Founders cashing out isn't the problem. It's common--even encouraged--for late stage founders to partially cash out so as to align their interests with the star

Founders cashing out isn't the problem. It's common--even encouraged--for late stage founders to partially cash out so as to align their interests with the startup, particularly if they're not otherwise sufficiently wealthy to aim for the fences. Not all deals seek to diversify the founders and there are a number of warning signs: 1. The cash out is too soon. The company is still growing rapidly and in need of capital; 2. Too much of the funding round goes to the founders when the capital requirements of the company are still high. If the company is already profitable then a paying out the founders makes sense; 3. Such offers are only available to the founders rather than all employees. Two recent deals fall into the highly suspect category: Groupon and Airbnb. In Groupon's case, the early investors are paid out. Eric Lefkofsky has cashed out to the tune of almost $400 million [1], Groupon has has dubious accounting practices, it is only cash flow positive by screwing merchants and it basically looks like a giant scam. In Airbnb's case the founders are using a large chunk of the funding round to pay themselves a dividend [2]. Dividends are normally a way to distribute profits to shareholders. Imagine if you take a $1 million loan from the bank, paid yourself a $500,000 dividend and then declared bankruptcy. What's worse, most employees will see none of this because most of them have options not shares. So this deal fails the smell test too. Twitter is a more borderline case. $400 million seems reserved for cashing out employees [3]. If that's open to all employees I'm generally OK with it. If not, it's a problem. That being said, I believe Twitter's future is far from assured. It's unclear how many "real" users they have and what those users do. The large majority seems to just follow celebrities. I'm not convinced it can really go mainstream. [1]: http://venturebeat.com/2011/06/10/the-questions-about-groupons-other-founder-eric-lefkofsky/ http://venturebeat.com/2011/06/10/the-questions-about-groupo... [2]: http://articles.businessinsider.com/2011-10-01/tech/30232499_1_cash-dividend-stock-options-groupon http://articles.businessinsider.com/2011-10-01/tech/30232499... [3]: http://mashable.com/2011/07/20/twitter-8-billion/ http://mashable.com/2011/07/20/twitter-8-billion/