Some Thoughts On Founder Liquidity

I saw a post last week that suggested that VCs competing to win deals is leading to excess amounts of founder liquidity. We haven’t seen that sort of thing to be honest. It may happen but it is certainly not rampant.

I also saw this tweet from Sam Altman yesterday:

If you click on that tweet, you will see a long and somewhat interesting discussion of the issue on Twitter. I don’t completely agree with Sam’s tweet, as I will outline below, but as my son and his friends like to say, “he’s not wrong.”

I’ve written a bunch about this issue over the years but the search function on this blog is pretty weak and it is not easy to go find all of those posts. So I will try to summarize my thoughts in tweetstorm format:

1/ when I got into the VC business in the mid 80s, there was little to no founder liquidity. VCs largely believed that founders should get liquid when they got liquid.

2/ that started to change in the late 90s when the VC market went bonkers and to some extent it was a good thing. to some extent it was not.

3/ i have evolved my point of view on this issue a lot over the years and i now believe that providing some founder liquidity, at the appropriate time, will incent the founders to have a longer term focus and that will result in exits at much larger valuations because, contrary to popular belief, founders drive the timing of exit way more than VCs do

4/ figuring out the “appropriate time” is tricky and there is no hard and fast rule. the twitter discussion on Sam Altman’s tweet focuses on how many years the company has been in business and i think that is a very flawed metric

5/ instead i would focus on whether the company has achieved sustainable and lasting enterprise value, meaning that there is no question it will exit at a significant number that is well in excess of the capital invested at some point in the future

6/ passing that test means that the common stock is “good money” and that the choice of the founder to sell it is not mitigation of risk issue as much as it is an asset allocation issue

7/ i am not a fan of founder liquidity sales that result in more than 10% of the founder’s position being liquidated at any one time

8/ an important exception to that rule is when a founder is leaving the company, particularly at the wishes of the board. in that situation i believe, if the test I outlined in #5 is passed, it is prudent for all involved to provide some liquidity to the departing founder and the 10% rule is not really valid in this situation

9/ i generally prefer that founder liquidity be provided by funds that are set up to do that sort of thing and not by the VCs who have been providing primary capital to the business. i believe that our capital should be used to continue to support the business and reserved for that until the company has become sustainably profitable

10/ once a company has become sustainably profitable, which in and of itself is a bit tricky to measure (GAAP Net Income positive?, EBITDA positive?, Adjusted EBITDA positive? cash flow positive?), I am more comfortable with the VCs buying in founder liquidity sales

11/ EOTS

I have seen too much founder liquidity too early in a company’s life mess things up. You do have to be very careful about this sort of thing.

And founder liquidity inevitably leads to questions about employee liquidity and angel liquidity. Like all things in life that involve money (and many that don’t), actions have consequences that are much broader than you might imagine. So once you start providing liquidity to founders, you need to at least start thinking about a liquidity plan for others as well.

What we have done in a number of our most successful portfolio companies is to wait until the company is sustainably profitable (this is such an important moment in a company’s evolution) and then think about tender offers to founders, employees, and early investors/angels. Interestingly, in these sales the employees and founders tend not to be particularly aggressive in their selling. The early investors and angels tend to be more aggressive than the insiders. Which makes a lot of sense if you think about it.

I will end this post with a quote The Gotham Gal shared with me yesterday from J. Robert Beyster, the founder of SAIC:

I have found that employees are more patient investors than the public. They are willing to wait longer for returns because they want a good place to work. They allow the company to invest in long-term growth and not just short-term gains.

So whatever you do, don’t let your company become owned too much by investors and not enough by founders and employees. It’s the folks who work at the company that make it tick and if they are not deeply invested in the business, you have a recipe for failure.

PS: There is a difference between a company “having created lasting sustainable value” and “being sustainably profitable”. The latter almost always means the former is true. But the former does not require the latter to be true. I could get into why this is so in more detail but this post is long enough already.

#VC & Technology

Comments (Archived):

  1. William Mougayar

    Any comments on whether founder liquidity transactions should be made public, at the same as the funding itself (if it is made public)?

    1. fredwilson

      i don’t know why they should be. what’s the argument for that?

      1. William Mougayar

        maybe the Buffer co-founders are taking it to an extreme, declaring they each took $1M from the $3.5M raise.

    2. Ana Milicevic

      I’m really split on this. On the one hand, it’s really up to the company and its investors. On the other, if you announce $3MM in funding raised, but 50% of that is going to founder equity, you’re no longer investing the full $3MM to scale the business and that changes the math substantially.

    3. awaldstein

      Can’t think of any circumstance where this is a good thing.

    4. Dave Hopton

      Trying to come up with hard and fast rules in this area is doomed to fail, but I’d say it would be good to disclose internally but not externally.Never been there personally but think it would be very damaging to find out that your CEO took a few hundred grand out of the company and didn’t tell anyone, even if it was for entirely justifiable reasons. With transparency, it helps everyone appreciate the personal cost weighing on the founder(s) and should reinforce commitment to the long-term vision.

      1. EquityZen

        Agree with Dave. Especially if the check-size is larger.Don’t think it needs to be publicly announced: the VCs will know about it though, as it most likely will require board approval (for founders).Employee stock sales don’t necessarily need board approval. Only in select cases.

    5. ErikSchwartz

      I think it should be public to the other holders of common shares (or options). I don’t think it should be widely public.

  2. LIAD

    There’s liquidity and then there’s liquidity.Pulling out 25% of an A round so you can live the high life is very different than pulling a couple of hundred G to pay off debts, and get your significant other off your back so you can concentrate fully on the startup with their full hearted blessing.Investors nowadays seem to use founder liquidity allowance as their main value add. Maybe a better heuristic than Sam’s is that if a VC encourages you to take a lot of liquidity it’s a reason to pass on them!

    1. fredwilson

      i agree with that last comment.i don’t agree that VCs are using founder liquidity as their main value add. that’s not even close to what is going on

      1. LIAD

        From the tweet convo I read it seemed VC’s were begrudging other VC’s because they used founder liquidity as a way of stealing a deal.

        1. George Gamble

          VC’s have to compete for deals and give more than they would like to founders? Tough. If that results in better deals and liquidity for the founders why should that be a problem especially if its a result of a free and open market? If too much is given out to founders and long term valuations suffer then the market will right itself over time.Frankly, I have seen enough deals where VCs seemed to enjoy watching the founders beg for crumbs just in order to pay off debts acquired during the initial company creation. The fact that the tables are turning on VCs and that they may have less power over the founders should not make anyone wring their hands in worry.

          1. CJ

            I start Company A. I take investment into Company A, providing 25% of MY company to a VC for $1MM. Shouldn’t I then be able to use a part of that money to get myself from under debts, gain some liquidity, and pay myself a salary?While it is now OUR company, when I sold you 25% it was MY company and that $1MM is mine by right to do with as I please, no? I mean, sure, we’re agreeing that I’m using it to build the company but how can I build a company if my car is repo’d or my house is under foreclosure?

          2. Dave Hopton

            no, not necessarily. They invested $1mm into your company, which although majority owned by you is not your personal bank account. That money was invested to grow the company.But if the VC(s) think that it makes sense to buy some of your equity as part of the round, which directly gives you cash, they can. They might do that for the reasons discussed in this post and the ones you give – difficult personal circumstances that distract from running the company. But as also explored, that can have all sorts of side-effects: a less motivated entrepreneur, disgruntled employees etc

          3. CJ

            Nominally, yes. But in practice, not really. I mean, when I own the company 100% is kinda is my personal bank account and that’s what makes this a hard situation…or maybe I don’t understand it well enough – never done this before.But to my eye, if I own the company 100% and I’ve put in 100k in personal debt to build it, if I get an investor afterwards then that 100k of personal debt needs to have a value on the company’s books otherwise I’m losing value in the deal when I agree to sell equity.I don’t know how these things typically work but I think if a founder’s personal financial situation isn’t taken into account during a funding round then it’s a disservice to the founder, the business and the investors.

          4. fredwilson

            If you take out $100k in personal debt to fund your company your stock in the company is the security for that investment.If you’ve done a good job your stock will be worth much more than the $100k in debtLet’s say you get someone to invest $250k for 20% of the business. That means your stock (the 80%) is worth $1mmSo you’ve just turned $100k into $1mm (on paper anyway). That is where the value is representedNow if you wanted to sell 10% of your position and take that $100k and pay off the debt, you could make a good argument for doing that.But then you’d own 70% and the investors would own 30%. My math may be slightly imprecise but it’s directionally correctThere are also tax considerations in selling stock which means you’d have to sell more than the $100k in stock to actually be able to pay off the debt

          5. CJ

            Thanks Fred, that helps a lot.

    2. Mario Cantin

      If someone pulls 200 k, I would tend to think it would go towards paying off debts or keeping the other half happy. I doubt they would be buying a Maserati with it; otherwise there would be other observeable red flags in their behavior and they might be headed towards Fred’s point #8!

  3. Val Tsanev

    Founders’ liquidity should only be used to cover short term personal costs so that those founders can exclusively focus on the business without having to worry about paying tomorrow’s rent/mortgage, educational debts or something of that sort but anything outside of that is a no go. In my view, founders should consider getting any liquidity before everyone else only to limit downside of personal financial circumstances and not to get any upside, for upside founders should build the business, scale it and exit when everyone else exits and get the upside at the same time with the rest of the stakeholders who have contributed to the success of the business.

  4. Nadav Reis

    I love these two parts:”i now believe that providing some founder liquidity, at the appropriate time, will incent the founders to have a longer term focus and that will result in exits at much larger valuations because, contrary to popular belief, founders drive the timing of exit way more than VCs do””So whatever you do, donโ€™t let your company become owned too much by investors and not enough by founders and employees. Itโ€™s the folks who work at the company that make it tick and if they are not deeply invested in the business, you have a recipe for failure.”Everyone involved wants to win and a bit of liquidity along the way allows the founders to keep moving forwarded and continuously add value rather than make cash-out decisions. Like you said, employees want to keep the good job going, particularly if they have a few cliffs before they themselves are fully vested. Keep everyone (all stakeholders) happy, and the VC’s investment will keep growing (assuming the market is right obviously).

  5. Mario Cantin

    This type of perspective-oriented post is what you excel at IMO, as opposed to the more ‘filler’ material you do at times.#5 & 6 are particularly enlightening.Can you, William, LE or someone else please expand on #9, i.e., what is a fund ‘set up to do that sort of thing’?

    1. fredwilson

      “filler posts” – brutal truth#respect

      1. LE

        Those filler posts are great. And those filler posts sometimes get the widest audiences because more people can participate in them. I could also argue that in order to achieve your marketing goals there needs to be a critical amount of comments on the blog or it won’t seem “as important”. Same reason a newspaper needs to include fluff articles in order to support advertising and circulation. Even the WSJ does that even though they didn’t use to.

      2. JamesHRH

        No post = no readership = no shame

    2. Jon Michael Miles

      Good question. Who pays the founders out in #9?

    3. Kirsten Lambertsen

      I was wondering the same thing re #9.

      1. JamesHRH

        There are funds that just buy stakes from founders.

    4. Dave Hopton

      can’t find it now, but I think Fred linked to a fund set up recently whose sole purpose is to arrange founder liquidity events. Their LPs are ok with a strategy of buying into companies by purchasing founder stakes.Other funds like this exist, but they differ from many ‘standard’ VCs where LPs expect the money to go into the business, not to founders.

      1. Mario Cantin

        Now that you mention it, I seem to vaguely recall it — obviously went over my head. In any case, thank you very much.

    5. EquityZen

      Funds “set up to do that sort of thing” are secondary funds, that have a specific investment mandate to buy shares from founders, early employees, and early investors. Larger institutional buyers include Saints Capital, Akkadian Ventures, 137 Ventures, Millennium Tech, and Industry Ventures.Additionally, for sellers of smaller stakes (say, < $2M in share value), secondary marketplaces connect those shareholders with accredited investors looking to invest in proven, private tech companies. Think of an AngelList but for late-stage companies. These marketplaces include EquityZen, SharesPost, and MicroVentures (full disclosure: I’m a founder of EquityZen).So, to recap:Secondary Funds —> raise $$ from institutional investors (Pensions, Endowments, Insurance Co’s), and purchase large blocks of shares from private companies.Secondary Exchanges —> match accredited investors (“retail” investors) with smaller shareholdersBoth are solutions related to #9 above. The former usually buys $5MM+ stakes, while the latter can cater to smaller bite-sizes.

      1. Mario Cantin

        Many thanks for the detailed reply.

  6. George Gamble

    Having been involved in multiple startups from the founder point of view I think it is incredibly important to provide some liquidity to the owners that frees them from money worries (especially debt acquired during the initial startup phase) for a forward looking 3 year period. In fact, I think this should be a requirement of any deal from a smart investor’s viewpoint. The end goals of the investors and founders are never 100% aligned and if things get rocky and the founders are still worrying about paying the mortgage, things can become more misaligned and can result in founders with a shorter term focus than is otherwise healthy for the long term valuation of the company.

  7. JimHirshfield

    Thank you for including employees in your coverage of this topic. Most posts, not just yours, on startups, take either the founder’s or the investor’s perspective. There are more startup employees than there are founders or investors in startups. And I think more attention and reform should take place as regards employee equity (e.g. cliff, termination exercise period, exercise costs, taxes…).

    1. JamesHRH

      Yes, but it is tricky. Often, founders financial situations are worse off because they are serial founders.

      1. JimHirshfield

        Whatever the case may be, such issues are pretty much balanced out by the amount of equity and control a founder has as compared to employee.

        1. awaldstein

          Important topic, I’m with you on part but it is not balanced out really.Even senior early employees who let’s say cut salary in half, pay the bills, work 24/7 and own what 3-5%. You are critical but you don’t feel the pain of not making payroll.It’s a job for employees. It’s more for the founders.Been both and this is my takeaway.

          1. JimHirshfield

            I hear ya. And I was generalizing… but stand by my point. Most employees have very little equity.

          2. awaldstein

            No employee equity to me means no real team.Others may not agree but the only thing that binds is the dream and the realization of it and the benefits of it.An employee of mine from the late 90s reminded me a few weeks ago how when CREAF went public there was a surge of houses and marriages amongst the team who all had equity.That is my way.

          3. JimHirshfield

            I agree with you more than you agree with yourself ;-)But reality out there combined with lottery-like odds, means that most employees will not see life changing compensation even upon a decent exit. They’re sold the dream, but reality is a different story.

          4. awaldstein

            Yup.The entire dynamic for sales teams is different of course.Always felt good when top sales people make more than the execs and in early to mid stage as they should.Companies flourish on customers and margins. Sales–nuance aside–is transaction based.A lot of founders don’t get this.

          5. ErikSchwartz

            This. Your technology and products are nothing without sales.Really generous, commission based comp packages.Do not call them biz dev and pay them a big salary. Call them sales and let them know what they have to do to be the most highly compensated employees in the organization.

          6. awaldstein

            Agree wholeheartedly. Often run both sales, market, biz dev and sales has its own dynamics and comp plans.

          7. Kirsten Lambertsen

            +++. After I sold my first company, the first thing the buyers did was start griping about how much my sole salesperson was making. My heart sank. It turned out to be as bad a sign as I feared it was.

          8. awaldstein

            You are right on.When the sales team is making money this is a great sign.

          9. CJ

            Why would that be a bad sign? I want sales to make more than me if I’m the founder! That means those guys are doing the work and being compensated for it. That’s how you grow sales!

          10. JimHirshfield

            She means it was an indication that the acquiring company/management did not understand that sales people that make lots of money is a good indicator of company sales.

          11. Kirsten Lambertsen

            Right – I meant that it was a bad sign about the folks who acquired the company. Priorities out of whack.

          12. CJ

            Yes, that’s what I took from it.

          13. Kirsten Lambertsen

            Ah! You were agreeing ๐Ÿ™‚ Now I get it. Ha ha!

          14. PhilipSugar

            We have been in the same position.Salesperson makes too much. What do you mean their salary is X which is half a top exec. Yes but they make 2 or 3X in commissions.”Those sales would have come in anyway” Pointing to a sale that really did come easy. Yes that sale was easy but we don’t pay them for the really tough ones that we lose.This is the usual argument. It usually comes from really smart people that work hard and it bothers them to the core that somebody get paid for something that might have happened anyway. (that is a huge might)

          15. ShanaC

            why were they griping

          16. Donna Brewington White

            How a company views — and compensates — the sales team is very telling.

          17. pointsnfigures

            Lots of geeks don’t respect sales

          18. JimHirshfield


          19. Robert Metcalf

            Any thoughts on compensation strategies to align a team when the likelihood of a liquidation event/trip to the pay window is small? Say, for a boot-strapped and high margin skin care line.

          20. awaldstein

            Success branded consumer body care products are hot acquisition targets.But specifically, I’ve worked with a number of companies that are successful, are not interested in selling and structure themselves to make it worthwhile to investors and employees alike.A good attorney should have a number of these options for you.Glad to chat about this as well.

    2. Robert Metcalf

      This isn’t exactly the right blog for this topic, but I’ve been looking for good sources on compensation plans for employees of “regular” businesses (aka, not VC backed).All of my personal experience has been in start-ups or as a contractor, and I’m trying to figure out the right profit-sharing or success-based-compensation for our team, since there won’t be an exit that would make an equity stake worth anything. I guess we could still do shares of some sort and issue dividends, but that seems unnecessarily burdensome from a legal and paperwork standpoint for a handful of employees. So far, generous holiday bonuses have done the trick, but I’d rather people know that they were going to benefit directly from our shared success.Any suggested reading or examples?

      1. JimHirshfield

        I think you’re on the right track with dividends or bonuses prorated to vested equity ownership. Like you, I’ve been in mostly startups for some time.

      2. Matt Zagaja

        Maybe worth thinking about tax law here. Are you already appropriately defraying employee related business expenses like travel, parking, and/or meals? Check out the IRS publication on fringe benefits and talk to a tax lawyer to maybe find some ways to get some more mileage out of the extra profits:…. Especially beneficial if a fringe benefit directly pays for something that an employee was paying for with after-tax wages.

        1. Robert Metcalf

          Perfect. Tax-advantaged expenditures definitely help. It’s too late for us this year, but I’m getting ready for 2015 and it looks like our employees will be getting some fringe benefits.

      3. pointsnfigures

        Mike Gibbs and Ed Lazear book on personnel economics

        1. Robert Metcalf

          Thanks @pointsnfigures

  8. Ana Milicevic

    The original article in BI brings up something else — immediate liquidity to founders as a way of declining an immediate sale where strong financial incentives might drive the founder to accept for hopes of bigger exits down the road (note the Snapchat example). That’s edging dangerously close to blackmail in my book.

    1. JimHirshfield

      Agreed and my thought when I read that passage as well. “Oh, boo hoo hoo…poor little you, chose not to sell your company to Zuck for a bajillion. Poor fella.”

      1. LE

        Business involves taking risks and gambles but let’s face it the types of companies that are turning down offers like that for hopes a a bigger payout are really foolish regardless of how things turn out. This idea of “we can always get” really exists only in a manic brain.

        1. JimHirshfield

          .I agree with you more than you agree with yourself..JH

          1. CJ

            Well played.

    2. PhilipSugar

      I don’t agree. Let’s say you really did get offered a life changing amount of money for your company.Your one asset that company. You have been working for a reasonable amount, that allows you to live, but not much more.You are crazy not to sell unless your investors allow you to cash out a bit. Crazy, absolutely stupid.You have that one asset if it goes up 5X it just means you have 4X more money than you will ever spend.A VC that has been making 10X of what you as a base and has 20 companies has every reason to want to capture that 4X for her carry, also she has 19 other investments so if that goes to zero no issue. She is crazy not to offer a round where you take some money off the table.

      1. Ana Milicevic

        The key operative word here is ‘cash out a bit’. I do see a lot of value in liquidity options at subsequent rounds for founders (and early employees) and ultimately it comes down to amount. Taking $40MM off the table for turning down a $3BB deal seems egregious, yet in % terms it wouldn’t be. What’s the magic number (and is there one) for founder liquidity?That said, we probably agree more than it looks. The Snapchat example in the original article is what conjured up the blackmail notion.

        1. PhilipSugar

          Its relative. Lets say you own 20% of a company and can cash out for $1B. So that’s $200mm. You are a fool if you don’t demand to take 20% or $40mm off the table.Adjust the numbers however you want, by percentages. Also understand the bigger the number the higher the risk/reward.Could you imagine telling your spouse/kids: Yeah I had an offer to take care of you for the rest of your lives but I turned it down and lost everything?Don’t kid yourself it happens.

          1. Ana Milicevic

            Does it come with any strings attached?

          2. PhilipSugar

            Unless you are trading common stock certificates for cash and you own the vast majority of common, money always comes with strings attached.More strings than are on a marionette.

    3. PrometheeFeu

      Don’t you want to give liquidity before you get to that point though? I imagine a founder will not just make the sale decision based on their personal financial situation, but a whole bunch of other decisions leading up to it.

  9. shafqat

    Can you elaborate on point 9? Are these particular funds/investors that are set up to invest in secondary? Isn’t the counterpoint to this simplicity — as part of a funding round, the diligence is already done so there is no additional focus needed. If there is a separate fund that needs to be brought in to do the secondary part, that means pitching to, convincing, and then doing diligence with yet another party.Agree with all the rest. How to time employee stock sales for early employees is a tricky subject. Is is based on tenure?

    1. EquityZen

      Most employees have the right to sell their vested shares, so long as they abide to the rules in their employee shareholder agreement and other documents that deal with their shares. (also, see my above comment regarding these types of funds)For company-sponsored liquidity programs, tenure would likely need to be > 1 year (since most employee shareholders have a 1-year cliff before their options vest).As for other criteria, to give an example of companies that have completed secondaries for their employees:- Kabam (twice)- SurveyMonkey (twice)- Wealthfront- HootSuite- Square- Dropbox – SpaceX (many times)

  10. Tom Labus

    RIP Rex.

    1. JimHirshfield

      Who’s Rex? Did your dog die? Sorry.

      1. falicon

        He’s talking about the Jets coach (Jets, 49ers, and Falcons have already fired their coaches since the end of the reg. season last night).

        1. JimHirshfield

          Oh, duh. But I thought Niners coach resigned so that he could take higher paying job at his alma mater…no?

          1. falicon

            They “mutually agreed to part ways”…

          2. JimHirshfield

            FB Status: It’s Complicated

          3. falicon

            I believe they actually got rid of that as an option didn’t they (or am I just mis-remembering a rumor I read/heard somewhere)…

          4. JimHirshfield

            I dunno

        2. JamesHRH

          Black Monday.Jets need to fire their owner, as does Washington.

          1. CJ

            As well as the Bears but it seems they might have woken up to the fact that they’ve been bad owners after this season.

      2. falicon

        oh…and the Bears as of a few minutes ago too ๐Ÿ˜‰

        1. JimHirshfield


        2. pointsnfigures

          Bears deserved to die

          1. CJ

            And burn in hell for this brutal season.

        3. CJ

          Oh man, we’re dancing over those executions. ๐Ÿ™‚ No reason to cry for them, they earned the earned the axe.I just hope Emery went to McCaskey’s office and said: “Executioner, strike now!”

  11. ErikSchwartz

    If founders can pull out F-U money there’s a real problem. If founders can pull out enough money to cover lapsed expenses and maybe pay off their college debt, that’s a good thing.The major problem I see is the misalignment that gets created with the employees, especially early employees who took almost as much risk as the founders. As a founder you are asking employees to “trust me, this is going to be big” when you’re already hedging.

    1. LE

      As a founder you are asking employees to “trust me, this is going to be big”I guess if you believe that type of thing when someone says it to you good luck with that because you deserve what you get.

      1. ErikSchwartz

        I for one would never work for a start up where I didn’t believe that.If you don’t believe that you should go work for Google or Microsoft. IMHO there’s no place for the salaryman in a start up.

        1. LE

          The part that bothers me is the “trust me” not that someone might feel that way independently for some other reason.

          1. ErikSchwartz

            Unless you’re in the BOD meetings you have to just trust them. They are the representatives of the common shareholders on the board.

    2. ShanaC

      if we’re talking about founders this way, why not employees. What are the ages of everyone involved. Why is basically not everyone’s salary rising (since hey, tech talent of all sorts shortage)

  12. LE

    Business is an art. Altman is smart and ambitious but he is not “wise”. He hasn’t been around the business world (or VC investing) long enough to see things from all angles over time. The thing you do isn’t like driving a car. You don’t max out at 5 years or 10 years and never get better at it.

  13. kirklove

    Are “Founder Liquidity” and “Taking money off the table” synonymous?

  14. falicon

    “the search function on this blog is pretty weak” – ah good times…good times. ๐Ÿ™‚

  15. Michael Smith

    This is a great post @fredwilson:disqus, thanks for writing. It seems as the goal of founder liquidity is to align the founders with a long term vision by alleviating/eliminating stressors like major debt and providing some sort of return on time for the founders. As Hunter Walk (… put it in a post: ” being out of debt, having a little cushion, actually allowed me to just put my head down and work, not worry about my month-to-month bank account balance.”I think founder liquidity is one of the main reasons Snapchat turned down the $3B offer from facebook (…. Without that liquidity I wonder if they would have turned down the acquisition.Tl:DR I think liquidity is good for the industry if deployed at an appropriate time.

  16. LE

    i now believe that providing some founder liquidity, at the appropriate time, will incent the founders to have a longer term focus and that will result in exits at much larger valuations because, contrary to popular belief, founders drive the timing of exit way more than VCs doKey: “incent the founders to have a longer term focus”. Very important. Similar to what parents do in family businesses to keep their kids in and working until the parents decide to retire or die. More important than pay, they “shtup them” [1] giving them bene’s and taking care of their every need to keep them happy. So they don’t decide to move out of the business and go elsewhere. Really important concept.Anyway this is one of those little nuances that escapes people who have never had to bust their ass for a long long time to achieve a goal. Sam make an absolute statement based on how he sees the world given his somewhat limited exposure and what his needs may be which don’t represent every founders needs (some may be married with kids for example). He isn’t knowledgeable about the psychology behind why it might be good to throw someone a small bone to keep them from eating their owner. Or going for a bigger bone.[1] Yiddish word: “Shtup” might be appropriate. In one context means “take care of” or in a sense maybe even “bribe” or closer “tip”.

    1. ShanaC

      Shtup literally means to put in.

  17. LE

    I have found that employees are more patient investors than the public. They are willing to wait longer for returns because they want a good place to work. They allow the company to invest in long-term growth and not just short-term gains.Couldn’t that be simply because the money is not as important to them? Or because they are stupid and naive as far as the motives of the company and think that it’s acting in their own interest? Or they haven’t been burned over time?I don’t buy into the fact that they do it because “they want a good place to work” (unless that’s some kind of idealistic “I don’t want for myself” naivety).

    1. Dave Hopton

      pretty cynical view.I can fully believe employees are more patient. They know the company better than the VCs and because their upside of working there (options) is dependent on the company executing well, they’d rather not rush to an exit if it jeopardises their one lottery ticket. By contrast, VCs are sitting on lots of bets so incentives are completely different.Of course, they could be naive too.

      1. LE

        jeopardises their one lottery ticket.I reject 100% that entire way “lottery ticket” of thinking.

        1. Dave Hopton

          could you expand? It’s obviously not a perfect metaphor but points to the tiny chances of success and big potential payoff

          1. LE

            Expand? How about just work hard and not go for the lottery ticket? That’s why it’s a lottery ticket (metaphor) most ideas won’t pay off. And while they might get you to a soft landing by accident the world is littered with people who haven’t hit that ticket.Bottom line is you have to evaluate the downside of the risk you are taking as well as the upside. If you don’t evaluate the downside and just click your heels and wish you are foolish.Of course every person’s particular’s are different. If someone has a safety net to fall back on they might be able to take a gamble that someone w/o a safety net can’t.I don’t know if they still do this anymore but I remember a time when people were so hyped up they were willing to forgo Harvard in order to do a startup or “to go to YC”. Really idiotic. Sure Zuck dropped out of Harvard and so did Gates. But Harvard has graduated thousands upon thousands of students who (my guess is) are pretty happy career wise and are doing quite well.

          2. Dave Hopton

            you’re right, evaluating downside risk is crucial; joining a startup and expecting a huge eventual payout is almost certainly going to end in disappointment. You should join because you want to work on something you deeply care about with people who inspire you, in an environment unburdened by bureaucracy/legacy issues.But we’d be naive not to acknowledge that a big pull is the chance to receive a life-changing amount of money. Given that employees can only work at one company at a time, and thus many eggs are in one basket, does it not make sense to be more patient?If it’s me, I’d rather the business executes slowly but thoroughly and ends up a big winner

  18. John Revay

    Re: J. Robert Beyster, the founder of SAIC….just saw that he pasted away died a few days ago.”Published December 26, 2014Associated PressSAN DIEGO โ€“ J. Robert Beyster, who founded a small technology firm called Science Applications International Corp. and built it into one of the largest defense contractors in the United States, has died at age 90.Beyster’s family says the engineer-turned-entrepreneur died Monday of natural causes at his San Diego home.Beyster, who held a doctorate in physics, founded SAIC in 1969 with a handful of employees.Before it was spun off into two companies last year it had $11 billion in annual revenues and 44,000 employees. The current SAIC, based in Virginia, has 13,000 employees.Beyster said he founded his own company after deciding the U.S. government wasn’t getting its money’s worth from other defense contractors.SAIC was founded as an employee-owned business. It became publicly traded in 2006.”

  19. bfeld

    Strongly agree with almost all of this. Well said. I”ll just start pointing people to this when it comes up.

    1. Tom Jackson

      I landed here because you tweeted it. Thanks.And I agree with previous comments about pulling out a little money to relieve financial pressures incurred during build and launch. And, equally important and mentioned in a previous comment, to give comfort to risk averse spouses. I will likely be in this position.

  20. Kirsten Lambertsen

    Regarding the search function: try activating Jetpack (if you haven’t already) and using its search. It uses Elastic Search, which is pretty good, and is calibrated for WP posts.

  21. pointsnfigures

    Weighing in late. I ask founders is the money going to make a material difference in their lives. Everyone comes from a different place. Sometimes taking a little off keeps you comfortable. I never want to make decisions from fear.From an angel perspective I like to ride winners and press them. However I hate VC’s that come in and try to cram me down or attach a bunch of bullshit to term sheets when they didn’t take upfront risk.That all being said if I had invested 50k in Uber I’d be out by now if there was a chance to be out. Pigs get slaughtered.

    1. ShanaC

      late is better than never

      1. pointsnfigures

        I am in Kenyya. Not the right time zone and only a little Internet. We have our phones on airplane mode to avoid roaming charges

  22. Anthony Lage

    As a former trader and portfolio manager and now as a current CEO and founder of a startup, the notion that a founder (or employees for that matter) should not sell stock “along the way” defies financial logic. Just ask the loyal employees of Bear Sterns, Lehman Brothers, AIG, WorldCom, Friendster, MySpace, Iomega, DEC, Woolworth, Kodak. There are reasons for diversification – to protect your family and your assets, to sleep well at night, and to protect your founder stake from a six sigma type of event. My point is that, as with all things and especially startups, there needs to be an appreciation for nuance. If the founder is selling his/her stake like a maniac “beware”. If they are selling a small amount of stock to pay for their child’s tuition….well – that’s logical.

    1. ShanaC

      I actually tell this to strtup employees who are starting to play the market for the first time. They should not invest in tech companies that IPO. It is extra risk, why do it to yourself.

  23. Anton Johansson

    Great post! I guess it also depends on how much salary the company pays to the management/founders. Money can be distributed in many ways, so to speak.I’m a strong believer that people get more committed, risk-willing and long-term if they don’t need to worry about their personal financial situation. If a VC want entrepreneurs to take big bets, they need to understand that entrepreneurs will try a safer way if they have a stressful personal situation. Remove the stress and the entrepreneur will think bigger, more committed and focused. If that comes from an OK salary or by selling stock depends on the situation. I’m pretty sure that’s why successful serial entrepreneurs often think bigger than first time entrepreneurs.

  24. ShanaC

    What about early employee liquidity – how do you feel about that?

  25. CedFunches

    They want to take money out to pay for rent and you know other basic things like credit card debt most VCs act like they have no idea about. While they write blog posts about “Taking the leap” “Just go for it” “Go all in”It shows how insanely greedy and selfish some can be when they say they don’t want to change the founders lifestyle…as the founders contribute to ensuring theirs.This post could easily have been 2 sentences.1. As VCs we get ridiculously rich while we trick inexperienced founders into taking less.2. We should probably not do that.

    1. ShanaC

      Why not just have more honest conversations?

  26. BrianAllman

    favorite comment here so far, “Hungry is good, starving is bad.” at what point is there enough salary or liquidity to overcome bad decision making brought on by personal financial struggles. Do you really want a CEO, etc., thinking about rent, mortgage, etc and not the best interests or priorities of the company first? Probably a fine line from investor pov and I go back to that line above, Hungry is good, starving is bad.

  27. Twain Twain

    Thanks for sharing this GREAT post.Point (9.) is something that really makes sense. There are funds sitting idle and passive which are better suited for facilitating founder liquidity rather than the working capital provided by VCs.Re “founders drive the timing of exit way more than VCs do” is interesting because on Pando last month there was an article under Anonymous Founders entitled ‘Can I Give Up Now?’*…Yes, investors can “call for the founder / CEO’s head” (as is happening to Twitter it seems). However, it’s the founder / CEO who makes the call that they either want to continue the good fight for their vision and execution strategy, go and do something else they feel more passionate about or “throw in the towel.”

  28. @CJ_NZ

    Its called a bullet point, not tweet storm format. Microsoft word has done it for years and I am sure they even copied it from someone ๐Ÿ˜‰

    1. fredwilson

      You can call it whatever you want. I’m calling it a tweetstorm format

  29. JM

    This is an interesting discussion – my perspective is as an entrepreneur. Fred’s position is refreshingly open minded as usual. Normally, though, there is an underlying hypocrisy when VC’s unilaterally oppose their founders doing well financially along the way. (Note: ‘doing well’ is significantly different than ‘getting by’).Consider what happens on the other side of the table. Imagine a fictitious VC firm managing $1 billion across a series of funds with <15 people working at the firm. The 2/20 rule (even adjusting for hold-back, true-ups, closed investments, etc.) leaves the firm with at $10 – $20 million in income per year, every year. As you can see, no one will be struggling financially along the way inside this firm and many are getting very rich on salary-from-fee-income alone.If the “founder” standard is applied to the VC partners, this firm couldn’t possibly succeed, right? How could they? The principals of an enterprise have to be hungry to be successful, right?LPs strongly prefer to invest in proven VCs. VCs love to back proven entrepreneurs. In these cases, success begets success. So, why is a founder who obtains some liquidity along the way going to magically lose focus and start making bad decisions?Also, in response to many of the comments posted, the notion that an entrepreneur with VC investment should only be allowed to make enough money to cover bare necessities and maybe (if very fortunate) be allowed to sell some appreciated stock to wipe debts clean is absurd. They shouldn’t get rich from salary – but they shouldn’t be kept poor either. The notion that investors should arbitrarily determine how much income and capital gains is “enough” for an entrepreneur is presumptuous, arrogant, and offensive.A more aligned alternative to Founder Liquidity would be for Preferred Investors to convert to Common so everyone is aligned in the same class of stock. Then every decision regarding an exit can be made by all involved on an equal footing. This would never happen, though, because investors need (and rightly deserve in most case) to have control and preference. Keeping entrepreneurs dependent is a tried-and-true play out of the VC playbook.

    1. fredwilson

      Investors don’t need control. Preference is mainly because they don’t normally have it. I agree with much of what you say but I wanted to point that out

      1. ShanaC

        so why is preference still kept around?

        1. fredwilson

          I don’t understand the question

      2. LE

        Some of the above parent argument reminds me of my stepkids who often, in the past, make whinning comments such as “why do we have to do that if you don’t”. My wife and I put a kibosh on that shit.If you train them right you don’t get that. Best is my stepson, say, in the basement playing some video game. I come down stairs ready to exercise. I say “ok tv off I’m exercising”. And you know he turns it right off. Didn’t used to be that way. [1] Took a few times until he knew who was boss. He does now. That’s a problem with some young people. They don’t know who is boss. They don’t understand the pecking order. If they did they’d know how to work around it. They just keep crying “life isn’t fair”. And guess what? My stepson still loves me even with that “hard ass” attitude. If you want to call it that.[1] Why? Because I’m getting home at 8:30pm and I want to exercise and I’m not interested in waiting even 5 minutes for him to finish a stupid game.

      3. PhilipSugar

        JM does bring up a good point. I have always told entrepreneurs the reason why VC’s have preferred stock is that they put up cold hard cash where $1 is worth $1. You put up highly illiquid stock, value of which is unknown that is controlled by you.If you have a cash offer for more than the preferred amount…..those conditions no longer exist. It is liquid, the value is known at the time, and if you sell, not controlled by you.

    2. LE

      If the “founder” standard is applied to the VC partners, this firm couldn’t possibly succeed, right? How could they? The principals of an enterprise have to be hungry to be successful, right?Why would or should the founder standard be applied to VC partners? As they say “nice work if you can get it” as well as “this is the life they have chosen”. And you know “that is the life you have chosen”. The government didn’t assign anyone to do a startup. They can take their degree and do something else and make more money right away. If they want.And nothing prevents someone from being a VC as opposed to a startup founder. If they can get a job in VC, and that’s what they want to do, then they should try. If they don’t get in, well, to bad. “Nice work if you can get it”. This is not to discount the pressure of being a VC. My guess is that Fred works harder than any of his founders and has done so for a much much longer time. (See the bags under his eyes imo he is running himself ragged..) Being that he is older the “much longer” is definitely true. Judging by his schedule the “work harder” is probably true.

      1. JM

        Of course people make career choices so I’m not sure where your reaction is coming from. Or, your comparison below of me to your formerly unruly stepkids… :)The point I was trying to make was to simply challenge the false equivalency that so many people put forth between an entrepreneur’s personal finances and his/her motivation and commitment to succeed. Plus, the absurd notion that if an entrepreneur gains some financial breathing room along the way, he/she will automatically become an unmotivated, disloyal, disinterested founder/employee who no longer cares about generating investor returns.Most entrepreneurs who ultimately raise capital from serious investors have unwavering fortitude and perseverance. They get knocked down time and again but keep getting up no matter the circumstances. Keeping entrepreneurs “hungry” is more of a worn-out cliche than a productive partnership approach.The only two things that will consistently knock the wind out of an entrepreneur’s sails are (i) being taken for granted and (ii) financial engineering.Fred -> it would be interesting to take a poll of VC-backed founders to get at the heart of this issue.Possible question: What impact would tripling your salary or providing $2 million in Founder Liquidity make – would you:1) Work even harder – nothing can lessen your desire for the business to succeed2) Look forward to coasting – you’re ready to sleep in and take vacations3) Be indifferent – your current level of effort will continue

        1. PhilipSugar

          See my comments on this thread. We agree.

  30. Sol

    Great post Fred thanks

  31. Alec Wilson

    >>They are willing to wait longer for returns because they want a good place to work.I recently went through a job search, entirely with startups, and found this to play a major factor in my ultimate decision.>> the search function on this blog is pretty weak.Related, I work at Swiftype, and we could definitely help you out with your blog search function.Incidentally, you have the same name as my father. Please keep up the writing, I learn a lot from it.

  32. David Share

    I certainly agree that a company must be prospectively sustainable. However, founders often work years with few resources and sometimes even accumulate personal debt to persevere. The inherent risks undertaken far exceed investor risks on a relative basis. Thus founders should be allowed to normalize there circumstances once sustainability is apparent. This is in the best interests of all stakeholders.

  33. Gustavo

    I don’t know what founders cashing out does to a company, but it sends a very important signal to the market as far as what founders believe a company is worth. If people paid attention to these signals ( does anyone remember Marc Andreessen selling Netscape stock back in the 90s before it tanked completely ? ) there would be fewer irrational valuations.

  34. Sean Hull

    As a consultant to many dot-coms in the 90’s and through to today, I’ve been offered equity at a lot of firms I’ve worked at.As a John Bogle faithful, I couldn’t bring myself to go the equity route. I took cash & invested in a broad basket of funds. I guess I’m old school, but even when I’m working for a firm, I think it’s a risky bet.

  35. Gregory Magarshak

    Fred, being sustainably profitable is an interesting question. It seems to be a balance between profitability and growth. The guys at Basecamp will tell you that if you charge early on for your services then you can make sound business decisions. But a lot of the time companies such as Twitter (to name a portfolio company of yours) doesn’t want to put up a lot of friction in front of their growth curve. I feel like a lot of it has to do with access to capital and existing relationships, rather than the other way around.In our case we started out not having access to a lot of capital and chose to focus on product and strategy at the expense of networking with VCs. The result is that we now have a stable user base of over a quarter million monthly users, and some revenue. If we stopped then we could live off the revenue and pay our investors back. But, we are in it for the long haul and reinvested all the revenes to build a platform to power decentralized social networking ( and the next versions of our products are going to be based on it. Along the way we’ve mostly raised from Angel investors. The trickiest question for isn’t “how will you get users” or “how will you make money”? (We already have and do.) It is “how much are you looking to raise?” And it all goes back to speed vs dilution. Profitability and growth. We want this to be a billion-dollar company someday, but given our limited connections we only recently started to talk seriouly with VCs about syndicating a round, and I’m glad the conversations are a lot more productive than the trial balloons two years ago.We always thought the company would be a good fit for VC, but it took years to get there. I have to tell you from personal experience that a lot of it has been slow and wasteful because there still isn’t a good market mechanism for VCs to invest small amounts in early stage companies with specific plans, and invest more if they hit their deliverables. Kind of like the microloans in India. Whoever cracks that will get the next generation of startups before they become hot, imho.

  36. Stephen Green

    Really great article and post by AVC…

  37. bsoist

    spot onand I agree that there are a couple of points here that I hope we’ll revisit in future posts

  38. Kirsten Lambertsen

    “…you have founders going to the pay window ahead of fellow investors and employees, which can cause problems as you mentioned…”This idea gets mentioned a lot in discussions on this topic. I don’t quite understand it considering that founders have typically gone to the “debt window” far ahead of everyone involved. What problems come up, assuming the early liquidity to the founders doesn’t amount to a cash-out?

  39. JamesHRH

    Hungry is good, starving is bad.

  40. Juan Yagรผe

    I believe honest need for liquidity is easy to spotlight as well as willingness to cash out for living a rockstar life…. people don’t suddenly change their behavior. Having them building a business on their own, commonly bootstrapped and funded by FFF in the past is pretty incompatible with loosing their mind (in that direction… other different issue is poor management, whose nature is not the same)

  41. Dave Hopton

    Look at it from the perspective of a very early engineer (say employee #5). She’s been responsible for implementing huge value across the business and quite rightly has options which compensate her for 1) taking the risk of joining a new company and 2) creating so much value.However, unlike the founders, she has no way to sell her options during a round – primarily because she’s not at the table during discussions. Although the founders deserve credit for starting the company, their success is a product of the team they build – including employee #5. If those founders take money during a round, they lock in some of the value they’ve created and could already be coming out ahead, even if the company is a long way off the vision it sold its employees and investors. For #5, her wealth remains locked up in options, which are a fickle thing.This is the imbalance that Fred and Charlie describe, and which can be very damaging to team morale and company culture.Of course, if the reason the founders need money is to pay off expensive credit card debt which they took on to start the company, that seems more reasonable. That enables them to stop worrying about money and focus on building the company; investors and employees alike should be able to get behind that. That’s where the nuance comes in – why are the founders looking for cash, and how much?

  42. LE

    “Frown”. [1] Back in the day I made sure that nobody saw my new car I never drove it to the company, always left it at the lot. I didn’t want them to ask me for a raise by being in their face about things (this was a traditional company, not a startup, and the employees were working class people in Philly). But likewise I always was there, working all the time and never took off. No vacations (which they took of course) none of that. Like 7 days a week. I had a guy working for me, a manager who was also somewhat of a friend. And that was bad because anything I did he expected as well. And he would always come with his hands out as if he deserved whatever I got. I hated that. Reminded me of the way sisters and brothers are “everyone is equal to parents” thing.[1] So to your point, employees are not in a position to evaluate why you have a frown on your face they are just going to react in a negative way to that frown.

  43. Sunny Khamkar

    Agreed. Loved the transparency by buffer in their post when they explained their rationale – “We want to be committed to the team, customers and to being part of the movements, and we feel that weโ€™ll be better able to control our temptation to prematurely sell if we have some money put aside.”

  44. Kirsten Lambertsen

    OK, so when that’s mentioned I can safely assume it’s usually with the idea of the founder(s) getting much more than just enough to get rid of debt and perhaps replace any savings poured into the biz.BTW, it hasn’t gone unnoticed that you and @ccrystle:disqus have used “she” in your examples. You guys rock ๐Ÿ™‚

  45. CJ

    Shouldn’t this sort of thing be accounted for when raising funds? I start a company and put $10k on my visa and then Fred comes around and offers to invest. Of that $2MM check he sends, $10k goes to pay off the visa as this is company debt rather than personal and another $xx,xxx goes to provide me with a salary so that I’m not putting another $20k on my visa to live.Is this not the way that it works?

  46. awaldstein

    Not in my experience as a rule.

  47. Jeff Thompson

    I’d want to see any first time founder debt on the balance sheet during diligence and negotiate a percentage that will be repaid on closing the round.

  48. CJ

    Huh, good to know. Why doesn’t it? Shouldn’t it?

  49. awaldstein

    The way I think about this as an investor or raising funds is simple:The goal is to aggregate enough capital to to execute on a plan for success or a goal with a realistic runway to either get to income or show traction for the next round. Or both.Within that, everything is negotiable.

  50. ShanaC

    starving is commoner than you think

  51. CJ

    Yes, this exactly. I just thought that it worked that way by default, I’m apparently wrong.

  52. Guy Mason

    I agree… hope it’s revisited!