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We did a video a couple of weeks back on how equity works at startups, but one question that kept coming up was about profits: how do you distribute profits?
It’s a fair question. Business school 101 will teach you that you need profits for a company to thrive! And business 101 is right, but that doesn’t exactly apply to startups.
When Facebook bought Instagram back in 2013, they paid $1B for the platform. At the time, Instagram had not generated a single dollar of revenue — it was all expenses — and yet, Instagram’s founders, investors, and hopefully, employees walked out with large paychecks from that exit.
Why such crazy numbers for a platform that generated no revenue? Since it was acquired, Instagram HAS generated billions of dollars in revenue for Facebook, and since Facebook stopped being cool, you could argue that Instagram is all they’ve got to lure young audiences.
So Instagram made a profit, eventually. Except that Instagram’s original investors never collected any of the profits from Instagram. They didn’t want to, and they never intended to. But why?
So in this article, I want to explain how the profit model works, run through some scenarios of different companies, and clarify why profits are just boring for venture capital investors.
