Brad Keywell_and_Eric LefkofskyThe first thing we noticed when Groupon filed to go public was the simply astounding amount of insider selling going on. 

This raises obvious questions for dullards like us who pay attention to things like corporate governance and behavioral economics: asymmetrical information and agency problems. 

Yipit's Vin Vacanti, perhaps one of the top experts on the daily deal space, wrote a great post saying many criticisms of Groupon are unfounded. The defense is worth reading in full, but the least convincing one is about the insider selling.


Of course Groupon insiders have cashed out a portion of their shares (approximately 20%). No matter how confident they are in the business, it would be financial irresponsible for them not to cash out a portion of their shares given the multi-billion dollar valuation they were being offered as part of earlier rounds. The vast majority of their wealth is still completely tied-up in the success of Groupon.

Sorry, but the specifics of the insider selling going on make this moot.

Here's why:

  • The sheer amount. The founders took $870 million off the table. It's not just the absolute amounts but the relative amounts. In Groupon's penultimate round with DST, $120 million of the $130 million went straight to the founders' pockets, i.e. more than 90%. One explanation for the cash-outs is that with a $4 billion acquisition offer from Google, it made sense for the founders to get some liquidity as a counterpart for turning down the acquisition, but the DST deal came before Google's offer.

  • Groupon co-founders Eric Lefkofsky and Brad Keywell are already rich. The other rationale for founder cash-outs is to "solve the money problem," as Groupon CEO Andrew Mason himself put it. If you're a scrappy founder with few liquid assets, the immediate liquidity of an acquisition can be so tempting even though it wouldn't be the best thing for the business. In that case, cashing-out a cash-poor founder so they can upgrade their lifestyle and focus on the long term of a business makes complete sense. In fact that's what former music student Mason did, cashing out $27 million, which is enough to "solve the money problem" but not enough for a yacht. Groupon's other two founders, Lefkofsky and Keywell, don't have a money problem. They previously took a company public together, Echo Logistics. Lefkofsky had another IPO before that. They have a private equity firm together. In no acceptable sense of the term do they "need" money. If Groupon went "poof" tomorrow and they had taken no money off the table, they'd still be very rich. And yet they're the ones who cashed out the most.

  • Groupon isn't just losing money, it needs the money. The selling is worrisome not just because Groupon is losing money, but because it desperately needs the money. It is in a high-stakes, global race for scale with literally hundreds of competitors, many of them very well funded. Its long-term success depends on acquiring as many subscribers as possible (expensive and getting more so because of competition) and on putting as many salespeople on the ground as possible. Groupon is ahead so far but LivingSocial is surging. Was there nothing else Groupon could do with $870 million?

  • They didn't just take investor money, they took company money. It's one thing to take money from outside buyers in exchange from shares. But the founders also took money out of the company itself. They paid themselves through dividends on preferred stock and stock buybacks from the company. Again, this is money the company needs. 

Here's why it's a problem. Groupon has around $250 million of cash in the bank right now, after raising "like a billion dollars". It also lost $150 million last quarter, and it's probably going to lose a lot more this quarter because of its huge revenue growth. It needs to go public right now to raise the money to stay in business.

And the public markets love tech companies right now so it's all good. But what if LinkedIn's IPO had been a dud and the public markets would have been shut down for tech companies for another six months to a year? What if, God forbid, there's a huge natural disaster or terrorist attack that shuts down the IPO window (not to mention wrecks the economy)? What if Amazon buys LivingSocial or Google gets serious about its Offers business and starts spending $500 million per quarter on customer acquisition? What if Groupon wanted to do a big acquisition of someone who won't take stock (Foursquare, let's say)?

Right now everything is up and to the right for Groupon, but it has very little margin for error and fewer options. And that's because $870 million of the billion-plus it raised is now in the founders' pockets instead of the company's pockets. 

No matter how you slice it, it seems irresponsible, and it's certainly a terrible signal for prospective public market investors. 

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