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Yahoo Overpays Tumblr's David Karp By Another $81 Million After paying $250 million to Tumblr's founder, Marissa Mayer has decided to waste another $81 million to get him to stick around.

By Peter S. Cohan Edited by Dan Bova

Opinions expressed by Entrepreneur contributors are their own.

AP Photo/Mark Lennihan
David Karp

Here's a Jeopardy question for you: "Why would an entrepreneur want to spend four years as a middle manager at a shrinking dinosaur that just paid him $250 million?"

After acquiring Tumblr this May, CEO Marissa Mayer decided that was not enough to keep Yahoo from "screwing up" the deal. So on August 9, Yahoo offered Tumblr founder, David Karp $81 million more to stay at the company for four years. It's a personnel move that will not pay off in higher Yahoo revenues and profits.

I am not saying that Yahoo's shares will stop rising. Since Mayer took over as CEO, its stock has risen 73 percent. And these spiking shares certainly reflect something other than Yahoo's improved financial performance.

After all, Yahoo revenues have fallen 7 percent under Mayer as has its market share. For example, ComScore reported that in June 2013, its core search market share fell 0.5 percentage points to 11.4 percent -- while Bing gained the same amount and Google controlled nearly 67 percent of the market.

Since Yahoo's shares are unhinged from its financial performance, the only possible explanation for the rise in its shares is something else. Some have speculated that Yahoo's share price rise reflects the growing value of its stake in Alibaba. Perhaps others thought that hedge fund honcho, Dan Loeb, would arrange a sale of the company. But Loeb left Yahoo's board after Yahoo bought back his shares.

Unless Karp and Mayer can defy well-established differences between a big public company and a tiny start-up, this move is likely not to add to Yahoo's financial well-being. What are these differences? In a publicly-traded company, the CEO is responsible for key decisions -- the same as in a start-up. But this move pays Karp as if he was Yahoo's CEO and he's not.

Essentially, Yahoo is paying $81 million for a middle manager with diminished power who has built a business with no revenue and lacks the experience necessary to work in a big company.

Before Yahoo acquired Tumblr, it had no revenues and was burning through cash at a rapid clip.

But running Tumblr as part of Yahoo is very different than as an independent company. Already Yahoo's acquisition has caused many of Tumblr's users to flee because they do not want to be associated with the stodgy parent company. Nor would companies want to run ads next to much of its dodgy content.

Karp will lack the control that he had while running Tumblr on his own. If he wants to hire people, he will need to persuade Mayer that spending on his business is a better use of corporate resources than on other Yahoo businesses that generate actual revenues and profits.

How will Mayer be able to justify such spending to Yahoo's board? And what happens if Karp and Mayer have different objectives for Tumblr? For example, what if Karp wants to give away the service and not advertise so it can increase the number of users while Mayer wants to focus on selling as many advertisements as possible to Tumblr users?

If Karp gets to do what he wants, Tumblr will continue to be a cash sink for Yahoo. If Mayer wins that battle, Karp will surely be demotivated. Moreover, the advertisements that Yahoo decides to push onto Tumblr's users may drive away even more of them.

Finally, there is the basic problem of Karp's motivation. In most deals in which big companies acquire start-ups, it is understood that the entrepreneur will leave after a transition period to go on and work on another venture. That is probably what he wanted to do after he got his $250 million in May.

So the answer to this Jeopardy question: $81 million.

Peter S. Cohan

President of Peter S. Cohan & Associates

Peter Cohan is president of Peter S. Cohan & Associates, a management consulting and venture capital firm. He is the author of Hungry Start-up Strategy (Berrett-Koehler, 2012) and a full-time visiting lecturer in strategy at Babson College in Wellesley, Mass.

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