5 ms·

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.