- Courtesy of Zillow
- Spencer Rascoff is the CEO of the real-estate website Zillow and the cofounder of the travel website Hotwire. In 2003, Expedia bought Hotwire for nearly $700 million, all cash. But the sale came right after a down round of financing, which wiped out a lot of employees’ equity.
In 2003, Expedia bought the travel website Hotwire for nearly $700 million, all cash.
And while at the time this was a huge deal, it was somewhat disappointing for Hotwire’s founders.
On an episode of Business Insider’s podcast, “Success! How I Did It,” Spencer Rascoff, a Hotwire founder who’s now the CEO of Zillow, shared the story with Business Insider’s US editor-in-chief, Alyson Shontell.
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It started with 9/11. For one thing, Hotwire learned it had inadvertently sold some tickets to the hijackers for flights in the days before the attacks. And for several months afterward, fewer people wanted to travel.
As a result, Hotwire struggled and went through what Rascoff called “significant layoffs.” Then it did a down round – a round of financing that values the company at less than the previous round – and Rascoff said it “wiped out a lot of the equity that the employees had in the company.”
So by the time Hotwire sold to Expedia in 2003, when Rascoff was in his late 20s, it was hardly the grand exit it might sound like. Rascoff told Shontell:
“This is a good lesson for founders: A down round basically wipes out most of the employee equity because employees typically have common [stock] and investors typically have preferred [stock]. So a $700 million sale sounds really great, but it’s mostly the venture capitalists who made the money, not the employees.”
As Business Insider previously reported, when a company is purchased, common-stock holders get paid with the money left over from paying the preferred-stock holders. Sometimes, depending on how a fundraising deal is structured, preferred-stock holders get promised so much – particularly if a deal is riskier – that common-stock holders are left with barely anything.
“You don’t have to feel sorry for anyone at Hotwire – they all did fine, and they’re doing fine,” Rascoff said. “But it wasn’t the type of exit that I think people expected.”
He added: “Read the fine print – or it usually doesn’t get printed as fine print – but usually, stories like that have a little layer of complexity to them.”