These days, if you raise money at a >=$80m-100m valuation, and are oversubscribed, most bigger Silicon Valley VC firms will offer to provide some founder liquidity. And these days, the valuations where it is offered is creeping down a bit as bigger funds do earlier stage deals.
It’s not out of the goodness of their hearts. It’s so they can buy more and/or win the deal. Bigger funds want to own as much as they can, and if they can get another 2%-3% more than otherwise, secondary liquidity is a way to get it. And if it helps them win the deal, potentially at a lower valuation, that’s easy for a big fund to do, too.
Some advice here though:
- Founders taking secondary liquidity at lower valuations creates signaling risk — especially at the CEOs level. If a founder is willing to sell shares at $30m … there is no way most folks will believe you are trying to build a $1b+ company. You are selling way, way too cheap.
- It’s much, much, much better to be asked. If a founder really wants to sell at almost any price, it’s a flag. But if the VC offers first, and the founder “reluctantly” agrees — it’s not such a negative signal.
- You can’t or at least shouldn’t sell too much – as a %. It’s important the founders only sell an immaterial stake, at least on a percentage basis. Don’t sell more than 5% of your shareholdings. Too much sends a signal you aren’t all-in. Selling 1% of your 1,000,000 shares though is clearly immaterial.
- Some, not all, investors will get nervous if the absolute $$$ are too much. Selling some shares at $100m for a downpayment on a house? Doesn’t create anxiety. Cashing out $5m in a hot deal? Who >wouldn’t< worry?
- Don’t force it. If it’s going to happen, it will happen organically. If you force it, it won’t work. At least, very rarely.
- Fewer rules for non-founders. Ex-employees can sell everything, if there’s a market and the company allows it, at any price. If we are doing a round at say $15m pre, and an ex-employee wants to sell $500k in stock — all of her stake because she’s left — the investors likely will be happy to buy it all. There is zero signaling risk or issues. She’s not a founder, or even, an employee anymore.
- In a super hot deal, no one will care. For now. In a super hot deal, VCs will break their own rules. They’ll throw secondary money at you. But that doesn’t mean if it’s too much, they won’t resent you or judge you later. They will. Be cognizant of this if you “break the rules” because you are super hot.
- Be cool. Do what’s right by the company first. Then, it will all work out. Everyone will get nervous if it doesn’t feel like secondary liquidity is your secondary priority.
In the end, done right, “Secondary Liquidity” is a good thing. I wish I’d taken some as a founder, the second time around. If it can destress your life, and help you go long — well that’s a win-win-win. But the best founders never want to sell cheap. They know those shares are precious.
Published on June 22, 2020