Entrepreneurship · Startups

What is the impact of founders doing a partial cash out?

Ioannis MSc IT professional

November 2nd, 2016

I see now that it is becoming a trend for early stage founders to cash out some of their common stock during Series Bs or secondary sales. Take as an example the founder of Zenefit, Snapchat, etc. Obviously this may send some signals to the employees as well as early or future investors.

What kind of impact can partial cash outs have for founders? Is it negative or just part of the game and something that is well received by insiders?

Henry Daas Coach-Approach Strategic Advisor

November 2nd, 2016

Not sure that it is a 'trend' or just noise; I would have to do more research.

Regardless, consider the optics. While the scenario might makes good business sense and in fact be downright prudent in some circumstance, investing is a game of emotion.

Consider what emotions your decision as a founder will elicit in others regardless of the logic behind it. That's where you'll find the answer....

Kelly Lefkowitz CEO at Strat/Assist, Conditioning Companies for Capital & Growth

November 2nd, 2016

Ioannis:

Series B and after is the key.  Keep in mind, founders generally spend years working on their own dime before getting a minimal salary until (take your pick) revenue of X, profitability, or the acceptance of their first born into Harvard/Stanford etc.   Sometimes, the salary increases have not kicked in even at Series B or later. 

Another advantage of allowing founders to partially cash out is that the Series B investors get a bigger piece of the company without diluting the Series A or Angel investors. 

It is not all that strange, nor should it be construed as problematic.  Like everything with start-ups, it depends on the situation. 

Good luck getting your partial cash out. :)

Kelly 


Arthur Lipper Chairman of British Far East Holdings Ltd.

November 2nd, 2016

I would have no interest in investing in an early stage company if the founders were selling that which they were expecting that I would be buying.