There are a few posts on Techmeme this morning about founder liquidity.
Here’s my take.
Back in the day, the idea of employees selling their shares before a liquidity event for all shareholders was looked down upon and rarely ever happened. it signaled that the founders didn’t believe in the big idea and that was a signal no one was interested in.
These days founder liquidity happens more than in years past but to be clear it’s still rare. The press suggests this is a common occurrence and in my experience that isn’t the case. The vast majority VC backed investments do not include liquidity for founders/employees.
In the select few cases where it does happen, providing liquidity to founders/early employees clearly has some benefits. It rewards them for creating significant value. It allows them to diversify their personal economic situation. And if done correctly aligns everyone on the cap table to seek building a bigger and better company.
We have seen this a few times in our portfolio and so far I’m quite pleased with the results.
There are two significant things to be mindful of when considering founder/employee liquidity ahead of the entire cap table
It may cause some folks to leave before the mission is achieved. I don’t have the data but it feels like early google employees stayed at google longer than the early Facebook employees. Again that’s what it feels like – I want to find out for sure.
Before there is any founder/employee liquidity there needs careful evaluation about the capital requirements of the company. That doesnt mean the company needs to be profitable. It just means that the company needs to be confident that it has the ability to raise enough money (thru equity or revenue) and having equity capital goto founders instead of the balance sheet won’t hurt the financial requirements going forward.
(please excuse typos and lack of links. wrote this on my phone).