George McKenzie (00:00.928)

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I think you have to square your jaw to the fact that maybe I've not run this company well and maybe there's not going to be a pot of gold at the end of the

And that was the counter suit that the board is making towards the founder of Fandals, right? That this company was mismanaged. The guys really weren't quite sure what they were doing. And this is the argument they're using to fight litigation.

Yeah, and I think that argument holds water because I mean there's some you could see it from a investor perspective right if you were the investor and you invested 450 million dollars in this company and the company was being run poorly and There was an opportunity for you to get your 450 million dollars back. Yeah, you take it

Welcome to Married to the Startup. I'm Alicia McKenzie, a wellness entrepreneur and digital creator. Alongside me is my amazing husband, George, the CEO who's always ready for a new challenge. We've been navigating marriage and running startups for over a decade, and we're here to share the real, unfiltered journey with you. Join us for insights and candid conversations about integrating love, family, and entrepreneurship. This is Married to the Startup, where every day is a new adventure.

George McKenzie (01:30.882)

Welcome back to episode number 52 of Married to the Startup. I am your host, Alicia McKenzie.

And I am the other person here. I wouldn't really say I'm a co-host, because I don't know if I host anything. I'm just a commentator. Yeah. I'm like a special guest that never leaves.

No, I think you just talk.

George McKenzie (01:50.542)

Never leaves. Never leaves. Okay, today we are talking about the company that sold for half a billion dollars and the founders got nothing. They walked away with nothing.

Exactly.

Alicia McKenzie (02:09.622)

Yeah. Yeah. So I think it's kind of a interesting topic and it's also a change for the pod really coming in more of dissecting almost like an MBA, like a business case around a founder issue. Yeah. So that's going to be interesting.

Yeah, because...

I think that's it's something that we've heard a lot and we've talked to people about it and You get so fixated on the number like that. They sold for how much half a billion? So a company sold for half a billion and everyone's like wow, the founder must have gotten paid Yeah, everybody's rich everybody made money. my god. It was so much and then without understanding the deal structure and without understanding the flow of funds from a sale Yeah, like that number could be meaningful. Yes, or in this case to the founder

could be nothing.

Absolutely nothing. And this is a company we've all heard of, right? Sports betting is huge. You've got FanDuel, you've got DraftKings, have... What's the... Market... Right? There's so many avenues in which you could bet on the most random shit.

Alicia McKenzie (03:08.546)

What, probably. Yeah, they're all.

Alicia McKenzie (03:18.028)

All because sports betting was legalized not too long ago. Yeah.

So this company, Fandool, we've all heard of it, was founded in 2009. Right? So how long ago was that? 16 years? It feels like it was yesterday. We were together when this company was founded. Right? And so was founded in 2009. And one thing that we've always preached on this podcast is do not give away your equity.

16 years ago?

now, 16 years ago.

Alicia McKenzie (03:49.486)

Yeah, I think that's something we've talked about before. When you start your business, you know, first understanding, is it a lifestyle business or is it something that I'm going to try to sell? Yeah. One day. And not that you have to have that answer upfront, but it makes, helps a lot of the flow down decisions later with regards to the taxable entity that you create, how you structure it, how equity, how do you want to incentivize? Right. And then how you run the business from the P &L perspective.

Absolutely. Is it going to be grassroots where you're going to grind it all out yourself? Are you going to try to raise capital? Are you going to go after loans? Are you going to start applying for grants? Like what is, how are you going to fund this company? And I think having that in mind before you even get started is only going to make you stronger.

Yep. And then if you think that you're going to be, you're going to exit this company at some point, it's built to sell. So like you're going to ingest VC funding or private equity funding or something at some point that understanding liquidity structure and the flow of funds and how the tiered structure of equity goes is paramount. And you need to plan your exit. Like you said, Hey, I need this. I want this number. This is what I want. You got to be doing the math on the flow on that kind of

tiered structure continuously. So you have to know how that works because if not, you could you could very much have the same thing happen here.

For sure. So 2009, a small team based in Scotland, which is also really important, right? Because back then there weren't a lot of protections for the founder.

Alicia McKenzie (05:20.29)

I don't think there are a lot. just think it's more commonplace now.

I think enough people have been screwed over.

that if you're hard pressed to do a deal where a founder is gonna not get super shares, or super voting rights.

Absolutely. So 2009, company was founded in Scotland, very small team, fantasy betting is starting to explode. You've got more and more people coming to the market and now it is a race to grow.

Yeah, and especially with you the US which was not legalized betting when that When they thought hey the pathway to legalized betting in the United States is coming so now the marketplace is going to be ginormous because now you have access to all the US market for gamblers where before it was all just European

George McKenzie (06:07.446)

Absolutely. So the US growth is insane. And then 2018 comes and it is all legalized. Right. So prior to this, because of the popularity that betting was starting to go through.

And Europe and other countries have had betting as part of their culture for a lot longer. For sure. Betting on soccer matches and everything. Yeah.

Yeah, it was more commonplace. Yes. Right. So you see that you have competitors. And we were talking about this earlier. I can't imagine what the ad spend for a company like this is.

Yeah, I mean it's that that's the only way to reach your audience. Yeah, it's for you got to do ads and you gotta

And you see them all over the place, right? Like you see them on TV, it's on social media, you see it on TikTok, like it is everywhere. FanDuel, SportsKings, Go Make Your Bats, Parlay, all this like...

Alicia McKenzie (06:59.064)

So now you're competing for ad spend with these guys and it's a cash burn business until you really open up that US market.

So basically they decided to ingest 400 and let's just call it $450 million in capital. Yeah. Right. And it was a slow raise. So they did a first round.

So a lot of series, A, series B, series C, series D, and you see that a lot. It's more commonplace than not now. That's where you have a lot of funding.

Yeah, so you did the funding rounds, but the further you go into the rounds, the more protections that the investor had.

Yes, because if you think about it, like an angel investor, an angel investor is basically, like they say, you're going to either get, it's almost like a loan or it's an exchange for equity, but it's a very, very founder friendly term. And then your series A is still somewhat founder friendly, right? Or pre-seed and there's so many fucking rounds now, but it still fairly founder friendly.

George McKenzie (07:42.08)

Coming in

George McKenzie (08:05.25)

For sure. And then the further down the line you go.

It becomes more because it's more risky, right? So if I'm investing later stage, you know, there's not there's not as much runway for exponential growth of the return of my capital. So I want to be more, you know, there's less risk. Yeah. So there's less upside. So I want less risk.

want to get paid back.

George McKenzie (08:25.358)

Absolutely. So as they proceeded to raise capital, the investors got preferred shares, they got liquidation preference, they got more controls shifting from the board or shifting from the founders to them.

Right. I imagine the founders got diluted each and every one of these rounds. Yeah. The founders may still have preferred chairs or may be reclassified into common chairs because the later rounds are going to get preferential treatment. They are further up the cap table.

Absolutely. And this was 10 to 15 years ago. Yeah. And I'm sure, sure, there wasn't a lot of use cases to go by. Right. So, well, I mean, you didn't realize you were being screwed.

More preferred chair.

Alicia McKenzie (09:09.4)

Well, that and you didn't realize you being screwed and you needed the capital. For sure. The worst time to raise money is when you need it.

Absolutely. So, Fandual is sitting on a gold mine. They try to invest a bunch of capital. They do invest a bunch of capital. And then in comes a merger. So, Patty Powers steps in and the merger values Fandual's stake at $465 million. So, the founder...

They had taken in 450 million of capital. So it's a lot.

Yes. 465 million is not enough to clear the investor stack. Right. Which means that

Somebody's going home with nothing.

George McKenzie (09:52.066)

Yes, yes, which is really sad. You did all of this work.

Yeah, I mean that's just the way it goes sometimes. And I don't know much about the Fandals owners and how they ran the business. A friend of mine, a mentor of mine once said, when you're sitting around the table with the money guys, if you sit around that table, you just gotta know somebody's getting fucked. And if you're not the one that's doing the fucking, that means you're the one that's getting fucked. So know the deal, know what's happening.

And like we talked about before, it's an emotional time for a founder. Either you need the capital because you believe in the product or the platform or whatever, you believe in your business so much you need the outside capital to realize the vision that you have for your company. You're so emotionally tied to it. Or it's a liquidity event for you and you're taking cash off the table, which again is still an emotional event for you. You're wanting to get that capital, you want that cash.

What I don't understand is how they made it this far down the line, not realizing that they were getting nothing.

Business side, they are not emotional at all.

Alicia McKenzie (11:03.714)

Well, because they're not doing the exit math in their head, right? I don't know, a lot of people, well, you don't do it correctly. You don't understand the tiered structure and how things work.

Who stopped doing the exit math?

George McKenzie (11:17.164)

Maybe you just didn't understand how diluted your cap table was or.

There are things in there that the layman probably just doesn't understand or you glaze over and you're afraid to ask questions or you don't have a mentor or someone to tell you what's happening. So let's say in the classic, I'll say from a private equity perspective, because it's very simple. You're taking on debt or you're having a liquidity event. say we'll just do a simple, buy, they're gonna invest $50 million in your company, right? And you're gonna take some portion of that.

off the table or maybe all of that off the table and you do some rollover, let's say you roll over some cash. And then as part of that, when they set up the operating agreement, they're going to get a preferred rate of return. What does that mean? So that says, OK, I invested 50 million dollars and I have 80 percent of the cap table, 80 percent of the shares. I'm going to have all preferred shares. preferred shares are going to earn 10 percent.

Yeah.

Alicia McKenzie (12:17.774)

return a return rate per annum compound. So now the first year, even though I'm not taking the cash out, the company owes me as the investor, $5 million. Yes. Next year, the company owes me six and a half, six point two, $5 million. The following year, it owes me seven million and it goes on and on. So let's say after five years, that preferred rate of return on that 50 million is 23 million. Right.

So that's the first preference post-debt off the flow of funds. So let's say you sell for $150 million. You sold the company the first time for $50 million, you rolled over, and now you just sold for $150 million. my God, I'm gonna make so much money. I tripled or quadrupled my, or whatever. I made a ton on my rollover shares. But at the same time, if you don't do the math, you're like, okay, that sounds great.

but the company had $50 million of debt service. So the first thing a lot of PEs do is they invest the money and then they get a line of credit or they take a loan out on the business and get cash. So let's say there's $50 million of debt on the company. So that 50 million is paid first, 50 million gone. So now the 150 million is 100 million. And then the 23 million for their preferred shares comes out. So they get their $23 million now. So now it's down to what?

70s.

$77 million, $76.5 or something. And then they have their preferred rate. let's say they invest at $50 million, we'll say they're honest and they say, hey, my preferred rate on the share is the same as my rollover. So they're going to get their $50 million back. So they got their $50 million off the table. So that's $76 becomes $26. And then the $26 then gets split to the rest of the cap table.

Alicia McKenzie (14:11.054)

Right. So 150 million is whittled away and the PE guys, they are whole before anybody else gets Debt gets paid first. Then all the preferred shares get whole. That's what saying. So they get whole, but not only do they get whole from what they invested, but they also get that preferred return. Right. So they're going to get an 8 % return on their capital compounded.

So what are you left with?

George McKenzie (14:33.528)

but what do they have that you don't?

The money. But that's what I'm saying. So do that math in your head. You have to have that waterfall math going all the time and understanding it. I do math constantly. I do this a lot. it's, so it's hard that rollover. mean, the second bite of the apple always sounds appealing. And it works for a lot of people. So I'm not going to poo poo the whole thing. It works for a lot of people. But there's probably a larger percentage in which you get nothing.

So how do you sleep at night?

George McKenzie (15:03.734)

Absolutely, right? Which is why I think it's really important to highlight that for every amazing egg day, you've got a fan duel.

Right, and there's probably a lot more fandools than there are other things. And I bet you're fandools doing pretty well right now.

Yeah.

George McKenzie (15:19.98)

Yeah, for sure. But I mean, these guys are still in litigation. Right. So they took this. They filed a lawsuit. Right. So the founders sued the board saying that the deal undervalued FanDuel.

Yeah, because I probably...

Alicia McKenzie (15:36.278)

Yeah, so saying that they took this deal at 465 million, which basically made all of the PE guys whole. And no one else got anything. And I imagine the PE guys got to participate in the new company in some fashion.

For sure. And they're saying that the board structured the merger to benefit themselves, obviously. course. Of course. Of course they don't have your good interest at heart. Really? Really? I think there's a little bit of naivety there. But the case is still in... It's still being tried in New York as of 2024. So, they're still in litigation. The founders still got nothing.

crazy.

Alicia McKenzie (16:17.44)

So what are the takeaways?

The biggest takeaway is that they should have slowed the capital raise, right?

If they could have. That's the question is could they have or were they in a race?

They should. They were in a race, of course. You're always in a race with somebody though, right? Just because your competitor sets themselves on fire doesn't mean you have to.

So they could have slowed down the capital raise and also understanding the terms and, you know, making sure that when you go in there, you're protecting yourself in every round. you know, by the sounds of it, that they got diluted out and they probably lost their voting shares. And then they had no control over what was happening and the deal, they could sell the company like they did.

Alicia McKenzie (17:06.197)

with a board vote without ever consulting them. So they could structure the deal in a way that would only benefit the

And I think that was one of your main questions. Like, did this go to a vote? It did, but they did not need the founders' votes to move forward with the acquisition.

Right. So they probably lost their board seats. Yeah. And yeah, so that's, yeah, those are some of the things that have changed a lot in venture capital and stuff where like these super shares become has become more norm. Yeah. So the founders get super shares. So they have a disproportionate vote to the amount of shares they own. Yeah. So that they still can continue to manage the company and have, you know, rights in the company, even though they may have a smaller.

percentage on the cap tape.

But think the biggest takeaway is that your equity on day one might not be worth anything, right?

Alicia McKenzie (17:58.21)

Well, no, think, yeah. Paper bait. might not look, seem like it's anything.

Absolutely. As a founder, if you are a new business owner, you're like, I have all this equity. My company is not worth anything, but I need to bring on somebody to help me run it. So I'm going to give them 50 % equity. Yep. Big mistake. And we see it happens so often.

Yeah, something we-

Alicia McKenzie (18:19.062)

Yeah, yeah, it'd be, it's much easier. You can't, once you give equity away, you can't take it back. looking at like some people like to the point you just made that oftentimes people are strapped, cash strapped, and then also time strapped. So you are willing to give away equity for something you should be paying somebody for. Right. Equity should be reserved for people that are driving the business. They're creating value to the business. they're,

Increasing the enterprise value. They're not the finance person. They're not, know, this guy is a great operator. That's the those things aren't bringing.

It to help you run accounts. It is somebody who has connections and value and can produce things that you cannot.

Exactly, something that's worth a percentage of your company versus worth a paycheck.

Ugh, I see it. And I actually, like, I have a friend of mine going through this right now.

Alicia McKenzie (19:15.182)

All the time. Yeah. It's all everybody's on the same page and it's kumbaya until it becomes real money.

That's the biggest misconception is that your business will never have any problems, right? You have a partnership. We're great friends. We get along so well until you don't.

Yeah, I think we've interviewed several people that have had that happen, Where everything's, you're the best of friends and then you start a business and everything's great until one time it's not.

Right? What is the saying? There's more paperwork between you and your business partner than there are you and your spouse. Right?

Yeah, for sure. Yeah, it's interesting how that works. But yeah, that's a common misconception is people think, oh, I can just give these phantom shares of this equity away and trade it for giving them a lower salary or having them really work hard. And at the end of the day, you're like, you're right. It's worth something. And you just don't know it yet. You don't value it. And if you're not valuing the equity, how do you expect anybody else to?

George McKenzie (20:16.216)

Yeah. So was it avoidable? Absolutely, this was avoidable.

Yeah. And yeah, the only caveat would be like, if you were truly in a, you know, the company was burning so much money that it could not continue without an injection of capital. And then at that point, you know, I think you have to square your jaw to the fact that, know, maybe I've not run this company well, and maybe there's not going to be a pot of gold at the end of the room.

Absolutely.

George McKenzie (20:45.078)

And that was the counter suit that the board is making towards the founder of Fandals, right? That this company was mismanaged, that the guys really weren't quite sure what they were doing. And this is the argument they're using to fight litigation.

And I think that argument holds water because I mean, there's some, you could see it from an investor perspective. If you were the investor and you invested $450 million in this company and the company was being run poorly and there was an opportunity for you to get your $450 million back, you'd take it. And the founder gets nothing? well, the founder doesn't deserve anything. Where you lose me is when it is a merger and they get to participate.

in the merger, the new entity. they continue to get upside where the founders.

Now do we know if that's actually the case?

Well, it's they said. Yeah. Well, they get they structured the deal in a way that would. Yeah. Yeah. So so they were getting a hole and then also being able to participate in the new. Yes. Fandle. So, you know, that is just I took a low ball deal to zero out the debt. Mm hmm. And that way I could collapse the company. But then I'm still in the company and participating in the upside. I just got these guys out.

George McKenzie (21:48.108)

Absolutely.

George McKenzie (22:02.424)

wonder what the current valuation of Fandool is. know, like I'm actually curious. Look it up. Play your phone, look it up. But one thing that I wanted to do was explain the liquidation stack like we're talking to our kids. And I was like, I was looking up a couple of examples, like how would you explain a liquidation stack to an eight year old? And the easiest explanation that I was able to find was

Yeah, it's probably pretty hard.

Alicia McKenzie (22:08.814)

Alright, keep talking.

George McKenzie (22:30.75)

Imagine that you and your friends are baking a cake. You baked it, your friend bought the sugar, your other friend bought the sprinkles, and your neighbor gave you the oven and the electricity to bake the cake. So once the cake is done, everybody wants a slice. Yeah. The person, your neighbor, who lent you the electricity and the oven gets three slices right away.

They say, want the first three slices because I gave you everything you needed to bake the cake. There would be no cake without me. go ahead.

Go ahead, sorry. They'll say Fandle doesn't have a market cap that's publicly available because it's a privately held company. So we can't tell that, take a guess at what DraftKings market cap is as of today.

OOF! 1.4 billion.

How about 14.7 billion?

George McKenzie (23:26.402)

Holy shit. That is crazy. Yeah. And that's FanDuel's biggest competitor, Strafkings. Jeez.

Yeah.

Alicia McKenzie (23:39.79)

You can tell that it's a lucrative space.

shocker, betting is literally what do they say when you walk into a casino, if you're here to make money, get an application, right? Like nobody's making money on Vandal.

It is very lucrative. Yeah.

Alicia McKenzie (23:56.512)

Except Las Vegas wasn't built by winners.

Okay, okay. Back to my cake though. Okay. Right. So the neighbor gets the first three slices because she gave you the electricity and the oven. Right. The issue came about with FanDuel because after the first three slices there was nothing left for anybody else.

Exactly. Those three slices were a third, a third, a third. Yeah. Yeah. And it's the same, mean, almost all private equity deals and all these have this kind of structure. Yeah. With preferred return and, you know, preferred rate of returns. And so the deal is structured such that the money guys are going to get theirs. They're going to get their money back. Yep. And they're going to get a preferred rate of return. Yes. So even if the company sells...

is doing poorly when it exits, it doesn't matter. They'll still make their money.

Yeah, and in this case, the investors were owed 550 million. Yeah. company was... No, 559 million.

Alicia McKenzie (24:52.76)

Sold for $450 million.

That was the debt? they only sold for $4.60? Yep. So they lost money. Yeah.

So there was no cake. Love for anybody else.

Yeah, so the question was was that a lifeline like they had to sell they couldn't keep going Maybe so maybe and that was the right move. Maybe there was no pot at the end gold at the end of the rainbow

I bet you it was.

George McKenzie (25:15.69)

or maybe they just didn't know any better.

Yeah. But I think it's something, lesson to learn about understanding how proceeds are going to get distributed and understanding where on the stack you fall and the difference between preferred shares and common shares and what writes and drag along writes those preferred shares.

Yeah. I also think it's the kind of company though too, right? Marketing is so expensive.

Marketing and sales in general, think that's-

And I feel, maybe it's the publisher in me speaking right now. The author in you? The author, the author in me speaking. Publishers make their money. Marketers make their money. Jesus Christ. Yeah. What? It is, it's so much money for marketing and public relations and PR and all this and...

Alicia McKenzie (25:51.478)

Yes, because publishers make their money.

Alicia McKenzie (26:07.82)

Yeah, there's a lot of cake left. Cake left? Exactly. you can see why record labels are so lucrative and publicists and all these people and then the stars are making like a penny a download. Right? And that's the reason that all these artists don't like these platforms. Yeah.

There's not a lot of cake left.

George McKenzie (26:32.483)

Who did you mention the other?

I think it was years ago. think I remember it was TLC I think back in the day. Uh-huh. Where they were complaining because they had just gone like triple platinum or whatever and then they were talking about how they are broke. And like for every one of these CDs we sell we get a penny.

So nothing.

Selling a CD for 10 bucks and they get a penny. Yeah

So I few takeaways, don't raise money unless you absolutely have to. Yeah.

Alicia McKenzie (27:00.046)

Don't raise money unless you absolutely you need it and you have a plan for it

But also if you do raise money, make sure that you're modeling your outcome.

Model your outcome for sure and understand and you know, don't be afraid to say no and that's if you're The best advice is never take money when you have to right? So if you if you say hey I want to expand my business or I want to enter this new marketplace and I need capital to do so I want to do a next generation of this and I need a capital to do it like the best capital you can get would be alone. Yeah, can I get a loan for this this because that's a

Someone explained it to me too, I love the analogies, Like getting a loan is like the guy standing on the street talking to you in the house, like, hey, how's it going? How's the business going? Am I gonna get my money back? Like, yeah, great. And then you can take like mezzanine debt, which is like another side of debt, but it's kind of backed by equity. And it's like the guy who's on your porch, sees you in the morning, hey, how's it going? Business going well? We're doing good? All right, everything's great, I'm getting my money, all right.

And he goes, and then you get PE and that's the guy sitting at your fucking dinner table every day. How's business going? How's dinner? Yeah. Am I going to get my money? So, you you think about it in that way. Like, who do you want to interface with every day? So where, if I can get it from debt, I would rather do that. For sure. And if you need it from PE, you just need to know that that's, it's a business relationship, not a personal one. And you've got to structure the deal in a way that protects you. Yep. you know.

George McKenzie (28:14.99)

Yeah

George McKenzie (28:33.046)

It's like, protect the founder.

fight for the rights that you want. And if you can't get the deal that you want, and you still have to take it, then you just got to know going in, you got to do that math of, you know, what does this really mean?

And never, ever give away equity if you don't have to. Because once it's gone...

Mm-hmm. Can't get it back.

can't get it back. All right. This will post after Thanksgiving, right? And just forget. Just forget. Just Just forget. No, don't forget. Don't forget that you probably don't have any Black Friday money or any Cyber Monday money or any talk.

Alicia McKenzie (29:04.226)

Good. Happy Thanksgiving.

Yeah

Alicia McKenzie (29:18.634)

Tuesday money. Invest that money in your business and watch it grow.

All right, we're done.

Peace.

George McKenzie (29:31.352)

Thank you for tuning in to Mary to the Startup. We hope you enjoyed today's episode. If you did, please take a moment to like, rate, and subscribe to our podcast. Your support helps us reach more people and keeps the conversation going. If you have any questions or topics you'd like us to cover, drop me a message. I love hearing from you guys. Until next time.

George out.