome stock options to join Facebook as employees in lieu of any cash compensation.
This story reads like a Harlequin novel. Let’s count the ways:
#1 - Facebook: The Startup That Keeps Slipping Out of Sequoia’s Hands?
The main (only?) reason Sequoia was out of any of Facebook’s funding rounds in the first place is because Sequoia squeezed out Sean Parker from Plaxo (a Sequoia funded company). Parker has the distinction of having his DNA on Napster, Plaxo and Facebook. After being jipped at Plaxo and joining Zuckerberg at Facebook early on, he apparently put the kybosh on any Sequoia involvement. That’s what I’ve read, could be less than true, since perhaps Facebook’s wild valuations had something to do with it.
#2 - Paypal Connection?
What’s more interesting about this, is the Paypal connection. Peter Thiel, Facebook’s first angel investor, was Paypal’s CEO. Roelof Botha, the wunderkind Sequoia VC who invested in YouTube and made the firm north of $500M on a $11.5M investment, was Paypal’s CFO. Is there a story there? Who knows… But you’d think that these two gents would probably connect and get Facebook some Sequoia love, no? Again, who knows.
#3 - Sequoia Screwed by Side Deal?
Sequoia is known to eat their young. It’s a great VC that adds a lot of cachet to any startup, but that means that they get to set the terms. In this case, I am surprised they did not have more rigid liquidation preferences. But if you connect the dots, maybe in Parakey’s negotiations, the founders were explicitly told that they wanted to avoid any Facebook stock to fall in Sequoia’s hands. That’s a brazen suggestion, but a possible one.
#4 - Lesson: Don’t Only Back Known Entrepreneurs
VCs readily admit that they like to back repeat entrepreneurs and folks they know: Blake Ross has a track record unlike any other, so he was probably able to get the terms he wanted.
The lesson - in an ideal world - would be for Sequoia to realize that only backing people who can get money from anyone is not optimal in the end, it does not reduce the risk profile of an endeavor and in fact runs counter to the interests of their LPs… that’s right, invest beyond Silicon Valley’s chummy circle, and maybe you won’t find yourself on the outside.
Alexander Muse has an interesting take on the deal.
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