Protocol Pipeline
The inside story of the venture capital and startup world by Biz Carson.
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How Automattic employees buy and sell their startup stock — without an IPO

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Hello and welcome to Pipeline. This week: the FBI's warning to startups, OnlyFans pulls a Tumblr and inside Automattic's unusual funding and buyback rounds.

Overheard

  • "Are there legitimate business reasons for a venture capitalist to ask a female entrepreneur whether and when she intends to have children? Hell, yes," wrote Republican California gubernatorial candidate Larry Elder (a leading contender in the VC-backed recall) in his 2002 book. Asked if he still stands by those words nearly 20 years later, it's still a hell yes.
  • "This is 1999 kind of stuff," said Kruze Consulting's CFO. So much money is pouring into the private equity markets that venture debt lenders are loosening up their deal terms as they get crowded out.
  • Who is the Broke Bobby of the VC world? Meme king Turner Novak started his own collaborative spreadsheet for investors to fill out the categories they think should be tracked, Forbes friends list style.
  • "I haven't seen anyone do this yet, but somebody will, because there's billions of dollars at play," Chris Sacca told Eric Newcomer. Given the crazy secondary market for unauthorized shares, he's wondering when someone will block a sale by invoking the right of first refusal. "I've been shocked that nobody's done that yet."
  • New founder flex: having artisan soft-serve ice cream on tap in your house.

Biz on Biz

Not your average funding announcement

Funding announcements in today's crazy environment typically go like this: "Here's a big number, the investors we want to list to impress you and our valuation if we're finally a unicorn."

Automattic's fundingpalooza announcement this week was anything but ordinary. It had a $288 million primary round, another $250 million in buybacks, common stock with a voting proxy and oh, the equivalent of an internal stock market for employees to sell their shares quarterly. Equally confused and intrigued by the announcement, I hopped on the phone with Automattic's founder Matt Mullenweg who graciously geeked out with me on the complicated mechanics, including Automattic's plans to (of course) open source it and offer some advice to founders considering the same.

Mullenweg actually started accruing voting power 10 years ago. Since 2011, all shares sold by the company have involved a voting proxy where the owner assigns the shares to Mullenweg, giving shareholders all the economics but none of the influence. (Most founders typically do it with multiple share class structures.)

  • "With Automattic, we're trying to build a very long-term company. We talk about it as aspiring to be the Berkshire Hathaway of the internet. And to do that, credibly, I think that you have to be in control of your destiny from a governance point of view as well," Mullenweg said.
  • Automattic started 16 years ago as a commercial arm to the WordPress open-source project. It now looks more like a holding company like IAC. Besides WordPress.com, it has Tumblr, WooCommerce, Day One, Pocket Casts and a handful of other properties now. (WordPress, the open-source publishing software, is run by a completely separate foundation now.)
  • Because of its growth, it has investors who are excited to double down, but also because of its age, the company had some who needed to exit their stake and return any gains to to their funds. There ended up significant interest in buybacks, from both early Automattic employees and the investor base.

The funding maneuvers that happened this week actually began back in 2020 when there was still some uncertainty on how the markets would play out.

  • "There's times when it feels like it's impossible to give away the stock and there's times when people are falling over themselves and fighting to buy shares," Mullenweg said. "I've experienced both, so I know that you're not terrible when no one wants it and you're not smart when everyone wants it."
  • Amid the uncertainty of early 2020, Automattic decided to give liquidity to some of its investors and do a buyback of around $100 million in stock. It kept those shares as treasury shares, which sets them aside until they're re-issued. Later in 2020, it did resell them to some of its existing investor base looking to double down.
  • In early 2021, it decided to raise another primary round, this one being the $288 million from BlackRock, Wellington and others who all received common shares and granted Mullenweg their voting proxy.
  • Last week, the company closed yet another buyback, buying $250 million in shares, which it will again hold as treasury shares until they're sold again.
  • When that will be is TBD. When I asked Mullenweg about IPO plans he laughed and said to "fill in standard corporate CEO's" answer. But he did elaborate that because of Automattic's model, there could be a future where one of its portfolio companies goes public or maybe raises its own kind of financing.

Then there's Automattic's employee-only exchange: A12. To help employees have liquidity, Automattic runs a stock plan that acts kind of like a mini stock market within its company.

  • Employees can buy stock in Automattic at its latest valuation in two windows a year. Automatticians (what Automattic calls its employees) have to hold it for one year, but then they can sell those shares every quarter if they want to.
  • "I think it's tough to ask people, even if they're making hundreds of thousands dollars a year, to take a significant portion of their net worth in illiquid stock," he said. Having an employee market adds that liquidity on a quarterly basis. "Let's say your life circumstances change and you had put $200,000 into Automattic stock and now you want to buy a house, so you want a down payment or something, it's liquid quarterly, so in a few months you can take it all back out," he said.
  • Unlike most startups, stock isn't a standard part of the compensation packages — if at all. Given the 80-plus countries that Automattic has employees around the globe, it found it easier to give employees the option to buy stock within its own program, rather than actually issue options which were more complicated and not the right fit for this stage of the company, Mullenweg said.
  • There's a lot of legal complexities around operating a marketplace like this, but Automattic, of course, plans to open source how companies can run their own similar programs and release their legal templates and guides soon.

If there's one regret Mullenweg has, it's not finding a way yet to involve the community as a stakeholder, especially given the fanbases of products like Wordpress.com and Tumblr. Lots of companies are experimenting with raising money from fans, like formula company Bobbie, so it's something Mullenweg is pondering.

Until then, Mullenweg's only piece of advice to other startup CEOs has a unique inspiration. "I saw some great relationship advice recently and it said, 'How many times do you wake up and say, 'How can I make my partner happier today?' And if you do that more days than not, you'll probably have a really great long-term relationship," he said. "So my advice to entrepreneurs would be: Just ask yourself periodically, 'What can I do to make my shareholders and colleagues happier?' And for those for whom liquidity is something that would be helpful ... , there's never been more options to do something now."

A MESSAGE FROM SINGAPORE EDB

Expanding to Asia can be difficult, but Singapore is here to help. The Singapore Economic Development Board's guide to setting up in Singapore has all the information you need to find the right partners, talent, and connections to succeed in Asia.

Learn More

Inside Track

  • Even the industry's best experts get it wrong. Salesforce president Bret Taylor started a Twitter thread of strong tech convictions that turned out to be wrong (His was self-driving cars on a timeline that would see his daughter never getting her driver's license). People like Paul Graham, Chris Sacca, Julie Zhuo and Sarah Guo all chimed in with their worst predictions.
  • A lot of startups want to know how to crack the code on a Product Hunt launch, so Launch Kitty scraped together stats on more than 6,600 products.
  • "Startups should not be collateral damage in addressing Big Tech," wrote Trinity Ventures' Patricia Nakache in an op-ed pushing back on proposals in Congress that could threaten startup acquisitions.
  • RIP my inbox, or as Upfront's Kerry Bennett more eloquently puts it, startup PR is getting harder and here's why.
  • What's the most life-changing blog post you've ever read? Hacker News readers weighed in with everything from guides on negotiating salaries to how it feels to be blind in your mind.

Need to Know

  • The FBI has been warning venture firms and startups about insider threats of IP theft and economic espionage. In a story I broke this week, the FBI has been giving briefings about what it sees as a "quotidian activity" for IP theft from autocratic governments, namely China and Russia. It developed the "delta protocol" (not related to COVID or this publication) to help startups raise their shields and protect themselves in the delta between when they start a company and become big enough to have their own security staff.
  • OnlyFans pulled a Tumblr. It's been struggling to get investors, and ultimately decided after pushback from its banks to pull the plug on porn — which is the only way it ever got fans.
  • A16z is making a NYC push. Insider reports that the firm is expanding east, particularly to attract fintech startups started by ex-Wall Street folks.
  • Investors in China pivot to chips. It's a "safer" investment after Beijing's crackdown on everything from ecommerce to edtech, according to the FT.
  • Coinbase is on an investing spree. It's one of the most active corporate VCs and investors in the crypto community, all without having a full-time staff.
  • The Snowflake effect: Databricks is reportedly raising at a $38 billion valuation.
  • Release radar: Kayak co-founder Paul English is back with a new startup, Moonbeam. Sadly, it's not a space travel startup, but it's instead trying to be TikTok but for podcasts.
  • On Protocol: How does an obsession with countertops translate into building a bitcoin wallet? Protocol's Benjamin Pimentel has a great story about the Apple veteran in charge of building Square's bitcoin wallet.
  • Also on Protocol: Do you need to hire a head of remote?
  • Your weekend reading: Self-driving cars were supposed to be here by now. The technology is close — 99% of the way there! — but it's the last 1% that has caused Waymo to slow down. Bloomberg has a great article on how traffic cones are stymying the future of self-driving cars.

Five Questions With...

Threshold's Mo Islam

Threshold Ventures' Mo Islam used to do technical diligence on behalf of the CIA at its venture arm, In-Q-Tel. The experience is what partially inspired his investments in enterprise and frontier tech, where he's done deals in companies like Elementary Robotics, Zymergen, Atomwise and Upside Foods (formerly known as Memphis Meats).

What is the biggest issue that your partners are thinking/talking about at your Monday partner meeting?

A mix of the impacts of inflation and debate when the Fed is going to taper quantitative easing and raise interest rates. Also consistently revising the plan to come back to the office.

What was your first job, and what's a skill you still use from it?

I stocked inventory and helped balance the books at my family's convenience store in Pompano Beach, Florida, where I grew up. It taught me how to be scrappy and how to be humble. Also, likely why I'm good at (VC) math.

What problem do you want to see a startup solve?

Bridging the genotype-phenotype gap and creating new products in consumer genomics, in everything from new types of drugs to lifestyle coaching to [optimizing] nutrition and health. There's still more scientific research to be done to advance our understanding of how our internal code really works, but I think this is a fascinating space for founders to tackle.

What book do you think every startup founder should read?

"Thinking, Fast and Slow" by Daniel Kahneman. I think it's a great foundation for understanding how humans make decisions, which becomes increasingly important as founders scale their companies. At the end of the day, a business is just a collection of people making products, and understanding human psychology is super useful.

Sam Lessin's recent essay caught the eye of a lot of folks. Do you think this is the end of VC as you know it?

I don't think it's the end of VC, but I do agree it's the end of VC as we've known it. The great news for an early-stage investor is that technology is dynamic and constantly evolving, the market opportunities are larger for technology than they've ever been and so many new startups are tackling important problems for humanity's benefit. The world's most valuable company in 20 years probably hasn't even been founded yet. The bad news is that it feels like you're being chased by a tiger.

A MESSAGE FROM SINGAPORE EDB

Expanding to Asia can be difficult, but Singapore is here to help. The Singapore Economic Development Board's guide to setting up in Singapore has all the information you need to find the right partners, talent, and connections to succeed in Asia.

Learn More

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