Great post by Mark Suster on when, if and how startup founders should be allowed to take money off the table before their starup has reached a real exit. Mark’s basic thesis is that it is sometimes a great idea for startup founders to sell some of their equity to their investors. He discusses his own experiences and suggests how he would have managed his own companies differently and/or not sold them when he did. His post is well reasoned and is worth reading. He does suggest a few scenarios where this makes sense and should be allowed, including the founder having been with the company for a certain number of years, limiting the $ amount to something reasonable, etc.
What I’ve seen is that early-stage VCs with big funds are not against buying common stock from founders, when the startup is doing well. As I’ve mentioned in my startup valuation post, VCs are always thinking in terms of their percentage ownership. When the company is doing great and VCs with deep pockets are already investors and want to increase their ownership, so if that means potentially buying stock from founders you may be in luck.
One of the other funds I worked for, Summit Partners, made a living off of buying stock from founders. It worked pretty well, since Summit liked investing in companies that were profitable and growing – and hence didn’t really need traditional venture capital to grow the business. Founder liquidity was the general excuse Summit used to get into some great companies.
I’m not at all against the idea of founders taking some money off of the table, provided the company is doing well and provided they continue to own enough of the company to continue to care about its success and work hard to keep it growing. I do think this would be a real advantage of selecting a larger sized fund as your initial venture capital investor. Smaller investors may not have the additional cash reserves available to both fund some liquidity and also continue to have enough in reserve to fund the company’s growth.
September 9th, 2009 at 3:39 pm
Well, I'm all for it within reasonable amounts… but I'm sort of biased…
September 9th, 2009 at 3:38 pm
[...] This post was mentioned on Twitter by HealyHoops. HealyHoops said: My reaction to @msuster post http://bit.ly/22R5n on founders taking $ off table pre-exit: http://bit.ly/ojTxA [...]
September 15th, 2009 at 10:51 am
Very interesting post, thanks lots.
September 16th, 2009 at 6:47 am
[...] I believe that Facebook has raised over $700 million in venture capital. Impressive. I doubt that more than a handful of companies, ever, have raised that much private capital. I don’t know how much of that has been used in the quest to become cashflow positive, but I assume it is a decent amount. Although, to be fair, a meaning amount of that capital might have gone to providing liquidity to the management team. [...]
March 5th, 2010 at 10:22 pm
[...] in Startups as of September 8, 2009 September 08, 2009 | John Lessnau | Comments 0 Taking money off the table before an exit – startable.com 09/08/2009 Great post by Mark Suster on when, if and how startup founders [...]