Both Sides of the Table - Latest Comments in Should Founders Be Allowed to Take Money off the Table?

Re: Should Founders Be Allowed to Take Money off the Table?

Peter Gallant — Fri, 17 Dec 2010 10:24:27 -0000

Mark:

A very insightful post! I have experienced firsthand what happens when the interests of the entrepreneur (me) and the investors (angels and venture funds) are not aligned. I do believe that at least some proportion of the responsibility rests with the entrepreneur during the search for cash when they should be doing their own due diligence on their prospective investor partners. All of us who have raised capital know that selecting the right people to be at the boardroom table with us one of the most critical business decisions in the life of a start-up. We can forget that cash is a commodity, especially when our start-ups are running out of it. When this happens, we can look past those deal terms (and people) that tend to mis-align incentives, and we don't ask our investor partners about how to keep our interests aligned as the storyboard either unfolds or as often happens, goes in a different direction.

Regards,
Peter

Re: Should Founders Be Allowed to Take Money off the Table?

Kevenwculp — Fri, 10 Dec 2010 04:04:34 -0000

I agree with all of this. As far as the people who don't think it's fair to the rest of the employees who don't get to take money out - "get over it" is what I'd tell them.

The "key players" had the vision and drive to start the project, you're just along for the ride. Remember your role.

Re: Should Founders Be Allowed to Take Money off the Table?

MikeSchinkel — Tue, 07 Dec 2010 14:53:58 -0000

@Renato: Great comment. I think your final point bears repeating:

"Getting the founder's family strained and against the startup is bad for everyone including founders, VCs, families and Startup."

Re: Should Founders Be Allowed to Take Money off the Table?

Harry van der Veen — Tue, 27 Oct 2009 15:28:33 -0000

Nice post. Many valid points.

In my opinion (in regards to the spouse topic), it is just very unwise to keep a door open for a spouse to have the opportunity to take your money if things go wrong.

Yes you hook up together in a period that you trust each other, but when people separate the fight can be very very nasty. In that case you just want to make sure you have your assets covered, in this case meaning that you want to avoid that your spouse can try and claim a big cut of your money or your company.

Re: Should Founders Be Allowed to Take Money off the Table?

msuster — Sun, 13 Sep 2009 16:00:28 -0000

Thanks for the comments. I know about Sharespost and competitors but I recently heard about this idea where founders can exchange a portion of their shares into a diversified pool with other founders. If that's what you do I'd love to learn more. Please email me at mark@grpvc.com Best, Mark

Re: Should Founders Be Allowed to Take Money off the Table?

larryalbukerk — Sat, 12 Sep 2009 20:00:38 -0000

Hi Mark,
A topic near to my heart, this is what I do for a living. I agree that releasing the pressure valve a bit does align incentives and in many cases will increase the return for the VC. There are a few ways to do this other than asking the VC to cash out the founder. The first is to participate in an exchange fund for private stock. Founders, if invited, can swap a small % of their stock with other founders, this raises the probability of an exit even though they don't cash out today. I say this selfishly as I run EB Exchange Funds (www.ebexchangefunds.com). Our funds have about 25-30 companies in each fund so plenty of diversification. The other alternative is to sell to a secondary investor. This alternative also validates that you've created value but usually you need a very late stage company or a very hot company to sell for cash.

And Mark maybe we have a similar view because we have plenty in common - we are the same age, I got my MBA at Chicago, I did a few venture backed startups and I have a couple of young kids.
Larry

Re: Should Founders Be Allowed to Take Money off the Table?

David Semeria — Tue, 08 Sep 2009 18:58:26 -0000

Re: Should Founders Be Allowed to Take Money off the Table?

ammosov — Tue, 08 Sep 2009 18:29:13 -0000

May the Force be with you.

Re: Should Founders Be Allowed to Take Money off the Table?

David Semeria — Tue, 08 Sep 2009 17:39:36 -0000

Strong of opinion this one is

Re: Should Founders Be Allowed to Take Money off the Table?

ammosov — Tue, 08 Sep 2009 10:35:46 -0000

Cannot help with that: Disqus hasn't changed much since it started, and I do not use Twitter, it's like reading a mem dump.

Re: Should Founders Be Allowed to Take Money off the Table?

msuster — Tue, 08 Sep 2009 10:27:04 -0000

By slow loading are you referring to Disqus? I posted your comments on Twitter for input. Most people told me that they felt that the positives outweighed the negatives. I also have slow loads sometimes when I try to comment. I'm guessing that the Disqus engineering team must be working on this.

Re: Should Founders Be Allowed to Take Money off the Table?

msuster — Tue, 08 Sep 2009 09:54:04 -0000

Your situation is the one in which it is easiest to take money off the table. There are a group of investors who look for purely bootstrapped companies where founders never raised any money but have reached profitability. They approach the founders with the idea of letting them take some money off of the table in exchange for investing in the company. This class of investor loves to find teams that have gotten to profitability this way. Well done.

Re: Should Founders Be Allowed to Take Money off the Table?

msuster — Tue, 08 Sep 2009 09:51:38 -0000

Thanks, Renato. This is one way of dealing with the "lost" wages. Many times investors view the lost wages as "sweat equity" meaning that they see it that as an investor you put in $1 million to own 33% of a company and the founders who don't have that kind of money work for 50-70% salaries instead. Rightly or wrongly, I think this is how many investors view the "lost" wages. Thanks for your input.

Re: Should Founders Be Allowed to Take Money off the Table?

ammosov — Tue, 08 Sep 2009 09:19:04 -0000

And there are places on Earth where they actually do. Try Moscow subway.

Re: Should Founders Be Allowed to Take Money off the Table?

ammosov — Tue, 08 Sep 2009 09:18:07 -0000

It's slow loading. It's slow. It's obnoxious. And it's so loaded with adware that I had to manually whitelist it in Adblock just to load comments, save writing with it.

Re: Should Founders Be Allowed to Take Money off the Table?

Mike Leach — Mon, 07 Sep 2009 22:14:38 -0000

$5M in the first year? Take some of the 60% margin and put it in your pocket.

Re: Should Founders Be Allowed to Take Money off the Table?

Name — Mon, 07 Sep 2009 15:38:52 -0000

A lot of good points made in this post and the comments. Seems to me that the key lies in evaluating the particular situation, which obviously isn't easy to do. 500K might make some entrepeneurs complacent, while 1.5M might give others a taste to swing for a 100M+ exit. It really depends on who you are dealing with.

In my particular case, I funded our startup and haven't taken salary for almost 3 years (until very recently). I can attest to the fact that the economic reality of mounting debt and massive opportunity cost become a distraction at some point. We haven't taken outside investment, and are close to profitability. If and when we do take investment, simply taking my seed capital off the table would suffice for me at this point.

It would seem that the larger the financing, and the more equity/control founders give up, the higher the desire to take some real money off the table.

Re: Should Founders Be Allowed to Take Money off the Table?

Renato — Mon, 07 Sep 2009 13:29:36 -0000

It is fair and necessary that founders get a reasonable salary, I'd say at least 70% of what founders or executives in small businesses get in the same region or city. As most startups can't do that, the amount not paid could be kept as "debt", to be paid as soon as possible, when there is cash or at the FIRST liquidity event. IMO this is not cashing out, it is just paying a debt.
Getting the founder's family strained and against the startup is bad for everyone including founders, VCs, families and Startup.

Re: Should Founders Be Allowed to Take Money off the Table?

msuster — Mon, 07 Sep 2009 12:57:22 -0000

I tend to agree with you. Outcomes for entrepreneurs can be bigger and faster than for VC. But obviously for entrepreneurs it's a binary outcome where for VCs we get the portfolio effect.

Re: Should Founders Be Allowed to Take Money off the Table?

msuster — Mon, 07 Sep 2009 12:57:14 -0000

I tend to agree with you. Outcomes for entrepreneurs can be bigger and faster than for VC. But obviously for entrepreneurs it's a binary outcome where for VCs we get the portfolio effect.

Re: Should Founders Be Allowed to Take Money off the Table?

msuster — Mon, 07 Sep 2009 12:54:47 -0000

It doesn't make you a bad person. Founding start-ups is certainly not for everybody. In fact, it's probably not right for 98% of VCs, which is the irony. Most VCs are with you - they prefer the certaintly of a large salary and stable work. But for those that are born with the entrepreneurial "obsession" I believe there is no better feeling in the world. It's a roller coaster ride for sure. With all the highs and lows that go with it. You can appreciate the ride from the sidelines but not in the same way as it feels when you're in the seat. Thanks for your input and rest assured that you're actually in the majority rather than minority of people.

Re: Should Founders Be Allowed to Take Money off the Table?

Joy Casey — Mon, 07 Sep 2009 12:15:03 -0000

I learned of your site and this post through Fred Wilson. It was a very interesting post.

Re: Should Founders Be Allowed to Take Money off the Table?

Alan Warms — Mon, 07 Sep 2009 09:11:23 -0000

Mark, great post. As an investor I've been involved with a few situations where we offered to allow the entrepreneur to take a little off the table.

I disagree with one of your posters on one point -- I think outcomes to entrepreneur are as good as VC - it's a preference thing -- allows you to focus like crazy but also allows you a really great set of outcomes especially if you think through your capitalization strategies carefully. That is, don't create a binary outcome for yourself. I know I know sometimes it happens, but the key is to be super careful with cash raised and leave yourself some options.

Re: Should Founders Be Allowed to Take Money off the Table?

adam v. — Mon, 07 Sep 2009 03:57:40 -0000

i have worked @ a startup for the past 2 years, making 50k a year. i have an offer to go back into finance, @ a hedge fund, making all-in comp of 190k-220k my first year back.

i'm sorry, i just can't deal with the crap pay and the waiting; maybe that makes me a bad person, but i want my (future) family to never have to so much as think about finances, and this is the only way i see how to do this with the most certainty. if you ask me, value creation in silicon valley is great for people who are rich, and don't need to worry about family, finances, etc. if i were rich, i'd work @ startups all day long (although i do really like finance, so i'm definitely happy with my decision to go back)

Re: Should Founders Be Allowed to Take Money off the Table?

ShanaC — Sun, 06 Sep 2009 14:40:41 -0000

Well, welcome to Disqus anyway.