Growth Financing · Financing

Is it a good idea to partially cash out on a financing round?

Sarabjeet Kaur Senior Software Consultant at HCL Technologies

October 19th, 2016

In my opinion, money from the financing rounds is meant to increase the business growth and to pay the employee salaries, especially in first financing rounds. However, there are cases when founders take some money off the table. From what I read those are some really fast growing companies with a lot of interested investors who want a seat at the table. What do you think about this partially cashing out as a founder?

Nick Damiano Co-Founder & CEO at Zenflow

October 19th, 2016

No, except in very rare exceptions. If nothing else, it signals to investors that you have doubts that the business will succeed and are hedging your risk. While it would be incredibly naive to think your startup has 100% chance of success, investors like to see that you believe it's almost certain that your company is going to be huge.

The exception is in later rounds where you're an absolute rocketship and investors are begging to throw money in even though you don't really need it. In this case, you may be able to grab a few million for yourself. Examples are Snapchat (which was a rocketship) and Secret (which looked like one based on growth numbers but ended up flopping). Unless you can honestly say that you have one of the absolute hottest deals out there, it's probably not a good idea to even suggest taking cash off the table. 

If you really need the money, increase your salary.

Neil Gordon Board Member, Corporate Finance Advisor and Strategy Consultant

October 19th, 2016

This one is complicated. Conventional wisdom, on the one hand, suggests diversification, to reduce risk. But cashing out reduces a founder's control, which might have risk implications, as well.  Beyond that, negotiating for a partial cash out will, in many cases, end discussions with investors. I think this one is situation specific.

I look forward to other responses on this.

Dane Madsen Organizational and Operational Strategy Consultant

October 19th, 2016

It is unusual to have an investor allow it. It does happen occasionally but rarely. In the cases I have seen, it was a good idea because the investor took control of the company and you could find yourself way in the back of the bus when shareholder rights are considered. Normally an investor wants you all in with perfectly aligned self interest. Dane Madsen Dane@DaneMadsen.com 206.900.5852 Mobile Sent from my mobile device. Forgive typographical and grammatical errors.