4 ms·

What options are there for founders to liquidate shares in the process of fundraising but before going public? Are founders typically able to liquidate some amo

by Pyxl101 11y ago

What options are there for founders to liquidate shares in the process of fundraising but before going public? Are founders typically able to liquidate some amount of shares in funding rounds in order to take home cash, or do investors disallow that entirely until a company is sold or goes public? Theranos is 12 years old at this point, and raised $400 million at a $4.5 billion valuation. Would a founder of a company in those circumstances have been able to liquidate - let's say - 1% of their ownership along the way, or in the last fundraising round, for cash? Or is that out of the question and founders are expected to retain their ownership aside from investment dilution until sale? I suppose the answer depends on the terms the company is able to work out with their investors. But perhaps someone can comment on what terms are common in such situations.

alaskamiller 11y ago
Biggest example is Snapchat, they got and keep asking for millions of dollars money when fundraising. Last year's big drama was Secret app's founder taking $6MM when they raised $25MM then proceeded to buy fancy cars. The product growth stalled and the company shut down in less than a year. Happened with Buffer.
- Pyxl101 11y ago
  Thanks for the tip to Buffer. They've published a blog post explaining their reasons that I've started reading: https://open.buffer.com/raising-3-5m-funding-valuation-term-sheet/ https://open.buffer.com/raising-3-5m-funding-valuation-term-... > So you might be wondering, why raise funding if everything is going so well and we’re in full control? Here are some of the reasons: > 1. We’re removing pressure to sell, so we can go all in and keep building Buffer for the next 5-10 years. 2. Setting up a precedent for multiple regular liquidity events for investors and team members. 3. It’s a way to get partners on board who are excited about the unique way we’re running the company. 4. We want to add a little extra cushion to the bank to help us with any speed bumps that might arise [more details on each point in the article] Their reasons make sense to me.
- Asparagirl 11y ago
  Happened with Basecamp (formerly 37 Signals), too -- they're bootstrapped but they took a small investment from Jeff Bezos so that they could cash out a little bit and enjoy themselves.
  - harryjo 11y ago
    Funny how they dedicate their blogging to attacking Bezos's business model, then make their living off of it.
    - fit2rule 11y ago
      The very definition of disruption.
JonFish85 11y ago
Not having been in that situation directly, I believe that it is fairly common for founder(s) to take some cash in exchange for their shares at the later stages, if only so that they don't feel the immediate need to cash out. It sucks to be cash poor while being worth $X billion on paper, so I believe investors would rather the founder turn some stock into $10m and not worry about money than to have a fidgety CEO.
- Pyxl101 11y ago
  Thank you. That makes sense. I suppose it happens with "hot" companies that have some negotiating leverage. I'm curious because if Holmes has been able to convert even 0.1% - 1% of her shares' current value along the way, that's a life-changing amount of money ($4.5m - $45 million). I'm very curious what the experience is like to be worth billions on paper via a private company. Can you get a mortgage? Can you borrow against stock in a private company? (Do banks recognize the valuation of a company as legitimate for that purpose?) It does make sense that investors would want founders to take something home so that they can live and buy a house, etc.
  - JacobAldridge 11y ago
    Last time I sat down with my mortgage broker (admittedly, in Australia where the private equity scene is abysmal) he advised me that none of the banks would take into account my shareholding in private companies as assets. Essentially, it's a crapshoot for them to justify the valuation so they aren't willing to attempt it. I suspect there's a point where they will, somewhere before 'publicly listed companies' (which publish the market valuation on a moment by moment basis), but it's likely to be within established industries (partnership in a law firm, for example) not near my situation or most tech startups.
  - adventured 11y ago
    At the scale of Theranos / Holmes you can easily borrow against your huge wealth. She was pegged recently - before this mess - by Forbes as being worth $4.5 billion. The best option would be to go to a giant firm like Goldman Sachs. They would have written her a check for $100+ million prior to all of this unfolding. They might still consider it, but Goldman would do a very thorough rectal exam of the company and its prospects now. If you wanted to borrow against private wealth of the sort Holmes was sitting on, you'd avoid common banks. Not because they won't give you a mortgage on a house, but because it wouldn't be even remotely worth the hassle of going through them. If you just wanted $500k for a mortgage, your best bet would be to make a call to one of the big VCs backing you, they'd cut you that check under all sorts of arrangements with hardly any questions asked.
lobster_johnson 11y ago
People sometimes do liquidate privately. There are even markets just for this. I don't like Quora, but these are some good explanations: https://www.quora.com/Why-cant-startup-founders-sell-some-of-their-shares-as-they-develop-their-business-instead-of-waiting-for-an-IPO-Who-gets-to-decide-on-the-timing-of-the-IPO-and-how-are-the-number-of-shares-determined https://www.quora.com/Why-cant-startup-founders-sell-some-of...

by Pyxl101 11y ago

alaskamiller 11y ago

Biggest example is Snapchat, they got and keep asking for millions of dollars money when fundraising. Last year's big drama was Secret app's founder taking $6MM when they raised $25MM then proceeded to buy fancy cars. The product growth stalled and the company shut down in less than a year. Happened with Buffer.

Pyxl101 11y ago
Thanks for the tip to Buffer. They've published a blog post explaining their reasons that I've started reading: https://open.buffer.com/raising-3-5m-funding-valuation-term-sheet/ https://open.buffer.com/raising-3-5m-funding-valuation-term-... > So you might be wondering, why raise funding if everything is going so well and we’re in full control? Here are some of the reasons: > 1. We’re removing pressure to sell, so we can go all in and keep building Buffer for the next 5-10 years. 2. Setting up a precedent for multiple regular liquidity events for investors and team members. 3. It’s a way to get partners on board who are excited about the unique way we’re running the company. 4. We want to add a little extra cushion to the bank to help us with any speed bumps that might arise [more details on each point in the article] Their reasons make sense to me.
Asparagirl 11y ago
Happened with Basecamp (formerly 37 Signals), too -- they're bootstrapped but they took a small investment from Jeff Bezos so that they could cash out a little bit and enjoy themselves.
- harryjo 11y ago
  Funny how they dedicate their blogging to attacking Bezos's business model, then make their living off of it.
  - fit2rule 11y ago
    The very definition of disruption.

JonFish85 11y ago

Not having been in that situation directly, I believe that it is fairly common for founder(s) to take some cash in exchange for their shares at the later stages, if only so that they don't feel the immediate need to cash out. It sucks to be cash poor while being worth $X billion on paper, so I believe investors would rather the founder turn some stock into $10m and not worry about money than to have a fidgety CEO.

Pyxl101 11y ago
Thank you. That makes sense. I suppose it happens with "hot" companies that have some negotiating leverage. I'm curious because if Holmes has been able to convert even 0.1% - 1% of her shares' current value along the way, that's a life-changing amount of money ($4.5m - $45 million). I'm very curious what the experience is like to be worth billions on paper via a private company. Can you get a mortgage? Can you borrow against stock in a private company? (Do banks recognize the valuation of a company as legitimate for that purpose?) It does make sense that investors would want founders to take something home so that they can live and buy a house, etc.
- JacobAldridge 11y ago
  Last time I sat down with my mortgage broker (admittedly, in Australia where the private equity scene is abysmal) he advised me that none of the banks would take into account my shareholding in private companies as assets. Essentially, it's a crapshoot for them to justify the valuation so they aren't willing to attempt it. I suspect there's a point where they will, somewhere before 'publicly listed companies' (which publish the market valuation on a moment by moment basis), but it's likely to be within established industries (partnership in a law firm, for example) not near my situation or most tech startups.
- adventured 11y ago
  At the scale of Theranos / Holmes you can easily borrow against your huge wealth. She was pegged recently - before this mess - by Forbes as being worth $4.5 billion. The best option would be to go to a giant firm like Goldman Sachs. They would have written her a check for $100+ million prior to all of this unfolding. They might still consider it, but Goldman would do a very thorough rectal exam of the company and its prospects now. If you wanted to borrow against private wealth of the sort Holmes was sitting on, you'd avoid common banks. Not because they won't give you a mortgage on a house, but because it wouldn't be even remotely worth the hassle of going through them. If you just wanted $500k for a mortgage, your best bet would be to make a call to one of the big VCs backing you, they'd cut you that check under all sorts of arrangements with hardly any questions asked.

lobster_johnson 11y ago

People sometimes do liquidate privately. There are even markets just for this. I don't like Quora, but these are some good explanations: https://www.quora.com/Why-cant-startup-founders-sell-some-of-their-shares-as-they-develop-their-business-instead-of-waiting-for-an-IPO-Who-gets-to-decide-on-the-timing-of-the-IPO-and-how-are-the-number-of-shares-determined https://www.quora.com/Why-cant-startup-founders-sell-some-of...