After Groupon made its books public yesterday for its IPO, it has faced a firestorm of criticism from the blogosphere. Many of those concerns are well founded. Over the past year Groupon has effectively pursued a hyper-revenue growth, profits be damned, spend $10 to make $5 business strategy. They have an army of employees cold calling every business in the country trying to drum up business. From what I’ve heard their merchant experience isn’t exactly spectacular given that they take 50% of the profits, and almost all of the customers produced by a deal don’t come back. And that’s just a tip of the iceberg.
Those issues aside, one of the big questions that many people have asked is why on earth Groupon took 810 million of the last 1 billion dollars it raised and gave it to early employees through stock purchases. That sounds reckless and stupid on its face. It could even seem familiarly suspicious to a Madoff-jaded public. But let’s put ourselves in Groupon’s shoes and figure out why executing those kind of stock sales might make sense.
It’s November 2010 and you’re on Groupon’s board. Google is offering to buy the company for $6 billion. 6 BILLION DOLLARS. Holy shit. A lot of early employees in the company want to sell. That’s the kind of money you can “go away” on. You’re mulling over what to do when someone comes up with a no-downside proposal:
Instead of selling, let’s promise to give early employees 75% of the next billion dollars we raise.
If it doesn’t work out we’re all pretty rich. If it does work out, we’re all really rich. This would keep the entire original team together, the people who understand the business the best, so that in the next year we can shoot for a much higher valuation than the $6 billion offered by Google.
This makes perfect business sense from Groupon’s perspective.
Believe me that doesn’t mean I’m saying that you should go out and buy Groupon stock when it IPOs. I’m just offering an explanation for what seems like an odd series of events on Groupon’s part.
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