> [He considered] bringing the company down to 10 people and just seeing what would be next.
Other than the fact that he would need to fire everybody, what is wrong with reducing costs to make it profitable like this? The problem seems like there wasn't enough profit to support a staff of 120 people. I can't imagine the VCs would object. They already lost their money.
There's a bunch of problems here. For a start, laying off the team is probably the worst thing a startup founder wants to do - he likely wants to protect them and so sending them as a unit to FitBit is better. But if we was to go down to 10 people, then if he sent the rest to FitBit they'd be competing against the current team! So he's given the choice of the company succeeding or the employees finding a new home with little disruption.
Secondly, the cap table is probably fucked. It's hard to go down to a 10 person company without fixing the cap table. It's probably something like VCs own 55%, founders 25%, employees 20%. So for it to "behave" like a 10 person company, you want to recap it and make it more like a Series A company (investors 35%, founders 50%, remaining employees 15%). If you don't it's shitty for the founders and remaining employees.
If you do, it's shitty for investors. Who wants stock in a Series A company at Series C prices? They wouldn't even have product market fit. And given they have the option to get their money back instead, I'd wager they'd all vote to sell.
A final reason is that the culture of a company changes as it grows. They'll currently have a "big company" mentality. They'd have to switch to a "small startup" mentality, which might be tough: they might not even have "small startup" employees left (it's not uncommon to see early employees leave when the company gets too big for them to enjoy).
Whereas if he starts a new company, he'll find it really easy to raise money, he can probably pull away the employees that he needs from FitBit, and he'll own almost all of it.
I agree with you, finding jobs for ~50 of the 120 employees is better than firing 110 of them.
The investors aren't getting their money back no matter what the cap table looks like now. Pebble went bankrupt. The founders are also walking away with nothing. No money from selling the company but also no debt - that's the benefit of limited liability.
I thought the company sold assets to FitBit. I saw a $40m number floating around. While that might be golden handcuffs for employees, I would typically expect to see the investors take some cash out of this.
If there was $40m, it's likely the founder got _something_, even if it's just 200k. There has to be financial incentive for him not to burn it to the ground, and the VCs probably don't want to get a founder-unfriendly reputation over a "small" chunk of cash.
I'm currently working for a company in that situation, and its a tough sell to both investors and employees. I don't regret my decision, but its really difficult supporting the infrastructure built up by a developed company with the resources available to an early stage startup.
If you're essentially getting rid of your whole R&D and marketing team, which you would be at that size, you're basically into eating your seed-corn. Yes, the company might be profitable for the remainder of the life of your current products but then what? You'd be into the same situation 18 months from now, except with an eroded brand and outdated products.
Other than the fact that he would need to fire everybody, what is wrong with reducing costs to make it profitable like this? The problem seems like there wasn't enough profit to support a staff of 120 people. I can't imagine the VCs would object. They already lost their money.