Ask HN: Founder selling some shares | Hacker News Reader

Ask HN: Founder selling some shares

Writing from a throwaway account for obvious reasons. I am Founder at a small but fast-growing startup, and my and co-founder we got an offer to sell some of our shares and continue to build the company with the old and new investors. Both of us are worried that it is going to alienate some of the team members who will see me and my partner make a (small) windfall. It won't be anything big by any means, but we fear that it will upset some of the folks who have been with us through the trenches. We obviously mean to continue building the company and do right by all the employees in the long run. Either way, are there any founders here who have been through similar situations and can offer some words of advice?

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FWIW, This same type of event DID demotivate me and a lot of my co-workers who were early employees at a startup (now 1000+ person company). The company raised a round and the founders sold off some of their shares. We knew because they bought nice cars/houses after the event. Our shares got diluted.

From our perspective, it seemed like a slight vote of no confidence in the company and a little unfair to us that we didn't get the chance to sell shares whereas they did. You lose a bit of that "we're in this together" vibe that makes it organically motivating to work at a place.

Just my 2c, but consider arranging a situation where employees can sell up to a percentage of their options as well. A small percentage makes the eventual payoff palpable and will reduce resentment. You'll likely need to sustain the high levels of motivation for your fast-growing startup to continue it's success.

> From our perspective, it seemed like a slight vote of no confidence in the company

It is. But it is not a bad thing: founders have very little besides their shares in the company in the world. Banks won't touch them when they apply for a mortgage or a car loan. Employees have safety nets that founders have to do without. Reducing some of the risk to sleep better is actually good for the company.

That 'vote of no confidence' is always there, start-ups are risky by nature. It's perfectly ok to de-risk a bit after carrying the vast bulk of that risk after some time has passed.

> and a little unfair to us that we didn't get the chance to sell shares whereas they did.

So, found a company yourself. See what you feel like after you've been slogging for a decade or so without any net. It is always super easy to berate the position of someone else when you yourself are taken care of.

> You lose a bit of that "we're in this together" vibe that makes it organically motivating to work at a place.

You lost something that you never had in the first place. Founders, employees and investors never have exact alignment of their goals.

> Just my 2c, but consider arranging a situation where employees can sell up to a percentage of their shares as well.

Employees typically have so little stock that this makes no sense, but in the few cases where employees have a significant amount of stock it might make sense.

Also, in many companies employees do not hold their stock directly, but as options and those options may not have been exercised yet.

>> and a little unfair to us that we didn't get the chance to sell shares whereas they did.

>So, found a company yourself. See what you feel like after you've been slogging for a decade or so without any net. It is always super easy to berate the position of someone else when you yourself are taken care of.

>> You lose a bit of that "we're in this together" vibe that makes it organically motivating to work at a place.

>You lost something that you never had in the first place. Founders, employees and investors never have exact alignment of their goals.

Don't startup employees normally take below market wages and work crazy hours to get the company going? They're not in as deep as the founders but they are making sacrifices for the company.

It's not like they are talking about taking on more investment here and everyone's getting diluted. It's the founders giving themselves a little personal enrichment ahead of all the other agreements that the employees agreed to.

Why would you expect the employees to continue to make the sacrifices to keep the company going if you do this?

> Don't startup employees normally take below market wages and work crazy hours to get the company going? They're not in as deep as the founders but they are making sacrifices for the company.

I'm not sure if I managed to make my point coherent enough, but 'below market wages' versus being up to your neck in debt are not exactly equivalent.

Some of the founders that I know have gone so far as to sell their personal belongings in order to get the company its initial funding. So sure, early employees make sacrifices too, but those are usually not at the same level. It is 'I am making less than I could' vs 'I risk all that I have built up over the last decade or more'.

> It's not like they are talking about taking on more investment here and everyone's getting diluted.

Well, that is not necessarily mutually exclusive. You can take on more investment and take some money off the table at the same time. Usually investors frown at this early on in the life of a company but after 3-5 years it is relatively common practice.

> It's the founders giving themselves a little personal enrichment ahead of all the other agreements that the employees agreed to.

No, it is the investors ensuring that founders can concentrate on the company rather than on their personal financial issues, which is good for everybody.

As for the agreements: if employees agree to be treated different from founders then that is their choice, you do not have to accept those terms. In general I never understood why early hires feel that 0.001% of the company is a fair compensation compared to founders that got together the week before and each put up $50 for their shares, but that's a totally different issue. Once you agree to that it's a done deal. Regret is hardly ever a valid reason to review a signed contract.

> Why would you expect the employees to continue to make the sacrifices to keep the company going if you do this?

I don't expect employees to make sacrifices at all. I expect employees to run the numbers, do the best they can by themselves and to (collectively if necessary) negotiate to the best of their ability. If they are unhappy with the way the founders comport themselves they can always use their most powerful option: vote with their feet.

To me it sounds like a case of utterly misplaced jealousy: if you think that founding a company and taking on the bulk of the risk is easy then you should found a company yourself. If you are unable to run the numbers and you'd rather have a CEO that can't get a mortgage or buy transportation vs one that is 100% focused on what matters then you are acting against your own interest and the company interest through pettiness.

That all started when - as an early employee - you agreed to a deal where you are not treated the same as the founders when it comes to the stock that you hold. In my company all employees and important freelancers hold the same class stock as my own, they paid for it (no options) and if I sell they have a right to go along with each sale.

But that does not mean every company is run like that and I can afford to do this because I already have a few successes behind me. Even so, if you are going for a worse deal then I assume that that is because you saw something positive in the longer term.

> Employees typically have so little stock that this makes no sense

Well, yeah. If you're already comfortable with under-compensating early employees feel free to continue shirking them.

Where did you see I'm comfortable with that? Please read elsewhere in this thread about how I run my company.

We made a similar arrangement a year ago, and it didn't cause any significant issues. We chose to be transparent about it, and every employee was allowed to sell the same percentage of their shares (as long as they're vested) as the founders. Most chose not to sell.

People should understand that building a successful independent company is easier when the founders don't have to worry about their financials.

Why don't you make it fair, like "everybody can sell X% of their vested shares". You can even be nice to employees and do it like "everybody can sell max{Z pieces of stock, X% of vested}", and set Z so that people will be happy, but it's still not too much. The co-founders have more, so they'll get more $, but everybody is okay with that. I had this happen at one of the companies (I was an employee), it was totally cool.

If you don't let employees cash out some of their stock, the good ones will leave. Remember, every company on the face of the earth is looking for good Sw.Eng., PM, DS these days; it's a seller's market, good people will just pack up and go on to the next gig.

For sure agree with this—letting your employees get a (very small) windfall themselves might make it easier for them to justify hard work and (potentially) lower pay. It also just shows you really care about your employees.

Depending on how long they have held the stock it may be a very small amount of money. Typically a real pay-out would require having held the stock for 3 years or more at a minimum, so this would benefit only the earliest employees in most cases.

Suggestion: let them sell X% of their vested shares as well. Ive heard of a company that did this with X=10. You could buy it from them too if investors do not see the value in cashing them out.

I just read all the solutions here, and this seems fair. That way they have no reason to be upset - they can take some profit now, or risk holding.

This is 100% normal, and very common.

You owe it to your employees to take everything off of your "mental plate" that doesn't relate to building the company. Your primary objective should be ensuring the business does well, employees are treated well, progress is being made etc.

Paying rent, worrying about food costs, etc should never be a primary concern if you have investors (for the investment's sake as well) and especially if employees are also shareholders (the value of their equity is at risk if you or other key members are personally at risk).

I've heard that usually around the Series A is when investors make the founders take some money off the table so they aren't living out of their car, eating ramen everyday, or dropping their child-care responsibilities, among other risk factors.

With all that being said, you can do good by your employees by offering liquidity to the earliest employees who have stuck it with you for X number of years or through some significant specified milestones.

Agreed... this is called "partial founder buyout" btw and helps align investors and founders.

Your investors want you to shoot for the stars... it's hard to do that when you're worried about rent, bills, etc.

Additionally, your EMPLOYEES benefit from this too as you're now thinking like investors and want to grow the company.

This is standard now, so that the founder can buy a Tesla and a house and get focused on the long term to maximize the company without taking the first buyout. Employees job is to do the work, trust them to understand. Don't buy a Ferrari and you'll be fine.

No one pays employees enough to buy houses; it’s pretty surprising that you don’t have to make a successful exit to earn that much as a founder.

Depends on where you live. There are lots of places in the U.S. where you can buy a house on a developer's salary. Not all startups are located in areas where the cost of real estate is ridiculously high.

We’re talking about startups, it should be pretty clear what geography is implied. You can live in those places but getting VC funding in one of them is an anachronism if it’s possible at all.

The bottleneck to making more money isn't directly employees, it's leadership. Market wins.

This would imply that EMs and Directors at bigger corporations are making that kind of money. Far as I can tell, they aren’t.

I'm a founder too. If I did this I'd expect my employees to be mad. Bad visually. Why are they buying your personal shares and not shares from the company.

Risk balance. Founders are essentially non-diversified investors. All of their wealth is tied up in a single investment. It is very sensible to take at least some money off the table after initial value has been built to ensure that you don't end up in poverty if things go South. Doing that reduces the chances of things going South because you have one less thing to worry about.

Employees are as well.

Employees have employment contracts, can apply for mortgages and credit to buy cars. Start-up founders tend to have a hard time with those things, especially if they went heavily into debt to be able to fund their start-up in the early days.

It's not rare where I live to have founders rent crappy houses and employees buy their place because banks will not touch founders from a risk perspective.

This is accurate, non-founders don't have a clue how hard normal everyday things can be, like even buying a crappy used car for a fair interest rate. I got downvoted in my other comment likely because I pointed out I would be suspect of early employees that get upset.

Fact is, if you explain to early employees the truth and they get upset than they MAYBE aren't in it to win with the team, because if they are they would see you as a founder needing to be able to function in everyday life as critical to the business succeeding. But this is the exact reason I usually have seen founders hide the fact they do this and try to hide even purchases or say they came from a family member. Personally, I prefer the transparent method myself, but understand why people hide it so often.

In my company we are radically transparent regarding stock deals, hires, our financials, order pipeline and so on. So far that seems to work well, time will tell what it does in the longer run. It's an experiment of sorts. We also do not have class 'B' shares and do not have an ESOP but issue stock directly to employees (or sell founder shares). It's a bit of an odd duck as companies go because the ramp-up to the point where others could join was 8 years.

8! When I made my first comment I assumed you were younger. This may make employees less mad, due to company age but I'm still not clear why the company doesn't just issue more shares rather than owners selling theirs. Have you been getting paid? Are you planning on leaving? Why divest?

Good questions.

I'm 53, have worked pretty hard all my life. It's time to pass the mantle. I've allocated 40% of the stock in my company for the people that will pull the cart, will draw down to 51% as long as I'm CEO and will then drop to 10% in an MBO when the time is right. I do not want to become a backseat driver. The consultancy arm is small and quite profitable, we do our own investments and have more work than we could reasonably deal with, and a very impressive array of customers.

I've been getting paid but about 1/2 of what I was making when I was still running the whole thing by myself, I see that as an investment and as a way to make the company less dependent on me as a person. To turn a one-man consultancy into a scalable company has been a major challenge but I think we have the hard part behind us.

Our profit allocation is: 1/3rd shareholders, 1/3rd employees, 1/3rd investments. That gives us plenty of opportunity to dogfood our processes, and ensures that people get paid for their efforts.

> Are you planning on leaving?

Not immediately, but somewhere in the next couple of years. What will happen is we will split the investment and the consultancy branches, I will continue to run the investment part and my partners will run the consultancy, maybe some will join the investment part, time will tell.

> Why divest?

Because of (1) diversification, (2) the stock already being issued and (3) it being more tax efficient both for me and the rest of the partners here.

Accelerated vesting in case of a liquidity event has been put in place as well, there is a tax liability there but it is manageable.

Employees are generally not non-diversified investors, since they don't own enough company stock for that to be their primary investment. (Most of their assets could be in 401-K retirement accounts from previous employers, for example.)

Depends a lot on the situation. If the two of you bust your asses and the company is on a great track to liquidity for the employees, I'm sure people would feel fine (though in that case, why not just pay yourself enough salary?). If there's still massive risk that employee equity goes to zero, as an employee I would be pretty turned off by the fact that the founders want to cash out.

Why don't you share some with the employees?

This. I think this makes the most sense. Your earliest hires took a risk as well by turning down big $$$ from Google, etc. to partake in sharing your vision and gave you this opportunity to cash out by building your company to this point.

I'm not sure what the situation looks like, but I've seen startups where the founder(s) have 50-90% of the company and then the first engineer who built the entire tech stack from the ground up has an illiquid ~1-2%. That is pure exploitation.

While a good sentiment and seemingly fair, it isn't reasonable for a company to offer this to early/all employees early on in the company lifecycle. Two key reasons. First, the early employees stock likely hasn't vested enough to make this reasonable. Second, unless the company has already reached the later levels of say Series C/D and are discussing options around IPO or next round to do XYZ, the investors aren't going to entertain this, except for maybe some select early employees.

And founders can't sell their own equity and turn around and pay bonuses to employees out of that, it would involve an accounting nightmare that no investor would like to see on the financials in later rounds. Not to mention that money would be taxed so many times no one but the government would win.

This is the sneaky little secret behind being a founder. It's not only common it's expected. No one wants you worried about money while running the company. If you're in the valley most seasoned employees know that it happens.

It is not common or expected unless the company is very successful. For most companies, investors will be disappointed if you want to sell before an exit.

I've never worked for a company successful or not that hasn't. Maybe it's different in other places in the valley but I've seen founder buy houses while their company fell apart. I don't think I've met a founder who hasn't after their series B

I wouldn't do this without providing a pro-rata opportunity for the employees. The employees, as small minority shareholders basically have to trust you to treat them fairly and equally, understanding that you, as larger shareholders will obviously be getting a multiple of their payout. If you cash out without giving them the same opportunity, you've broken that trust. You say that "We obviously mean to do right by all the employees in the long run", but they don't know that for sure, and the best guide they have to what you'll do in the future is what you're doing now.

Why not take the small windfall and offer to buy a portion of your employees' shares or give them a bonus?

There is no issue with this, taking some life pressure off founders is not bad, it lets you focus where you should. Could it upset some early employees, yes it could, but I'd argue done properly it won't and done properly anyone who gets upset should raise your eyebrows about why they are there.

Two ways to go about this though, one is 100% transparent to the (at least early) employees and tell them exactly what is happening. Second is not to tell them anything about your personal situation as frankly as long as the business is moving forward appropriately and has enough money to reach the next milestones there is no issue. Under the second scenario you only mention the raise going directly to the business as that is all that is relevant to the team. The personal share sale is just that, private and personal. In no way will you be getting wealthy off doing this, you will simply get some living money which you have probably foregone over the past few years, more so than early employees likely.

If you do it transparent, I'd present it exactly in the manner above. e.g. "Look, we are taking another X round and as part of the round we are selling a small amount of founders equity to relieve some of our personal life pressures so we can stay 100% focused here". Be honest, you gave up making money to do a startup willingly but that doesn't mean life stopped moving forward and you have bills to pay just like everyone else. Honestly if they can't understand it they may not be there for the right reasons anyway and it will be some insight to the early team members. Early employees might be below market, but likely aren't so far below that they are getting hurt, and if so they'll leave soon enough, rightfully and understandably.

If your company is actually growing, you should not sell shares. They will be worth more later and the optics are bad. Much better to adjust your salary/bonus to address personal cashflow issues.

This is bad advice. No one should have all their (paper) net worth tied up in one investment. Selling secondary shares is just sensible, even assuming you believe in your company.

Another perspectivemight be that selling a small amount of shares gives the founders the financial stability to weather any storms. Let's say they sell 2 mil worth. Small in the grand scheme of things, but invested wisely can cover food, modest rent in an apartment etc for life assuming they do odd jobs.

Then again I come from a working class background, so I may have a different perspective.

Make sure to have a lawyer go over your operating agreement to make sure that you are selling your shares in accordance with your operating agreement. Also consider the risks of control. Depending on structure, you could inadvertently lose control if you have it now. That said, taking cash off the table is never a bad Idea if it means giving yourself breathing room.

If you don't take some money out, everyone on your team will be worse off. They need you to lead to company and make their equity worthwhile - they don't want you worrying about rent/mortgage/school/whatever, and they especially don't want you to sell the company too soon because you don't have any money.

Gotta look after yourself first. I’d suggest not making any immediate lifestyle changes or flashy purchases to minimize morale impact. Furthermore if you’re still putting in the effort that will be obvious to employees.

Ignore concepts of “fairness” and think purely about cause and effect.

This is only acceptable if your company is very successful and it is clear you have made a lot of value for your team and your investors. If the success isn’t there, it will cause lots of problems. If you take money off the table when everyone else’s success is still in question, you’ll lose the trust of your team. A founder selling 5% of their stock could be a lot of $, but 5% of employee #2s is likely much less so the impact of their participation is much less.

Offer to buy some shares of employees and spread some of the cash for Xmas if any have vested.

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