Wouldn’t it be nice to put in six months of work and make $US6 million?
That just happened for the founders of Secret, a 6-month-old anonymous social networking app that raised $US25 million at an eye-popping $100 million valuation earlier this month. During the round of financing, investors let founders David Byttow and Chrys Bader-Wechseler sell restricted stock in exchange for $US6 million in cash, which sources say they split.
When asked about the new-found millions, Secret pointed to its Form D filing, which seems to confirm the $US6 million deal. The form shows a total offering of $US30.9 million, of which $US24.9 was sold for cash and the remaining $US6 million sold (or will be sold) “in exchange for securities of the issuer.”
It may seem shocking for a 6-month-old startup to net its founders a few million dollars without any sort of exit. Actually, these days it’s almost normal.
Allowing founders of hot startups to take money off the table has become a popular motivational tool in Silicon Valley. It encourages startups to think long term and as big as possible. It relieves some of the temptation to sell the company early, which could minimize return on investment.
The idea is to let founders breathe a little financial sigh of relief, but not give them enough that they start slacking off. Snapchat’s founders, for example, took $US10 million each during their last round of financing. In Secret’s case, $US3 million after taxes boils down to about $US2 million — hardly enough for the young, ex-Googlers to throw in the towel (or even to afford a modest house in Silicon Valley).
“I’m seeing that happen more and more often,” one investor said of Byttow and Bader-Wechseler’s fundraise. “The founders are giving up a piece of the outcome they could have had. What you have to gauge as an investor giving them a deal like that is, will they be negatively motivated? As long as people are careful about those aspects, it can be fine to do. Every scenario is different. At a high level, I think it’s best to keep motivation with employees.”