When Google went public in August of 2004 one of the first things I did with my employee grants was sell enough to pay off my student loans. In retrospect I lost a lot of future gains by cashing out too early but what I gained was more important: peace of mind in removing the only debt I’d ever carried. Did I work any less hard the next day because of my liquidity event? Nope. The vast majority of my future savings was (a) not vested yet and (b) tied to hope for future stock grants I’d earn. Being out of debt, having a little cushion, actually allowed me to just put my head down and work, not worrying about my month-to-month bank account balance.
It’s for reasons like these that I support getting startup founders some liquidity during their company’s first few years, perhaps as early as Series A financing when appropriate. At Homebrew we’ve backed many first time founders, many of whom have struck out on their own and are putting lots at risk. They’re hungry – not just for financial success but to build a company they can be proud of for years to come. Pre-seed round they’ve done things like share the same room in a two-bedroom apartment in order to airbnb the other room. Or put startup expenses on their credit cards, far beyond their savings, hoping they can close financing for the company by end of the month.
So what should happen when these founders get past a few important milestones in their company and are able to raise healthy financing rounds at meaningful multiples? They should get a chance to sell small amounts of stock and put some money in the bank ($50k, $100k, $200k). Feel ok about going out to dinner every once in a while – maybe even take their significant other for a weekend to Napa as thanks for putting up with the long hours and uncertainty. Clear our some student debt. Get an apartment of their own in an expensive city like San Francisco.
Is there a formula for this? ie Raise $X million at Y valuation and sell up to Z%? Of course not, it’s situational and a discussion between founders and their investors. It’s a personal decision – to sell stock that you hope will be worth much more later on – but one which should be given to founders. Done properly I don’t believe it will disincentivize or send wrong signals to employees or future investors. As seed venture capitalists, we want founders to ‘go the distance’ and continue building value. It’s not clear to me that “all or nothing” is the right path forward or even that waiting until growth capital rounds makes sense. Yes, at early stages you want to maximize investment going into company operations and not private pockets but that’s why these conversations should happen openly and with structure (for example, series FF which requires Board approval to liquidate in a financing).
I conjecture there’s a secondary benefit to managed liquidity for founders: it may help diversify founder populations. The opportunity cost of a startup in forfeited salary and in-the-money equity at larger tech companies can be considerable. If you don’t have family money or a nest egg from previous wins, let’s balance that risk with some short-term opportunities. It’s not about giving founders a wild lifestyle or encouraging them to increase their personal burn (Sam Altman has a great tweet about this and I’ve written the same).
If you’ve entrusted a young founder with millions of your LP’s money, you can probably trust them to make the right choices if you offer the ability to pull $100k out of a company that was just valued $50 million.