The practice of startup founders taking cash off the table in fundraising deals is getting more and more widespread, with one founder asking (and getting) 25% of a seed, i.e. very early round, straight to their pocket, PE Hub reports.
A lot more entrepreneurs are asking for, and getting, more and more cash off the table earlier and earlier. PE Hub quotes straight-talking VC Mark Suster talking with a company he wanted to fund who were asking for $20 million off the table before they had accomplished what he felt were significant enough milestones, and backing out of the deal as a result.
No doubt people will use these anecdotes as further evidence that we’re in a bubble. Certainly it shows a frothy funding environment.
Founders taking some money off the table has been around practically forever, but it was always hush-hush and most often small amounts. In theory the practice is sound: investors want entrepreneurs to go for a huge exit, not just a good one, and the good exit can be very tempting when you’re running a big company but personally living hand to mouth. It’s also unreasonable to ask a CEO to be 100% on their company if they’re stressed out about, say, mortgage payments or school tuition for kids.
But smart investors want entrepreneurs who are, in the VC saying, “missionary, not mercenary”, meaning they care about the vision of the company, not the money. Taking a bit of cash off the table to have a better focus on achieving the big vision is “missionary.” Taking tons of money off the table too soon is “mercenary”. And in any company, what does insider selling say to other investors?
Practically every big startup has had huge founder cash-outs. When Groupon raised almost a billion dollars, only $377 million of that went to the company, with the rest going to founders and early employees, PE Hub says. Even Foursquare’s founders cashed in on their latest fundraising round even though the company is sitll small in the grand scheme of things and has little revenues to speak of — but the founders could have gotten much richer, at least in the short term, from the $100 million-plus acquisition offers they had on the table.
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