Founder liquidity – good or bad?

The topic of founder liquidity is interesting, proponents talk about helping entrepreneurs “pay the mortgage.” or get less stress around driving the company to an exit.

In other words: A company gets founded, generates revenue, the CEO pulls a modest salary but the challenging exit environment means that they remain distracted by personal financial obligations. So VCs feel it’s often best to remove this distraction, either by buying back shares themselves or letting early employees sell shares on the secondary market.

I am a proponent of this, and it makes perfect sense to me. Being a cash starved entrepreneur numerous times (while being “rich on paper”), I know that this really works to create more focus as an entrepreneur. And sometime there is a fairness to this (you worked hard to build significant value for others, and sometimes you have given what you can to create that value (and it is time to take another role with your company), a smaller partial exit can be a good thing for everybody.

This story emerged in the morning news flow: The IPO filing of Brightcove that yesterday filed for a $50 million IPO. Brightcove was once considered one of Boston’s hottest up-and-coming tech companies (when there was a booming startup scene in Boston). Its founder Jeremy Allaire previously was credited with creating Flash (after he sold his first company to Macromedia), and Brightcove seemed to be the enterprise version of YouTube.

But then the company stumbled repeatedly, and has yet to make a profit in its seven years of since inception. However, early employees sold around $7.2 million worth of stock back to lead VC firms Accel Partners and General Catalyst. Included in these sales was CEO and founder Jeremy Allaire, who sold around 35% of his shares for $4.86 million, according to the S-1.

Good or bad for founder equity? What is your take?

2 replies
  1. Andrew Romans
    Andrew Romans says:

    There is no single answer that is correct for every person, every company and every stage of a venture. Make the analogy to playing poker in a casino and this becomes more self evident. If you gambled $200 playing poker and then grew your $200 to $5,000 would it be logical to bet 100% of your $5k? Absolutely not! If your wife or husband were sitting next to you on your vacation in Vegas and you grew $200 to 5 grand you can bet he or she would encourage you to put $4,800 in your left pocket to take home and keep gambling with the initial $200 and maybe blow another $200 after you lose the $200. The moral of the story here is that it is almost sick and twisted that VC’s and even other entrepreneurs encourage wild risk taking when the value of these companies goes up. There is a strange culture in Silicon Valley and the global Silicon Valley that puts glory on the stupidity of gambling and betting the full 5 grand that you grew from $200 even when it took 5 years of your life to get from point A in starting the company to point B of having stock nominally worth $4.5M and someone is trying to talk you into keeping all of your chips on the table and putting not even 2% into your pocket to take home now. My advice to entrepreneurs is to carefully diversify some of their equity (common shares, stock options, phantom stock, what ever) into cash or a derivative of other shares via some vehicle like The Founders Club offering a well managed equity exchange fund. 

    • Anonymous
      Anonymous says:

      In general I favor early founder liquidity, most entrepreneur are more focused and committed when they feel that all long hours, also gives some financial reward, and also their families see some result of all their work. 

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