6 ms·

Some Thoughts on Founder Liquidity

64 points by wasd 12y ago

pc86 12y ago
This has always been a curiosity of mine as someone far removed from SV and outside of any major metropolitan area. If you found or cofound a startup, at what point do you get any money from that? When do you draw a salary? When do disbursements to equity partners become a common (or at least not unheard of) occurrence?
- ig1 12y ago
  Generally it's considered normal practice for a founder to draw salary post-seed funding, although it's common for it to be below market rate (rising when you raise your A)
- mattzito 12y ago
  There's a broad spectrum of opinions on this. Personally, I think that founders should draw enough of a salary to live on in the early days - that's going to differ from person to person, but I don't think it's reasonable to ask a startup founder to completely destroy their personal financial situation to extend runway an extra few months. Once you get past Series A, I think you should be getting paid a fair salary based on your role and level of experience. You can work that out with the board. As far as paying out equity holders, typically excess cash gets reinvested in the business, since many (most?) startups are optimized for growth rather than profitability. It is not uncommon, however, to have an executive bonus plan for achieving various revenue or other milestone objectives as the company grows.
- tptacek 12y ago
  In bootstrapped startups, it's not unusual for distributions to start happening immediately. One of the good features of bootstrapping is that it forces you to rig the business sustainably from day one.
  - prostoalex 12y ago
    Sometimes you need those to kick in immediately, as the founders have maxed out (or spent significantly on) their credit cards, and you want the startup to have a clean bill of health, not this major liability revolving at 20% APR.
- deleted 12y ago
  [deleted]
  - deleted 12y ago
    [deleted]
kasey_junk 12y ago
Founder liquidity seems like such a minor issue in comparison to employee liquidity that I fail to see why it is taking up any brain cycles at all.
- jacques_chester 12y ago
  Founders have much larger allocations, and might be suspected as trading on insider perspective or their own confidence in the company. So their movements are much more influential on the overall share price of the company than an employee's.
- tptacek 12y ago
  It's the agency problem. Illiquid founders are motivated to act against the interests of shareholders. I saw this happen bigtime at a company I once worked for.
  - angersock 12y ago
    Mind elaborating on that?
    - tptacek 12y ago
      Illiquid founders push for early exits.
      - boucher 12y ago
        Illiquid founders are, generally speaking, majority shareholders. Hard to argue they are not looking out for shareholder interests.
        tptacek 12y ago
        That doesn't change the fact that pushes for early exits can screw over both the investors --- who put real money into the company based on a promise that the founders would work for their interests --- and employees, who will receive a pittance compared to founders in most early exits.
deleted 12y ago
[deleted]
toasted 12y ago
Not to be overly emotive, but honestly, fuck Sam Altman on this one. If a person founds or cofounds a company worth >5million, they should become a millionaire and have lifetime financial security. The VC already in all likelihood already has lifetime financial security. VC's bank on an 80-95% failure rate, so they are basically sacrificing lifetime financial security for 9/10 of their founders in order to increase the likelihood that 1/10 will be a bit more miserable and therefore work harder to increase the chance of a big exit. fuck them, take financial security.
- toasted 12y ago
  Just out of interest, is there a company which provides covert early exits for founders? For example I meet with a founder, they sign a contract saying secretly that they will give me a share of their equity in 2 year's time or whenever a major liquidity event occurs, and in return I pay them an amount based on current valuation?
  - hglaser 12y ago
    I have heard of loans either secured by or "based on" shares of privately-held startups. I have no idea how common this is -- probably pretty uncommon. See e.g. https://www.svb.com/private-bank/founder-liquidity/ https://www.svb.com/private-bank/founder-liquidity/ and http://www.founderscircle.com/services/ http://www.founderscircle.com/services/
  - gwillen 12y ago
    I would be interested to know (1) what the legal and regulatory implications of such a deal would be, and (2) what the implications would be with respect to the deals the founder would have signed with regard to the equity they were holding. My suspicion is this couldn't be done without causing problems in one or both domains, but I don't base that on anything solid.
  - tptacek 12y ago
    Founder stock agreement boilerplates restrict founders from encumbering or pledging their shares without the approval of the board.

64 points by wasd 12y ago

pc86 12y ago

This has always been a curiosity of mine as someone far removed from SV and outside of any major metropolitan area. If you found or cofound a startup, at what point do you get any money from that? When do you draw a salary? When do disbursements to equity partners become a common (or at least not unheard of) occurrence?

ig1 12y ago
Generally it's considered normal practice for a founder to draw salary post-seed funding, although it's common for it to be below market rate (rising when you raise your A)
mattzito 12y ago
There's a broad spectrum of opinions on this. Personally, I think that founders should draw enough of a salary to live on in the early days - that's going to differ from person to person, but I don't think it's reasonable to ask a startup founder to completely destroy their personal financial situation to extend runway an extra few months. Once you get past Series A, I think you should be getting paid a fair salary based on your role and level of experience. You can work that out with the board. As far as paying out equity holders, typically excess cash gets reinvested in the business, since many (most?) startups are optimized for growth rather than profitability. It is not uncommon, however, to have an executive bonus plan for achieving various revenue or other milestone objectives as the company grows.
tptacek 12y ago
In bootstrapped startups, it's not unusual for distributions to start happening immediately. One of the good features of bootstrapping is that it forces you to rig the business sustainably from day one.
- prostoalex 12y ago
  Sometimes you need those to kick in immediately, as the founders have maxed out (or spent significantly on) their credit cards, and you want the startup to have a clean bill of health, not this major liability revolving at 20% APR.
deleted 12y ago
[deleted]
- deleted 12y ago
  [deleted]

kasey_junk 12y ago

Founder liquidity seems like such a minor issue in comparison to employee liquidity that I fail to see why it is taking up any brain cycles at all.

jacques_chester 12y ago
Founders have much larger allocations, and might be suspected as trading on insider perspective or their own confidence in the company. So their movements are much more influential on the overall share price of the company than an employee's.
tptacek 12y ago
It's the agency problem. Illiquid founders are motivated to act against the interests of shareholders. I saw this happen bigtime at a company I once worked for.
- angersock 12y ago
  Mind elaborating on that?
  - tptacek 12y ago
    Illiquid founders push for early exits.
    - boucher 12y ago
      Illiquid founders are, generally speaking, majority shareholders. Hard to argue they are not looking out for shareholder interests.
      - tptacek 12y ago
        That doesn't change the fact that pushes for early exits can screw over both the investors --- who put real money into the company based on a promise that the founders would work for their interests --- and employees, who will receive a pittance compared to founders in most early exits.

deleted 12y ago

[deleted]

toasted 12y ago

Not to be overly emotive, but honestly, fuck Sam Altman on this one. If a person founds or cofounds a company worth >5million, they should become a millionaire and have lifetime financial security. The VC already in all likelihood already has lifetime financial security. VC's bank on an 80-95% failure rate, so they are basically sacrificing lifetime financial security for 9/10 of their founders in order to increase the likelihood that 1/10 will be a bit more miserable and therefore work harder to increase the chance of a big exit. fuck them, take financial security.

toasted 12y ago
Just out of interest, is there a company which provides covert early exits for founders? For example I meet with a founder, they sign a contract saying secretly that they will give me a share of their equity in 2 year's time or whenever a major liquidity event occurs, and in return I pay them an amount based on current valuation?
- hglaser 12y ago
  I have heard of loans either secured by or "based on" shares of privately-held startups. I have no idea how common this is -- probably pretty uncommon. See e.g. https://www.svb.com/private-bank/founder-liquidity/ https://www.svb.com/private-bank/founder-liquidity/ and http://www.founderscircle.com/services/ http://www.founderscircle.com/services/
- gwillen 12y ago
  I would be interested to know (1) what the legal and regulatory implications of such a deal would be, and (2) what the implications would be with respect to the deals the founder would have signed with regard to the equity they were holding. My suspicion is this couldn't be done without causing problems in one or both domains, but I don't base that on anything solid.
- tptacek 12y ago
  Founder stock agreement boilerplates restrict founders from encumbering or pledging their shares without the approval of the board.