PRIVATE COMPANY DIVIDENDS This is one of my favorite annual emails, from a private software company that is CF positive and issues a yearly shareholder dividend. At this point, I've recovered a nice multiple of my original investment, all through these dividends over the past few years. Investors (multiple VCs on the board) are happy and there is no pressure on the management team to do unnatural things. Continue growing sustainably, invest some % of the incremental FCF into the business while returning some back to shareholders. The amount of the dividend changes year to year (it was $0.23 per share last year, for example) based on various factors. Growth CEOs and Investors: this is absolutely a viable path for private companies. Get to FCF positive and start issuing shareholder dividends.
Joe D'Elia
1w
"There is no pressure on the management team to do unnatural things". This is also the power of founder led companies, even public companies. James Sinegal, Costco founder, famously told Wall Street to pound sand every quarter when it demanded he squeeze the benefits for his employees in order to try to eek out a extra few pennies of earnings. WAY before Bezos (and Bezos even picked Sinegal's brain for tips), he was doing it his way looking at the long term, not short term. Must be something in the water in the Pacific Northwest. Grunge music too was an FU to the establishment.
Anupam Nath
1w
I am an investor in Gumroad. Sahil Lavingia is doing the same with 60% of income being distributed as dividends. That said, Gokul, do you feel people who invest in private equity consider this a great risk adjusted return if it just matches the interest rates at the time? Private equity is usually considered the riskiest and unless these returns continue for a few years and also increase value of the equity eventually, risk adjusted, they are likely not as impressive. That said, I would take dividends forever over companies that lack any liquidity event and eventually become zombies and die.
Puneet Suri
1w
How do you return capital to the LPs? Even if the dividend has covered up, you still have to do in specie distribution of shares and LPs won’t like it … For individual investors it may still be fine but eventually you need liquidity event for the shares.
What surprises me most about this is that the VCs and other very HNW investors are OK receiving dividends at all. A company in which I invested paid a dividend and management received a lot of blowback from billionaire shareholders that did not want to pay the higher federal & state income tax rates required of dividend income. The company has not paid another dividend since.
Gokul, It is great to see how growth and returns are possibly balanced. Unfortunately, most investors expect exponential growth, where valuations are only unrealistic multipliers. But we deliver consistently and as you mentioned with no pressure of doing unnatural things... that a place to be.
This will be the way for many Indian companies that hit TAM ceilings
Chris Hwang
1w
That must be quite fulfilling for the startup team. To know that you are at a point in your journey where the value you're able to provide to investors and base your company on is finally expressed in the form of consistent cash flow. Such a rare milestone to achieve and worth celebrating every time.
It’s really hard to build great business to CF, so when you can get distributions and continue to build it’s a great option
Love to see the adoption of CF areas like software and real estate
Co-Founder and SVP Growth & Innovation at Housecall Pro - Angel Investor & Advisor
1wWhat % of FCF to growth before dividend?