Some Thoughts on Founder Liquidity | Hacker News Reader

Some Thoughts on Founder Liquidity

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64 pointswasd43 comments

Not to be overly emotive, but honestly, fuck Sam Altman on this one.

If a person founds or cofounds a company worth >5million, they should become a millionaire and have lifetime financial security. The VC already in all likelihood already has lifetime financial security.

VC's bank on an 80-95% failure rate, so they are basically sacrificing lifetime financial security for 9/10 of their founders in order to increase the likelihood that 1/10 will be a bit more miserable and therefore work harder to increase the chance of a big exit.

fuck them, take financial security.

As a founder of a company that's raised $25M combined over our seed, Series A, and Series B, I think Sam's coming from the right place. We raised a $2.5M seed round and a $7.5M Series A. At no point during our seed and Series A (the time period you're talking about) would it have made any financial sense for the founders to cash out even a penny. We felt this way because we had and still have genuine intentions of building a huge company, and every penny should be invested in growing the company. If we had instead felt differently, we would have tried to cash out some of our equity (which we didn't), and that should have been a red flag for investors to stay away.

There's nothing wrong with trying to build a company to flip it for a few million in a year. Even better if you can do it without taking any outside money. If I were even an angel investor though, I would run away if I had any suspicion that that was the case.

Also, if your company is worth $5M on paper due to investor term sheets, there isn't any really meaningful way you can achieve financial security unless you sell almost your entire stake in the company, which investors obviously wouldn't want to partake in. $5M from a term sheet doesn't meant $5M of liquidity.

As an aside, I think your reply is incredibly immature, but I'm not going to use that as an argument for why you're wrong.

Congrats. You guys have a great product and deserve your success.

Tomorrow Youtube or Twitch could expand their offerings to include your business model and you may find yourself irrelevant within 6 months.

I had a liquidity event last year in which I had the opportunity to sell either none, a part, or all of a holding in a product I strongly believed in for $6 million. I cashed out $2 million, kept 2/3rds equity. Since then, despite my belief in the product, it has lost most of it's value. I am very relieved (as is my girlfriend!) that I took (some) money and ran.

When you are young you can feel a sense that success is inevitable and you want to keep doubling down, but there are a truckload of people in their late 30s and 40s and 50s for whom things just never quite worked out who would give anything for the security that a couple of million dollars provides.

Wait: doesn't the third graf of this comment answer your original question upthread? You cashed out 2MM, which came directly out of the hides of investors, who lost most of their investment. How is this a good story? When you take substantial money from an investor, your job is to earn them a return. That's not a moralism; it's definitional.

I "got liquid" 2 years ago. I don't have to worry about whether I served the best interests of my investors, because we didn't take funding. If your instinct is to say "fuck VC", you shouldn't be taking their money either.

>If your instinct is to say "fuck VC", you shouldn't be taking their money either.

This is a key takeaway I think. If you take investor money, you de-facto lose the "creating value" monopoly despite the fact that the founders are in fact the ones who are creating value (by building the business) - not investors.

What happens is causation gets muddled, so an investor can always say "well it wouldn't have happened without me!" when that might not have been the case. No one will ever know though.

When you execute a business plan that can't possibly work without a runway bought with millions of dollars of someone else's money, there's some pretty clear causation.

> How is this a good story?

A professional investor is likely to shrug and move onto the next thing if investments 1-9 of 10 don't pay out.

The 9 founders who bet their lives on it, less so.

This appears to be a story about someone who created no actual value walking away with 2MM.

That's fine; it's not per se unjust. It's just not, like, a moral imperative that it happen that way.

Also: speaking as someone who has been doing startups since 1995 and only recently had a significant success: I call total bullshit on the idea that founders "bet their lives". We're some of the most employable people in the world.

>I call total bullshit on the idea that founders "bet their lives".

So much this. It is one of the most annoying parts of the startup narrative that technology workers who spend parts of their career building companies are taking huge risks or that it is in someway abnormal to give up salary now for deferred compensation later (every person who gets a graduate degree full time does this).

In fact, the first time you raise an A round, you get more employable, even after the business fails.

It's like the opposite of betting your life.

About the worst thing you can say is that there's an opportunity cost from not starting a different more successful startup or not landing a job that would be the envy of 99% of employed Americans.

You need a scanning electron microscope to see the violin playing the sad song for VC-funded startup founders.

Say Tim Cook cashes out $50 million in Apple stock today. Say in a year that same stock was only worth $40 million.

Would you then say that he walked away with $10 million more than the actual value he created?

The point here is that at the time the founder cashed out his $2 million in equity, it had a value of $2 million. Not zero, not nothing. And the financiers obviously agreed, and took that equity in return.

You can't judge the deal by the direction the value took later.

Sorry, but over short time frames the deal gets asymptotically easier to judge as the value approaches zero.

It's hyperbole, fine. But the marginal value of the same million dollars to the pro investor and the founder are wildly different. To one it's a shrug, to another it's a life-changing amount of money.

I'd also be interested in seeing the expected lifetime outcomes. Taking a hit for several years, every few years, is probably not as wonderful as you're making it out to be on the average.

Congrats on the liquidity!

There will always be competition. I'm a huge fan of both YouTube and Twitch. I spend most of my leisure hours watching videos on those sites. They may enter the space, but even if they do, they'll have a long way to go before they can make us irrelevant. If we were ever to become irrelevant, it would most likely be due to other things, not those players.

This. Your last paragraph. Absolutely.

The mindset here is that financiers owe company founders financial security. Financiers are rich. But, relative to the economy, so are founders, even out-of-the-money founders. Why are they uniquely deserving of redistribution? Why aren't we instead arguing for a 95% tax on VCs that funds job training for people in the manufacturing economy?

Because the founders have created the business and have created several million dollars of value (based on the VC's own valuation). Why should they not be able to cash out for a lifetime of financial security?

Clearly they didn't solely create the business, because they had to take other people's money to do that. Why should we single them out for special treatment?

Should someone be rewarded with "a lifetime of financial security" if their product turns out to be hype that has no value two years later?

if the founders create the value, why would you give them a chance to leave with discounted future profits before the value is realized in a real (not discounted) profit stream?

Because regardless of whether profit is there, they should be able to extract value if they want to.

If profit isn't there, value is theoretical. You're just taking money from the VC (and the business' growth). You may find future rounds harder to fund.

So amazon's market cap of 144b is theoretical because they don't have profits? And bezos should be paid enough salary to survive but not so much that he is no longer "hungry"?

First, Amazon's valuation is theoretical. Their valuation is so detached from their fundamentals and so dependent on a narrative about their future performance that Matthew Yglesias describes them as "a charity benefiting American consumers funded by Wall Street".

Second, there's no valid comparison between the A-round valuation of a startup and Amazon, a giant publicly traded company with a decades-long track record and huge cash flows. Mutual and pension fund managers invest in Amazon. To a first approximation, none of those managers directly value startups.

Just out of interest, is there a company which provides covert early exits for founders? For example I meet with a founder, they sign a contract saying secretly that they will give me a share of their equity in 2 year's time or whenever a major liquidity event occurs, and in return I pay them an amount based on current valuation?

Founder stock agreement boilerplates restrict founders from encumbering or pledging their shares without the approval of the board.

I have heard of loans either secured by or "based on" shares of privately-held startups. I have no idea how common this is -- probably pretty uncommon.

See e.g. https://www.svb.com/private-bank/founder-liquidity/ and http://www.founderscircle.com/services/

I would be interested to know (1) what the legal and regulatory implications of such a deal would be, and (2) what the implications would be with respect to the deals the founder would have signed with regard to the equity they were holding.

My suspicion is this couldn't be done without causing problems in one or both domains, but I don't base that on anything solid.

> fuck Sam Altman on this one

Really? Most early investors make 90+ % of their return from the tiny fraction of investments that become huge. If the founder is willing to cash out for current market value, doesn't that imply the founder doesn't believe the equity will quickly grow 1000-fold? And if the founder doesn't think the company will become huge, wouldn't the investor be foolish to think so?

This isn't about squeezing the founders, it's about passing on stuff that might be glittery, but probably isn't the mother lode.

If the founder is willing to cash out for current market value, doesn't that imply the founder doesn't believe the equity will quickly grow 1000-fold?

I don't think it is that simple. The reality of startups is that there is too much happening in the market to accurately predict outcomes based solely on actions of the founders.

Given that, a smart founder probably should hedge this inherent market risk by liquidating so that in the case of a failure, given the high percentage chance of that, they aren't destitute and can start something else/get a job.

Arguably an investor should look at this as a prudent strategy given the risk profiles. Unfortunately there are too many confounding factors for it to be seen as a "rational" economic decision. Investors want fanatics and such behavior is way more pragmatic than fanatical, so it signals that the founder isn't rabid for full tipped scale risk/reward balance.

I think red flags start flying if founders are doing this and spending time on other things, but just as a general case it seems very rational to liquidate some portion early if given the opportunity.

This has always been a curiosity of mine as someone far removed from SV and outside of any major metropolitan area.

If you found or cofound a startup, at what point do you get any money from that? When do you draw a salary? When do disbursements to equity partners become a common (or at least not unheard of) occurrence?

There's a broad spectrum of opinions on this. Personally, I think that founders should draw enough of a salary to live on in the early days - that's going to differ from person to person, but I don't think it's reasonable to ask a startup founder to completely destroy their personal financial situation to extend runway an extra few months.

Once you get past Series A, I think you should be getting paid a fair salary based on your role and level of experience. You can work that out with the board.

As far as paying out equity holders, typically excess cash gets reinvested in the business, since many (most?) startups are optimized for growth rather than profitability. It is not uncommon, however, to have an executive bonus plan for achieving various revenue or other milestone objectives as the company grows.

In bootstrapped startups, it's not unusual for distributions to start happening immediately. One of the good features of bootstrapping is that it forces you to rig the business sustainably from day one.

Sometimes you need those to kick in immediately, as the founders have maxed out (or spent significantly on) their credit cards, and you want the startup to have a clean bill of health, not this major liability revolving at 20% APR.

Generally it's considered normal practice for a founder to draw salary post-seed funding, although it's common for it to be below market rate (rising when you raise your A)

Founder liquidity seems like such a minor issue in comparison to employee liquidity that I fail to see why it is taking up any brain cycles at all.

It's the agency problem. Illiquid founders are motivated to act against the interests of shareholders. I saw this happen bigtime at a company I once worked for.

Mind elaborating on that?

Illiquid founders push for early exits.

Illiquid founders are, generally speaking, majority shareholders. Hard to argue they are not looking out for shareholder interests.

That doesn't change the fact that pushes for early exits can screw over both the investors --- who put real money into the company based on a promise that the founders would work for their interests --- and employees, who will receive a pittance compared to founders in most early exits.

The marginal utility of a million dollars is a lot more to them than the other investors.

Founders have much larger allocations, and might be suspected as trading on insider perspective or their own confidence in the company. So their movements are much more influential on the overall share price of the company than an employee's.

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