A VC - Latest Comments in Founder Liquidity

Re: Founder Liquidity

robyncowie — Tue, 08 Sep 2009 21:03:15 -0000

Thanks Shana. I'm still confident that we'll (partner, business) be able to come to some arrangement that lets me do both.

Re: Founder Liquidity

robyncowie — Tue, 08 Sep 2009 20:59:45 -0000

Mark, great solution. I see you've had the benefit of having been on both sides of the fence. Although my co-founder and I had been in business together for 8 years before we started this venture, I think we were just grateful for the investment and didn't really understand what we could or should ask for. Having said that, our investors are incredibly supportive and do try to look after us. They volunteered extra options in-lieu of salary without us having to ask, and I think they would be open to something like the path you are suggesting.

Re: Founder Liquidity

fredwilson — Tue, 08 Sep 2009 20:41:09 -0000

I smelled it when I read his blog for the first time. He's an action oriented person. Nice

Re: Founder Liquidity

fredwilson — Tue, 08 Sep 2009 20:03:03 -0000

I disagree about the ability to sell to anyone without restrictions. That's how craigslist got its competitor eBay as a 25pcnt shareholder

Re: Founder Liquidity

Andrew Warner — Tue, 08 Sep 2009 17:48:01 -0000

If you think Mark Suster's blog is helpful, you should see what he's doing to the SoCal startup scene.

He's energizing the community here by helping event organizers, talking to entrepreneurs, connecting promising entrepreneurs with mentors and giving feedback.

Re: Founder Liquidity

Nick Oliva — Tue, 08 Sep 2009 13:04:19 -0000

It's easy to distinguish, within a market and reasonable personal circumstances, between getting rich on salary, getting by, and starving. Anyone working at a startup is taking significant risks already, and it takes much longer to accomplish things than first-time founders or early employees expect when they commit. A fair wage is the only reasonable approach unless the founders are able to get by without compensation (e.g. serial entrepreneurs); in which case, they are also investors and for that deserve a larger share.

Re: Founder Liquidity

markslater — Tue, 08 Sep 2009 09:34:16 -0000

conflict of interest.

Re: Founder Liquidity

markslater — Tue, 08 Sep 2009 09:30:08 -0000

the way we addressed this robyn i mentioned i a post above. We started the company 2.5 years ago - invested 7 figure sum at founding - and ran for a year with no salary before completing a second financing in april of this year, at which point we re-upped along with a syndication of institutions. What we did and continue to do is to 'defer' a portion of a board approved salary (lower than market but lights on level) - and seek to re-coup a portion of this at the next financing event or profitability.

some institutions will balk at this as they simply see this as a payable and they want their money to 'pay forward' not 'pay off' - but if you have chips in (like it sounds like you do) as we all do, and simply want a 'top up' as part of a go forward strategy - not a liquidity event, then this is a sensible way to address this. the reality is no founder can go really beyond a year at no or little salary - with out a recourse milestone thats achievable. Its extremely tiring and can get very frustrating.

Re: Founder Liquidity

aarondelcohen — Tue, 08 Sep 2009 00:31:09 -0000

Bijan, makes very key points here.

1. Big Funds should put more money to work and buy bigger pieces of companies by granting founder liquidity. Gone are the days when VCs own 70% or more of companies. I think this is the best way to do it. And the only fair way.

2. In Boston, NYC, and SV even a few million dollars of liquidity per founder would not qualify as retirement. It does remove desperation for the founders who think it's all or nothing without liquidity. I don't think this discussion has covered whether entrepreneurs who have nothing are better than entrepreneurs who have something, but not retirement money.

I've certainly see some great entrepreneurs retire because they don't want to manage startups anymore. Very few of them moved to some super cheap place to live and are living frugally to preserve the one time they made a million or two. In general they made enough money to stay where they are.

BTW, twice I've participated in founder liquidity events, and all it ever did was make me hungrier to build even more valuable companies that would produce even greater returns investors and for me. But Bijan is right. If that was say, $20mm in liquidity (say Angie's List) then maybe I would do something different. Angie's List met Chris' criteria of being profitable and they had acquisition offers.

Re: Founder Liquidity

Jason — Mon, 07 Sep 2009 20:00:53 -0000

yes Fred, and the last thing i want to say about it before you see it is by please Googling it =)

Re: Founder Liquidity

Nat Kannan — Mon, 07 Sep 2009 19:32:13 -0000

Fred,

I think the idea of using market signals to set Founder's comp is a rational one. If a Founders role is rewarded with ownership stake, then his or her leadership role should be based on comparable comp plan to attract an outside CEO to run the company. This would set the Founder's comp plan on a fair basis as per market signals. As regards selling shares to third parties, all shareholders including Founders should be free to do so as they would be in a free market. There should be no contractual restrictions for any shareholder. If a Founder is not motivated and energized by his business then he should not be counted on to build it. The Board need to replace him.

Nat

Re: Founder Liquidity

Jerry Vandesic — Mon, 07 Sep 2009 19:11:14 -0000

I think you misunderstood my point. I was simply saying that being hungry for a cash payout is not al that motivates successful entrapraneurs. If it were, there would be no motivation to do a second startup once you have cashed out. And the VCs know this, since the are happy to back founders who have seen prior success.

Re: Founder Liquidity

fredwilson — Mon, 07 Sep 2009 17:04:04 -0000

There's a simpler solution. Let the market work.

Re: Founder Liquidity

Darren Herman — Mon, 07 Sep 2009 17:01:52 -0000

"Seems complicated and hard to arrange and enforce"

With all due respect, weak answer. If we can lay out the road map to this with all the hurdles, then it can be enforced and arranged.

This is is purely in a theoretical world of course, but could be interesting to dig deeper into.

Re: Founder Liquidity

kidmercury — Mon, 07 Sep 2009 16:21:04 -0000

lol, well i guess it won't be happening then! too bad, because i think an entirely new economic/financial framework is what is needed.

Re: Founder Liquidity

Dave Pinsen — Mon, 07 Sep 2009 16:01:11 -0000

I can imagine one reason you wouldn't like them, but I'd be interested in reading your post.

Re: Founder Liquidity

fredwilson — Mon, 07 Sep 2009 13:38:03 -0000

I don't love exchange funds for a variety of reasons. I should post about them sometime

Re: Founder Liquidity

fredwilson — Mon, 07 Sep 2009 13:36:06 -0000

Is that what you are calling it? Suredone?

Re: Founder Liquidity

fredwilson — Mon, 07 Sep 2009 12:53:12 -0000

I agree

Re: Founder Liquidity

fredwilson — Mon, 07 Sep 2009 12:51:10 -0000

If this is going to happen the federal govt is going to have to allow it. I'm all for it too

Re: Founder Liquidity

Daniel Weinreb — Mon, 07 Sep 2009 12:34:22 -0000

At my two startups, we didn't do "subsistence salaries"; we got perfectly reasonable salaries. Especially on the second one, when the average age of the founders was higher, we had spouses, kids, mortgages, etc. "Get rich on the equity" is fine; nobody expected to get rich on the salary. But deferring any reasonable compensation until a liquidity event just is not feasible for most people. (Sure, some founders of companies are quite well off, but many are not.)

Re: Founder Liquidity

Daniel Weinreb — Mon, 07 Sep 2009 12:32:07 -0000

Keeping interests aligned is great. I don't know how many VC's would be willing to put themselves in the position of a company founder, though. That 2% annually must be nice to get. And getting 20% of the profits without a corresponding downside is pretty sweet, too.

Re: Founder Liquidity

Daniel Weinreb — Mon, 07 Sep 2009 12:29:50 -0000

At the Business of Software conference last year, someone made the point that if the founders are financially struggling personally, it might be a good idea to let them take some money off the table so that they can concentrate more on the business and less on how to pay the bills. Obviously this depends a lot on knowing the personality of the founder in question and his or her circumstances, so you can have some confidence that the desired outcome will occur.

Re: Founder Liquidity

markslater — Mon, 07 Sep 2009 12:22:38 -0000

we just closed a financing and we enforced a certain amount of what we called 'employee debt' - Us four founders agreed to take half salary (the total salary amount was also under market) with a view to converting up to 50% of the outstanding debt to common - at a discount to the financing price. This worked for us and for the institutions for a whole bunch of reasons - we were all founding investors anyway - so the new investors had no issues with our 'commitment' - any one of us would have had a material adverse affect on the company were we to leave - and it was plainly obvious to them the amount that we had committed coming in to the financing.

I am currently considering a new real time texting opportunity, and would want this situation to repeat. As chris sais below - if you run in to a VC that would not consider this - get another one. If you don't have this kind of leverage - than that spells trouble for both parties.

In this day and age - some measure of pay back for my sweat and toil - is not Liquidity - its the conclusion of shared risk, cash flow for founders who have put their families likely through the ringer, and a true sign that the new guys get it, and are going to do right by everyone going forward.

If the salary was $150k - lets say it went 6 months that would provide for - 75k/2 ($37.5k) - lets say that 50% of that goes out in cash, the remainder converted in to common at a discount to the financing. is that so dislikable to a VC? given that this amount is far far less than the cash already in by the founders.

bottom line is - i don't want liquidity for my founding stake at an institutional financing. And if a VC were to try and tell me its a re-start - or no credit for past work - then its a short conversation - i've heard these lines before. If there is 'employee debt' and the situation is properly audited, and the amount is (it should not be FYI) palatable (less than 7% of financing) and the terms require a founder re-commit in addition to a small amount of cash - to ease the pain - then it should work for all concerned. The problem comes if you have a PPT and an idea and $xxx,xxx of 'employee debt' - then you will legitimately be fighting the 're-start' or 'no credit' game.

Re: Founder Liquidity

ShanaC — Mon, 07 Sep 2009 12:07:03 -0000

That's very true and makes parts of the barrier for entry harder. Not sure if that is a good thing or a bad thing