during which the...
during which the acquirer welched on the deal.
It turned out to be good in the end, but we had to raise our last round of
funding while this was happening. You want to raise a round of funding with an
Paul Graham 215
IP cloud over your head? It’s just impossible, because potential investors have
no way of judging how serious it is. It could be no big deal, or it could be that
this other company owns half your software.
That was the second low point—tied for lowest. Ultimately we managed to
get some bureaucrat within the big company to give us a release, so we could
say to acquirers we actually owned our software. But we had to do a round of
funding before that, because we were out of money.
It was pretty miserable. Basically, the angel investors played chicken with
us. They knew we couldn’t get money from anyone else, since we didn’t even
know for sure if we owned our software. So they proposed to do a cramdown
round where they would refinance the company, I believe, at a pre-money valuation
of zero—meaning all the common stockholders were completely wiped
out. To keep us around, since they kind of needed us to write the software, they
were going to give us options. So we called their bluff. We said, “If you do that,
we’re leaving.”
Livingston: You and your cofounders said you were leaving?
Graham: Yeah, all the technical guys. So when it came down to that, they compromised
and we ended up doing a funding round at a low, but reasonable,
valuation—$12 million, I think. We got bought only a couple months after
that round closed. But we had to do the round because we were in debt at that
point.
Livingston: You must have been displeased with your investors for doing that
to you.
Graham: Well, everybody ended up rich, so it’s hard to be too displeased. I’d
rather have an investor who invested in us and made our lives hell than one who
didn’t invest in us at all, which is what most investors do to most startups.
I mean, we needed their money to grow the company, and some amount of
stress always comes with the money.
In retrospect, I think it was more about control than money. They weren’t
trying to rob us so much as take over the company. They were offering us quite
a lot of options. The point was, we’d have to do what they said from then on, or
lose them.
Livingston: Was there ever a point when you wanted to quit?
Graham: There was one point when I almost did quit, when the investors were
telling us they were going to refinance the company. I had an appointment with
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