How would this work for the investors of Justin.tv? I know that Justin.tv has a stake in Socialcam, but to go from owning 100% of the value to something less seems like a lousy deal for the investors.
I suppose you could make the argument that this will enable Socialcam to grow more quickly and thus drive higher value for everyone, but it seems like quite a high risk.
Justin.tv owns some of it. What they're probably doing is having Socialcam issue some stock to investors, and to grant lots options to the founding team. Imagine that SocialCam has 100 shares now. They might have the company sell 50 shares to outside investors for funding (so Justin.tv owns ~67%, but that is 67% post-money, and the total value of the stake will be the same). Then the company could allocate 50 shares to an option pool for their founders. That dilutes Justin.tv's stake down to 50%. Nobody has to give anything up--the investors are putting in money, and the options are a form of employee compensation.
The investors in Justin.tv now own a smaller share (or none) of SocialCam, right? How is this allowed (without approval)? And who would approve it if growth is good?
That's certainly one way to paint the picture. Most of investing, though, is trying to grow the pie, not necessarily focusing on your specific piece.
I've been on the founder side (trying to convince investors to spin off a new company) and the pitch goes like this: Before, you had an ownership stake in 1 company with two products. After, you have an ownership stake in 2 companies. Both of these companies are out to grow, raise money and exit in their own right, and have teams solely devoted to hitting a home run. From that perspective, you could argue that you now own more than you did before, essentially by growing the pie.
Well, they own a stake through Justin.tv. If Justin.tv makes a good deal, it will naturally be a good deal for investors.
An example might clarify it. Let's say Justin.tv thinks SocialCam is worth $1 million. So, those 100 shares are worth $10,000 each. In the scenario above, SocialCam might:
- Sell 50 shares to an outside investor, for $500K. (So there are now 150 shares. But the company is worth $500K more, or $1.5 million. $1.5 million / 150 shares = $10K per share, the original price).
- Grant options with a $10K strike price. This would dilute existing investors, and thus slightly reduce the value of their stake. But a) this is standard for many companies--they issue shares to managers, and figure that the equity incentive pays for itself through higher performance (see http://paulgraham.com/equity.html ), or b) SocialCam's founding team might exchange their Justin.tv shares/options for SocialCam shares/options. As long as investors agree on the value for both companies, that's a fair deal.
I hope that explains it. This kind of thing is usually done with board approval, after discussion with the board, so it's unlikely that anyone did anything underhanded.
Running an additional product, especially one that takes off requires a lot of resources and attention, is very difficult to manage when your primary focus is on a different business. From Justin.tv and their investor's perspective, they are able to maximize the chance of success of Socialcam while likely maintaining an equity stake. Also, the Justin.tv team can focus all of their energy on growing their primary service rather than managing multiple services.
I like the analogy that having a business with multiple very different businesses is like a multi-front war.
Justin.tv's strategy of using their video-hosting infrastructure to aggressively pursue verticals within the video watching/sharing/hosting space is working out really well. They seem to have a knack for identifying how people use video and streaming on the web, and are creating products that serve the specific needs of each group.
Interesting. I suspect that Instagram are also contemplating adding video sooner or later, given that in their API images are to be found in the "media" branch, and for each entry there the data-type is labelled as "image".
I suppose you could make the argument that this will enable Socialcam to grow more quickly and thus drive higher value for everyone, but it seems like quite a high risk.