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Ask the CEO whether the investors would buy your shares as part of the funding round. I've seen a company do this. It's a win for everyone. Offer a moderate dis

Ask the CEO whether the investors would buy your shares as part of the funding round. I've seen a company do this. It's a win for everyone. Offer a moderate discount (10-20%) to make it worth their while. - Company gets to re-concentrate their ownership among active investors/employees, and remove "dead wood" ex-founder with small stake from the cap table. This alone might make it worth their while. - Investors get shares more cheaply than they otherwise would - You get cash and get to wash your hands of the company Where this might get complicated is that you likely own founders' shares/common and the investors are getting shares with a bunch of preferences. If the latest funding round is $20mil, 5% of that would be 1mil. What's the 409(a) value on the common shares? I doubt the shares would be worth more than 500-600k given the numbers above, so with a 20% discount, you're looking at 400-500k. I have no idea what the headline valuation is but you can probably work something out. Email is in sig if you want to talk. EDIT: Another option would be to sell a portion, but not all, of your shares as part of the funding round. That might allay any "we can't afford it" concerns from the company while still giving you a bit of upside in case the business is a real home run. Would they take 10% of your position for 100k? That might be a good option.

ouid 9y ago
Selling existing shares does not raise money for the company. They have no more incentive to take this offer than to buy him out now.
- stale2002 9y ago
  Well, it makes an investor happy, because they received a 10% discount. Also, although it doesn't help the other founders that much, if one investor sells stock to another investor, it also doesn't HARM them at all. Why should they care if two investors trade shares between each other? If you own 5%, thats what you are. An investor.
  - ouid 9y ago
    Right, so why does it matter when it occurs?
    - jacquesm 9y ago
      An investment round is a way for the company to aim for a higher future level than they would otherwise achieve. That's the moment when the shares are presumably the cheapest, and there is already a deal in progress so it is very easy and convenient to roll in another transaction. Since the lawyers are getting paid anyway and money is flowing at an established valuation it is an excellent moment to offer your shares. Later on you might have to re-establish a valuation and you will have to make a lot of overhead on a relatively small transaction.
  - greglindahl 9y ago
    Investors are happy with a 10% discount from preferred when buying common shares with no liquidation preferences?
    - stale2002 9y ago
      Not every company has onerous terms. But you could still factor that in to whatever the fair market value is. Call it a 50% discount if you like, to get to the "market value". But that still sounds like a much much better deal than what the CEO is offering
      - greglindahl 9y ago
        Even a 1X liquidation preference knocks a lot off, and that's hardly onerous. There's a reason why the 409a value is often only 10%.
- jacquesm 9y ago
  Yes they do. Cleaning up the captable at a discount is an extremely common thing during funding rounds, if they have to do it at a later date or as a separate transaction there is a lot of overhead. If it can be rolled in there is a much better chance of getting it done.
  - ouid 9y ago
    This supposed overhead is not worth >300 thousand dollars. If I saw a founding member trying to divest himself at a 20% discount in a funding round for petty cash, I probably would find something else to invest in.
    - jacquesm 9y ago
      Not to you, but you don't matter. The investors and the other shareholders matter. If the company is doing well in the eyes of the CEO, the remaining shareholders and the investors this is their chance to get a larger slice of the pie at a discount. Founders are not by law or the shareholder agreement required to stay with the company across its lifecycle, and founders being bought out during funding rounds is common and does not immediately lead to investors bolting from the deal when presented with a good enough story behind it (such as someone wanting to move on, or being tired). It's actually quite rare to see a 5 year old company where all co-founders are still active and in their original roles. Nothing worse for a company than to have a bunch of ex-founders who no longer produce anything and that are holding on to sizable blocks of shares and that do not wish to sell. In investors parlance that's called 'dead wood' and the more you have of that the harder it will be to raise money. Now if all of the founders want to take money of the table that is known as a buy-out and tends to be looked at differently, but even those deals are made, usually at some kind of discount. The version where other employees of the company elevate themselves to the C level is called an MBO and is also quite common. Optionally there will a bank involved to fund part of the operating capital of the company depending on the amount and liquidity of the companies' assets. Source: veteran of a bunch of deals involving my own company and being closely involved in another 50 M&A or investment deals or so, usually on the investors / buyers side.
    - endlessvoid94 9y ago
- siegel 9y ago
  That 5% is deadweight on the cap table. The investors don't want 5% of the company owned by a founder who is no longer employed by the company.
- rdlecler1 9y ago
  Moreover, you're handing over more control to this new investor. If he guy doesn't want to take it then he can still sit on his shares.
jacquesm 9y ago
Excellent advice and worth suggesting, but talk to the CEO first to make sure the company speaks with one voice otherwise you might imperil the funding round.
- louisswiss 9y ago
  This. Ex-employees appearing out of the woodwork just before a funding round and wanting to divest all of their shares is definitely a scenario which (best case) gives the investors an extra weapon with which to put pressure on the valuation/terms of the deal and (worst case) could even get the deal called off completely. Even if you're not on great terms with your ex-cofounders, think of your ex-employees (and your own share value) EDIT: I was thinking from the perspective of the company and not the individual. Getting sued is indeed the worst case (if we're being pedantic then also assuming you lose the suit of course).
  - jacquesm 9y ago
    That's not the worst case. The worst case is where the other shareholders sue you for damaging the company.
    - SaltySolomon 9y ago
      Maybe I am not just into that area, but how can you win such a suit, by that logic you could sue anybody who short sells a company...
      - krallja 9y ago
        jacquesm is talking about corporate officers harming the company, not random investors
        jacquesm 9y ago
        Exactly.
      - 9y ago
ransom1538 9y ago
+ The difference in long term vs short term capital gains could be a factor - depending how long you held exercised shares (83b election etc). If those are held longer than one year it would fall into long term capital gains which is a large tax benefit [short term capital gains is calculated as regular INCOME]. E.g. if you have held shares for 10 months I would see if you could wait to sell your options for 2 months - your shares will probably time align with the other founders so it could be an easy sell.

ouid 9y ago

Selling existing shares does not raise money for the company. They have no more incentive to take this offer than to buy him out now.

stale2002 9y ago
Well, it makes an investor happy, because they received a 10% discount. Also, although it doesn't help the other founders that much, if one investor sells stock to another investor, it also doesn't HARM them at all. Why should they care if two investors trade shares between each other? If you own 5%, thats what you are. An investor.
- ouid 9y ago
  Right, so why does it matter when it occurs?
  - jacquesm 9y ago
    An investment round is a way for the company to aim for a higher future level than they would otherwise achieve. That's the moment when the shares are presumably the cheapest, and there is already a deal in progress so it is very easy and convenient to roll in another transaction. Since the lawyers are getting paid anyway and money is flowing at an established valuation it is an excellent moment to offer your shares. Later on you might have to re-establish a valuation and you will have to make a lot of overhead on a relatively small transaction.
- greglindahl 9y ago
  Investors are happy with a 10% discount from preferred when buying common shares with no liquidation preferences?
  - stale2002 9y ago
    Not every company has onerous terms. But you could still factor that in to whatever the fair market value is. Call it a 50% discount if you like, to get to the "market value". But that still sounds like a much much better deal than what the CEO is offering
    - greglindahl 9y ago
      Even a 1X liquidation preference knocks a lot off, and that's hardly onerous. There's a reason why the 409a value is often only 10%.
jacquesm 9y ago
Yes they do. Cleaning up the captable at a discount is an extremely common thing during funding rounds, if they have to do it at a later date or as a separate transaction there is a lot of overhead. If it can be rolled in there is a much better chance of getting it done.
- ouid 9y ago
  This supposed overhead is not worth >300 thousand dollars. If I saw a founding member trying to divest himself at a 20% discount in a funding round for petty cash, I probably would find something else to invest in.
  - jacquesm 9y ago
    Not to you, but you don't matter. The investors and the other shareholders matter. If the company is doing well in the eyes of the CEO, the remaining shareholders and the investors this is their chance to get a larger slice of the pie at a discount. Founders are not by law or the shareholder agreement required to stay with the company across its lifecycle, and founders being bought out during funding rounds is common and does not immediately lead to investors bolting from the deal when presented with a good enough story behind it (such as someone wanting to move on, or being tired). It's actually quite rare to see a 5 year old company where all co-founders are still active and in their original roles. Nothing worse for a company than to have a bunch of ex-founders who no longer produce anything and that are holding on to sizable blocks of shares and that do not wish to sell. In investors parlance that's called 'dead wood' and the more you have of that the harder it will be to raise money. Now if all of the founders want to take money of the table that is known as a buy-out and tends to be looked at differently, but even those deals are made, usually at some kind of discount. The version where other employees of the company elevate themselves to the C level is called an MBO and is also quite common. Optionally there will a bank involved to fund part of the operating capital of the company depending on the amount and liquidity of the companies' assets. Source: veteran of a bunch of deals involving my own company and being closely involved in another 50 M&A or investment deals or so, usually on the investors / buyers side.
  - endlessvoid94 9y ago
siegel 9y ago
That 5% is deadweight on the cap table. The investors don't want 5% of the company owned by a founder who is no longer employed by the company.
rdlecler1 9y ago
Moreover, you're handing over more control to this new investor. If he guy doesn't want to take it then he can still sit on his shares.

jacquesm 9y ago

Excellent advice and worth suggesting, but talk to the CEO first to make sure the company speaks with one voice otherwise you might imperil the funding round.

louisswiss 9y ago
This. Ex-employees appearing out of the woodwork just before a funding round and wanting to divest all of their shares is definitely a scenario which (best case) gives the investors an extra weapon with which to put pressure on the valuation/terms of the deal and (worst case) could even get the deal called off completely. Even if you're not on great terms with your ex-cofounders, think of your ex-employees (and your own share value) EDIT: I was thinking from the perspective of the company and not the individual. Getting sued is indeed the worst case (if we're being pedantic then also assuming you lose the suit of course).
- jacquesm 9y ago
  That's not the worst case. The worst case is where the other shareholders sue you for damaging the company.
  - SaltySolomon 9y ago
    Maybe I am not just into that area, but how can you win such a suit, by that logic you could sue anybody who short sells a company...
    - krallja 9y ago
      jacquesm is talking about corporate officers harming the company, not random investors
      - jacquesm 9y ago
        Exactly.
    - 9y ago

ransom1538 9y ago

+ The difference in long term vs short term capital gains could be a factor - depending how long you held exercised shares (83b election etc). If those are held longer than one year it would fall into long term capital gains which is a large tax benefit [short term capital gains is calculated as regular INCOME]. E.g. if you have held shares for 10 months I would see if you could wait to sell your options for 2 months - your shares will probably time align with the other founders so it could be an easy sell.