Should Founders Be Allowed to Take Money off the Table?

Posted on Sep 2, 2009 | 142 comments


Jeans Pockets OutThis is part of my ongoing series “Start Up Advice” but I’d really like to call this post, “VC Advice.”

If a company has reached a level of success, has been around for a few years and you believe the company has potential to break out into a much bigger company then you should let the founders take money off of the table.  It’s that simple.  Only then are you truly aligned.

Not FU money, but “feed the family” money.  And to be clear – I believe it is also in the VC’s interests.  I’m not trying to open Pandora’s Box and suggest all founders should be able to cash out – far from it.  But the handful who are building something of substance need to be able to take the pressure off in a way that creates a similar objective to the VC.

I think too many VCs simply don’t understand this.   When you’re too far removed from renting a house, driving an 8-year-old car, worrying about how you’ll put your kids through college or coming home to a spouse who wants to know why you don’t just get a “real job” then it’s hard to identify.

I know this is a controversial topic.  No matter what I say some people are going to believe passionately on the other side of the argument.  On a panel that I sat on with a prominent VC in 2008 he stated that there were no circumstances in which the founder should take money off of the table.  I believe this is wrong.

Let me start with a couple of stories.

A friend of mine is a serial entrepreneur and is running a high-profile, early stage company in NorCal.  He’s been at it since 2005.  We trade emails on the topic of entrepreneurship often.  We exchanged ideas when I was an entrepreneur along side him in NorCal in 05-07 and my point-of-view on founder / VC relationships hasn’t shifted even 1% since I went to the dark side.

We were trading emails on a recent rant posted on The Funded about founders’ equity and here is what my friend wrote to me in our exchange (printed anonymously with his permission):

Actually FWIW I think at least in cases of folks like me (and this seems also to be part of what Founders’ Fund tries to do), many of the challenges of working with my VCs would be eliminated if the investors would support partially liquidity for founders after X years. The VCs basically have liquidity in management fees along the way, in the sense they get paid decently along the way. Founders however are asked to take low salaries and never really get back the time they worked for free. At some point, this breaks if their isn’t an exit or IPO. I think it breaks for most people after 3-4 years.

The net effect for [my company] for example is we are now doing reasonably well. We should end the year with a few million in fully recurring revenue and we’re projected to double next year. We could do more in 2010 with more VC investment; the doubling assumes only ratable increase in marketing spend to achieve profitability. But more spend = more viral opps = more revenue down the road. >50% of our revenue in now viral.

However, without any liquidity at all for my cofounder and me, it makes more sense to grow more slowly and be profitable next year and stay there.

My investors don’t seem to understand this, yet it will materially impact their ROI IMHO b/c the absolute return to them will be lower …

The are in a delusional world where every founder just works for a pat on the back, forever. For a while but not forever.

I agree 100% with my friend.  I couldn’t have said it any better.  VC’s who don’t get this are naive.  I’m not being Pollyana-ish for the sake of being nice.  I know that eventually if your company is out of cash and you need the money you’ll take it even on punishing terms.  It’s your baby.  It’s what makes you a missionary CEO rather than a mercenary CEO.  But the day after you’ll wake up and see yourself more as a manager than an owner.  It happens slowly and subtly.  You start leaving the office earlier.  You work less weekends.  You stop catching the early flight.  You lose the dream.  And importantly you start thinking about your next gig.  That’s when the VC has lost.

I know because I’ve been there.  In my first company I had to raise money in April 2001 or die.  I took money with a 3x participating preferred liquidation preference with 8% compounded interest annually.  Coupled with my participating preferred from 1999 and 2000 I had more than $55 million of liquidation preferences.  Ironically our business started to perform very will by 2004 but by then management had lost the dream of a huge upside.  We managed the business because we felt responsible since we raised money.  But there’s no doubt we took the edge off.

Fast forward to my second company.  I founded it in 2005 at the age of 37.  I had just moved back to the US from living in Europe for 11 years.  We had never purchased a house in Europe because we always knew we’d move home at some point.  When we moved to Palo Alto we rented a place.   I raised $500k in seed money to start the company.  The very modest salary that I drew didn’t come anywhere near meeting my monthly costs so I had to eat into savings.  I had a 2.5 year old boy and another one due in 1 months.

koralThe company did well in 2006 as we delivered a phenomenal product that got much industry acclaim at conferences and with initial customers.  Many term sheets ensued.  By then I was still on the board of my first company but it hadn’t yet sold (it ended up selling in 2007 to a publicly traded French company).  So by this point I hadn’t had an exit.  I had some diversity – 2 companies – but not nearly the diversity of a VC.

So here’s my question, along the lines of my friend’s comments above.  How on Earth would any VC think that our incentives were aligned?  They had their nice salaries and I was approaching 40 and still living on a modest salary with good savings over many years but no big exit yet.  It was all on the promise of a potential exit down the road and sometimes you don’t end up with that even with the best of execution or intentions.  They vacationed at 5-star resorts; I saved up my frequent traveler points and traveled free.

And then the offer came in to buy my company.  I had that against the backdrop of several term sheets.  The offer wasn’t FU money but it was enough to change my life forever.  This made me think hard about the relationship between VCs and entrepreneurs.  VC’s have diversification and management fees.  Entrepreneurs have much more immediate upside but often all-or-nothing outcomes.  If a founding team could take enough money off the table to take the pressure off at home or as I sometimes call it “feed the family” money but not take too much money off of the table then incentives would be aligned.

The entrepreneur would be free to “swing for the fences” with the VC’s.  I truly believe it aligns incentives.  But it is clearly not warranted in all cases.  I think the following circumstances warrant consideration, but there is no doubt it is deal specific.

A strawman set of rules (or for my UK friends, “a starter for 10″) ;-)

  1. Founders need to have been in the company for a few years.  Probably a minimum of 3.
  2. Company needs to have achieved some significant early milestones.  Probably revenue based.  I think a few million of revenues is probably a reasonable goal.  Let’s say, $2-3 million minimum – maybe more?
  3. The company has to have the potential for a break-out on the upside down the road.  Otherwise, what incentive exists for the VC  to put in more capital or to have the founders earn money.  It can’t just be a gift.  The VC is hoping that by buying your shares they will be worth more in the future.  You’re hoping to derisk your life.
  4. There has to be a degree of lock-in for the founder to make it quid pro quo – there are easy ways to do this.
  5. It should be enough money to take care of basic needs but not extravagant needs.  Basic needs vary by location and personal circumstances (e.g. married with kids vs. single and 25 years old).  For a typical 28-35 year old founder I think the right number is probably between $500k – $1.5 million.  I’m assuming this in Silicon Valley, LA or similar locations. But money off of the table is comensurate with the stage of business.
  6. Founders have to also be the KEY employees going forward.  Only people who are delivering value going forward can take money off the table.  It’s not charity – it’s an incentive alignment.
  7. Obviously for super successful companies (Facebook, Zynga, etc.) these rules don’t apply.  No one could fault Mark Zuckerberg if he wanted $20 million.  He’s earned it.
  8. If the founder has earned a few million in the past the rules don’t apply.  The rationale is to align incentives.  If you took out $3 million in your last deal I’m assuming our incentives are already aligned.  Another $1 million isn’t going to fundamentally change your life.  You’re probably wanting $10 million plus on the next deal.
  9. You get a carve-out for rule 7 if you’re recently divorced and your spouse is devouring your money.  Joking aside – I’ve seen this twice already.

I don’t know – I think these are directionally correct.  I’d love people to weigh in on the comments with where you think I got it wrong or what points I should add.

Post script: The VC’s rationale in our debate was:

  • “all money in a start-up should remain in the company.”  Only if it’s truly early stage would I agree.
  • “it’s not fair to the rest of the employees who don’t get to take money out.”  Two answers from me.  In most start-up companies a handful of people really determine the majority of the outcome of the company.  I’m not saying others aren’t important but a few really drive the economic value.  So I think it’s OK for the “key players” to monetize.  But if that’s not egalitarian enough for you then you can always have everybody take a proportional amount off of the table.

  • David Smuts

    Hi Mark

    It’s obvious that you’re taking this position given the fact that you’ve been on the other side of the table. You know only too well what it’s like as an Entreprenuer building up a business and the sacrifices he makes; both personally and financially. Not enough VCs have this insight regrettably.

    In my view I think the fundamental is actually in getting the Founders comp package right from the onset. This can alleviate the need in future for an equity release to ease personal burdens. They need a realistic starting salary which is not just “avoid-starvation” money. Alongside this they should have performance bonuses which are only awarded upon milestones being achieved. These can of course be revenue based, customer based etc.., These bonuses should consist of an appropriatley set cash lump sum alongside with a small release of equity allowance, which the Founder could excersize if he so chose to.

    This is how I would approach this:

    1) Identify a Market rate salary for your Founder(s)

    2) Add 15-20% on top because you want “above-market rate” Founder Employees for an “above -market” company. This is the OT (on target) salary

    3) Stage the salary so that initially they are earning, say 50% of OT salary, and then set agreed milestones that as they are achieved gradually increase this to 100% OT salary. (OT Salary is reviewed every 6 moths)

    4) Assign cash lump sum bonus payments for milestones achieved

    5) Alongside the cash bonus have an equity release option, example for each milestone achieved the Founder has an equity release option for up to x% of his holding. The valuation of each share can either be a set amount or an agreed upon form of independent valuation. He can excersize this at his option (provided of course the milestones are achieved).

    Understanding that the Founder is achieveing the milestones set, then the value of the company shall also likely be rising. This permits and affords the bonus payments and the equity release is small enough not to mis-align VC/Founder interests but is still there as an added cash source if the personal circusmtances of the Founder means that he needs to draw upon this. However, if as a result of key milestones being achieved the company value is rising then any sensible Founder will be reluctant to give up any amount of his precious equity at a time when that equity is rising in value.

    I’m sure we can probably come up with a “Model” template on this if you want to have a stab at it?

    all the best

    David

  • http://www.emotionai.com Ian Wilson

    Another perspective is behaviorally. When a founder has to go home to “why dont you get a real job” or “why cant we get a home loan” it puts them under extreme stress on a side of their life that they really dont need. Stress reduces performance, reduces aggressive risk taking behavior, none of which are good for a start up. So stress in your personal life is bad for the company and the investors. I dont think you can “stress” enough how liberating it would be for a founder to be financially stable, allowing them to “swing for the fences”.

    The down side of this is that maybe investors increasingly focus on founders who are 25 and living with their parents or who have previously exited at a good return. Where the words “wife” and “children” become toxic, which would be disappointingly short term thinking as there is nothing like having a family to focus your mind on success at all costs and where failure is absolutely not an option.

  • Mark Suster

    David … maybe. I see your points. But most early-stage businesses (even many 3-4 years in) are either barely profitable or are still investing in growth (e.g. loss making). Look at Twitter. It’s clear to me that they could be profitable over night if investors wanted them to quickly monetize (e.g. put ads up on Twitter.com) but they prefer growth. So let’s assume a mythical business with 3 founders. Most of these businesses couldn’t support the kind of earn-out that most founders would want. Getting an extra $50k or $100k in a year for an entrepreneur in LA, San Fran, NY or London isn’t going to go very far. It’s not practical to give $200k from a business perspective AND if you had the 3 founders that would be $600k.

    The only work around I see is for the founders to sell some of their shares OR to take out a loan from the company with investors kicking in new capital to fund the loan. The first relies on investors (either existing or new) believing the stock is going to be worth more in the future. It relies on the founder realizing that even people holding public stock sometimes sell part of their position to de-risk.

  • Sachin Jade

    As someone who has followed a similar route of being an entrepreneur and now working with the investor community, I try to bring sanity to the insane world of raising capital for new ventures. One of the things I try to put together for the start ups that I advise or invest in is to ensure that they are in it for the long run. I am being selfish in that because I very well know that if the founders start losing their passion, perseverance and patience, then the game is half over.

    If the founders have had exits before, they usually understand that you are in the for the long run. First time entrepreneurs and folks who haven’t had exits to provide them with a healthy bank account definitely need something to take their mind off of the “how do I pay the bills this month?” and accordingly the agreement should be packaged.

  • Mark Suster

    agreed. I think the trick is in finding out how much is enough to take the pressure off from the spouse for late nights and low pay but not so much that it’s unfair to investors. also, I think founders need to remember the quid pro quo bit … cash off table = more lock-in, which is fair. thanks for your input.

  • Sachin Jade

    Absolutely. Its the right mix and trade off and this is where I have seen investors who have been entrepreneurs before making better decisions than pure finance based whiz kids.

  • David Smuts

    Hi Mark, thanks for your reply…,

    In looking at this problem (the problem being Founders who need capital during the build up stage of a business but can’t access it because they’re tied in). I see 2 scenarios here:

    1) Founder needs capital for basic personal/family reasons (living expenses)

    2) Founder wants to spend a bit of well earned cash on some assets that we all from time to time like or “feel” we need to have

    If it’s #1 I don’t see a conflict of interests here and this can either be adequately addressed by;

    a) having them have a comp package that adequatley provides for their personal/family needs (obvioulsy with an incentive to perform and earn more) including an uplift in salary if warranted OR

    b) allowing the Founder to sell on some of his equity back to the investors OR

    c) company loan to the Founder.

    In my personal opinion I think the comp package should be set sufficiently to avoid personal financial difficulties and there should be incentives in place to increase basic pay upon delivery of key milestones (even pre-revenue or pre-profit milestones) but I take your point that a $50-$100k uplift my not be what the Founder is actually looking for.

    If the basic comp is insufficient and the bonuses or incentives are insufficent then how do arrive at an equity formula for selling back (option B)? In my view, again, any release of Founders’ equity should be contingent upon performance metrics being achieved. If it’s an absolute emergency then this can be looked at on an individual case by case basis.

    As for option C) at least in the UK we have restrictions on the amounts companies can loan Directors (I think it’s up to £10K) . Personally, I shriek at the thought of a company making a loan to a Director unless it’s short term and for a very small amount to meet cash flow needs. Going out and securing further investment capital to give to a Director in the form of a loan or a “one off bonus” to me just seems unjustifiable IMHO.

    If we look at scenario 2 where you referenced a what-if with Facebook and Mr Zuckerberger wanting to take out $20M. Again, I think that’s fine subject to milestones having been met and his equity release would be a small % of his holding (well for Mark $20M must be about less than 1% of his holding?). So a Founder who is NOT working for a company as highly valued as Facebook (but is meeting milestones like Mr Zuckerberger) could still have his 1% sell rights but the value of that would probably not be enough for him if he is wanting cash to spend.

    Basically my feeling is a well structured comp package should avoid scenario 1. If it’s scenario 2 then I have a problem in Founders’ selling their equity unless it is a small percentage of their holding and is entirely contingent upon milestones having being achieved, in which case I don’t see a conflict of interest.

    What sort of % of equity release did you have in mind to address this Mark?

    all the best

    David

  • http://www.interphasesystems.com John Biglin

    Like you Mark, I have been on both sides of the table for years. Having experienced the process of launching several startups and then advising/funding others balances your approach to these sort of issues.

    In general, I get nervous when I see an entrepreneur attempting to take money off the table while seeking funding from investors. I totally agree with the “feed the family” concept – which we all should be able to identify with. But, I am more comfortable as an investor/board member when I see the founders investing more than sweat equity into their venture. I have always been a believer that you shouldn’t ask others to risk their money until you have risked some of yours. Real skin in the game helps keep the mind focused.

    That said, I agree with you and others that after x number of years (4-6 IMO) -and- after significant milestones are reached, that owners should be able to take “something” off the table, whether that be in a bonus, base increase or whatever. In fact, I like David’s idea of the OT Salary. If they are looking to really take a large sum out of the company, then that should be done by them giving up more equity. But even that shouldn’t be done prematurely.

    As for the pureplay VC perspective example you mentioned, I agree that no money should be taken out of an emerging startup initially, but after a while the “feed-the family” need will be staring the founder in the face and eventually will consume his or her thoughts almost all day long. That type of distraction is very costly for all involved, especially if it continues year after year.

    Thanks,

    John Biglin

  • Ken Lingad

    Having been in a similar situation – twice – I’m inclined to agree with David. The founder’s comp package must be established with sufficient provision from the get-go to avoid financial stress.

    I am happy to have stumbled upon this post.

    Regards,

    Ken Lingad

  • http://lmframework.com/blog/about David Semeria

    Mark – many thanks for writing that, it cheered me up.

    I believe your post touches on the wider issue of the rather odd state the VC industry has evolved into. Coming as I did from over a decade’s experience of the public (stock) markets, I assumed it would be relatively straightforward to pick-up the basics of VC . Fat chance. I was quite honestly amazed to learn the rules of this new game.

    When, after several months of intense research, I finally posted on The Funded asking how on earth VC’s could get away with the likes of liquidation preferences, founder vesting, lock-up agreements, and countless other perversions, the response was ovwerwhelming: ‘Because they can. Learn to deal with it’.

    Most remarkably, in a sector in which there appears to have been a surfeit of capital for the last decade, capital has managed to carve-out for itself an improbable position of power. Last time I checked, money was money.

    Cutting (alas, very rapidly) to the chase: I own shares in a startup. Somebody would like to buy some of them. Why on earth should I not be allowed to sell? Regardless of the (very valid) arguments regarding the fact that the VC has bet on numerous horses, whilst the entrepreneur only holds one ticket, there is an even more basic premise: it’s my property – and I can sell it if I want.

    My favourite investor, Peter Lynch, used to look at insider trading forms for listed companies. He only ever paid attention to the insider *buyers*, reasoning that there a million reasons to sell (new house, new car, college fees, and, YES!, even a little bit of risk management). In other words, if a founder wants to take a little profit, it doesn’t mean he’s lost faith.

    I could go on for pages, but I’ll limit myself to this: for an industry that looks for disruption, VC is , itself, ripe for disruption. The word ‘equity’ derives from the Latin ‘equitas’, which means ‘fair’.

    I feel a bit guilty about dumping all this here, Mark. You may have crossed to the Dark Side, but I don’t think you’ve been seduced by it.

  • http://aproductguy.wordpress.com Mike

    Nice new site design!

    Totally agree. Another argument I’ve heard is that allowing founders to take money off the table means they’ll lose motivation/go soft etc. If that’s the case then the VC has likely backed the wrong entrepreneur. Most good VCs I meet seem pretty rich and still somehow manage to find the inner strength to make it into work each day. Guys like the twitter founders who have already had nice exits still seem to be working pretty hard and building valuable businesses….

    I recall reading a quote from Zuckerberg about FB allowing all employees to sell some stock now and thought it was great perspective. At some point along the way, his investors let him take some money off the table, and he really felt less pressure to go for a quick exit. If it takes 10 more years for him to build FB into a gazillion dollar business, he can afford that sort of timeline without the fear of 10 years of his life going down the tubes without a dime to show for it. And likewise, FB has reached a level of success now that it makes sense for the employees to take a little off the table so they don’t feel tempted to hop over to a different startup and can afford to build for the long haul. I completely agree that this is not just a nice thing for the founder, but it actually aligns founder/VC interests.

    Say you lend me $1000 to go to Vegas cause I’m a killer blackjack player. I get on a roll and at some point I have $5000, and have the opportunity to split and double down on a great hand and walk away with $15000, or loose it all, I’d be pretty nervous and might just take the $5000 and go home kinda happy. BUT, if you let me pocket $100 first so I know I can eat, get a cab to the airport and all that in case the dealer gets a 21, well, then I think the choice is clear and I go for broke.

  • Shane

    This is why it’s good to be a college-aged entrepreneur with practically zero personal expenses ;)

  • Mark Suster

    I think loaning the money is fine if investors support it and are willing to fund the loan. I think selling equity is also fine. Probably no more than 20% of the position. The goal is to take the pressure off so the founder wants to swing for the fences – even if it takes several years. Thanks for the input.

  • Mark Suster

    Thanks, John. Well said.

  • Mark Suster

    Thanks for the comments, David. I do have to say that I think issues on The Funded are too skewed to the disgruntled entrepreneur point-of-view. I was screwed by some VC behavior in the past so I am colored by this experience, BUT I do understand why some of the terms are in the agreement and don’t think that all VC’s are evil. There are many good ones. If I just take one example from your post – founder vesting – you can’t ask a VC for $3 million and have no lock-up. How would that look if a VC invests the money on the basis of you as an individual and then you walk the next day because you’re fully vested. I think of it merely as an insurance policy for the VC. But, that said, there are many terms if VCs that are malevolent and used unfairly.

  • Mark Suster

    The Facebook example personifies my point – thanks for elaborating on it. As for the Blackjack example, don’t think I’ll touch that one ;-)

  • Mark Suster

    Let’s be honest – that’s one of the reasons why VC’s love to back young teams who have no families. It is an enormous challenge to build a company from scratch in this hyper-competitive world. Most VCs partners are 40+ with kids. We know how hard it is and I think most wonder if they could really sustain themselves at the same pace as the 28-year-old entrepreneur. It’s tough.

  • David Smuts

    Personally, as a Founder I would love a VC who gave me the option to sell up to 20% of my equity at my choosing. Ironically, as a Social Entreprenuer I really think 20% is too much. If I put myself in the other pair of shoes and I was investing in a Founder the max I think I would be comfortable with in sell rights would be up to 10% of his equity and this would be absolutely conditional upon milestones having been achieved. Otherwise as an Investor I would feel very unnerved.

    I guess my next question would be then: how do you establish a value for the equity being sold back to the Investor? Some considerations are:

    1) Do you have a fixed value for each Founders’ share?

    2) Do you have an agreed upon formula for valuation?

    3) Do you have a mutually agreed “independent” expert who will value the equity?

    If the valuation is based on a fixed price (option 1) from the date of the investment then this provides a disinsentive for the Founder to sell, as the fixed value of his equity would probably be lower than it’s real market value at the time of sale. It also at least gives the Investor a determinable cost with which to budget for and factor in as a potential cost, if in future the Founder exercises his sell rights.

    Otions 2 & 3 can be time consuming and costly but I’m also thinking about the nightmare of the Investor having to set aside a budget for this on the proviso that the Founder MAY sell some of his shares back at a future date and potentially at a future valuation which cannot be predicted today!

    Alternatively I supose you could allow the Founder to sell his equity to a willing buyer at a negotiated price however I see so much danger in this especially if the price the Founder negotiates is lower than the price paid by the Investor! Of course you could make it a condition that the sell price must be a higher or at the same valuation as the last Investor paid but to be honest as an Investor I would probably not be too keen on this. If he’s going to sell he should keep it in the family (ie, existing shareholders, either back to one of the Founders or the Investors).

    I’m curious to know Mark what your thoughts are on how a VC should structure this, how they would budget for this and how they would value the equity being sold back?

    Again, everyone here appreciates your sharing such valuable insight!

    David

  • http://lmframework.com/blog/about David Semeria

    Mark, I wasn’t suggesting VCs are evil – just hyper rational. The risk/reward ratio is skewed very much towards capital simply because capital got to make the rules.

    I agree that many of the protections VCs seek address valid concerns. But I would say frequently they overcompensate and are asymmetrical.

  • Jim

    This is a very reasonable proposal.

    One thing to think through is the impact on the morale of non-founders. I’ve seen early stage companies limp along on angel money or a small VC round until the founders (or the board) bring in people who really make the company happen. They are the ones who grow revenue and allow the company to raise serious capital.

    In these cases, allowing the founders to cash in, but not the key employees (who have also worked for years at below-market salaries), can create serious problems.

  • Mark Suster

    In the US we need to do fair market valuations frequently so it is easier. Plus, there is always information about price at last round raised and you could have a simple negotiation. Or you could do investment as a company loan where investors kick in a bit of cash. Increasingly in the US there are secondary exchanges like Sharespost where people are trying to address this issue from a market perspective.

  • Mark Suster

    fair enough

  • Mark Suster

    Yes, I should have worded this more carefully. If the founders are not the KEY employees then they don’t get money off the table. Value only goes out to people who are delivering value going forward. Thanks for clarifying.

  • Mark S

    Awesome post.

    I first spent a number of years on the financial side and then became an entrepreneur. I must say this was a RUDE awakening.

    Going from a pay package that was in the six figures (btw- lots of performance based) to taking a pay of $4k per month changes your life and relationships. Yes, there were many times that I second guessed myself during the process, but, I must say my wife supported my decision for a couple of years.

    …with out any additional rant…. I will NEVER do a deal going forward with a VC unless I get some liquidity. As pointed out in the post this has to be a win-win for all. I don’t care how much sweat you put in that does not pay the bills in the San Francisco bay area.

  • http://www.saintsvc.com Ken Sawyer

    Mark –

    I think your perspective is a good one. I’d note that once you get to the point that allowing some liquidity is a good thing in certain circumstances, the issue becomes how should this be done. As a partner in a firm that does this exclusively, there is a big difference betweeen doing it well and doing it poorly. In some cases, founders take money off the table for common shares when a new round of preferred comes in with senior liquidation preference over the top of all other securities. I think this is fraught with issues of fairness for non-selling common and option holders. Further, is the founder/CEO allowed to really sell some of his shares for fair value or are the restrictions (Rights of First Refusal) etc. that are in place value inhibiting. Finally, a very significant issues relates to founders that are displaced/replaced. Their value-add going forward may be more limited but it seems only fair that if they are fired they aught to be allowed to acheive some liquidity on the value they built while there. How that process works is also fraught with challenges to align interests going forward.

  • http://www.online-guitar-tuition.com/ Online Guitar Tuition

    Hmm, it doesn’t seem quite fair that the VCs want their share, but want to forbid the founders from getting theirs… the partial liquidity sounds like a good compromise in this case. Don’t be greedy.

  • http://khaitan.org Indus Khaitan

    Interesting piece — equally disruptive like the one elsewhere which questioned the 20-2 rule!

    BTW, add the WordPress Series B example to your post — Matt, Toni & some of the other people who had their options vested took a few million off the table in the $30m round.

    Cheers!

    Indus

  • markorgan

    Mark, a brilliant post, I could not agree more. My B-round investors were smart enough to let the founders take some money off the table – enough for a down payment on a modest house – and there is no question that the business thrived as a result of improved founder energy/morale. In our case, the business was at the level of development that you indicate in your post.

  • http://lmframework.com/blog/about David Semeria

    “I felt a great disturbance in the Force, as if millions of voices cried out in terror and were suddenly silenced.”

    And thus a new commenting system was installed.

  • http://www.JamesSiminoff.com Siminoff

    Mark, another great post. I think you hit the bulls eye with this one. Jamie

  • markorgan

    Mark, a brilliant post, I could not agree more. My B-round investors were smart enough to let the founders take some money off the table – enough for a down payment on a modest house – and there is no question that the business thrived as a result of improved founder energy/morale. In our case, the business was at the level of development that you indicate in your post.

  • http://bothsidesofthetable.com msuster

    awesome. thanks for the input, Mark. Hope you're well.

  • http://bothsidesofthetable.com msuster

    wanted to install disqus for months but had to get off of wp.com first! Let the plug-ins begin!

  • http://lmframework.com/blog/about David Semeria

    Good move. But where have the old comments gone?

  • http://lmframework.com/blog/about David Semeria

    “I felt a great disturbance in the Force, as if millions of voices cried out in terror and were suddenly silenced.”

    And thus a new commenting system was installed.

  • ammosov

    I dare say all of this is valid IF AND ONCE PROFITABILITY is reach. Get business out of the red, get paid.

  • http://bothsidesofthetable.com msuster

    trying to get imported now …

  • http://bothsidesofthetable.com msuster

    Maybe. There are some times where the investors push the founding team to grow faster and therefore are not profitable as they go for growth. In these situations I think it still makes sense.

  • http://lmframework.com/blog/about David Semeria

    I'm glad I don't have to look Mr. Smuts in the eye if it all goes pear :)

  • ammosov

    Then it is obvious investors do not want to pay for the founder's needs. Either not take such investors or work to make profit. We already saw so many companies that collapsed after investment monies ran out that it must be obvious there is nothing to compensate founders for. Value must be created, not destroyed.

    PS. Disqus sucks!

  • http://www.JamesSiminoff.com Siminoff

    Mark, another great post. I think you hit the bulls eye with this one. Jamie

  • http://bothsidesofthetable.com msuster

    awesome. thanks for the input, Mark. Hope you're well.

  • http://bothsidesofthetable.com msuster

    wanted to install disqus for months but had to get off of wp.com first! Let the plug-ins begin!

  • http://lmframework.com/blog/about David Semeria

    Good move. But where have the old comments gone?

  • http://lmframework.com/blog/about David Semeria

    “Value must be created, not destroyed”

    Well said. And the trains must run on time.

  • http://bothsidesofthetable.com msuster

    Hmmm. This is day one for my on Disqus – what is it about Disqus you don't like?

  • ammosov

    I dare say all of this is valid IF AND ONCE PROFITABILITY is reach. Get business out of the red, get paid.

  • http://bothsidesofthetable.com msuster

    trying to get imported now …

  • http://bothsidesofthetable.com msuster

    Maybe. There are some times where the investors push the founding team to grow faster and therefore are not profitable as they go for growth. In these situations I think it still makes sense.

  • http://lmframework.com/blog/about David Semeria

    I'm glad I don't have to look Mr. Smuts in the eye if it all goes pear :)