Founders and Risk-Taking
In Silicon Valley, founders are often portrayed as heroes. They are celebrated for leaving stable jobs and risking everything on uncertain ventures. This narrative justifies why founders hold significantly more equity than early employees. However, the reality is more complex, with the practice of founder liquidity hidden behind the scenes.
What is Founder Liquidity?
Founder liquidity refers to the practice of founders selling a portion of their shares during a new funding round. This allows them to secure personal financial stability while continuing to grow their company. Often, this process is conducted discreetly, with only a brief mention in investor updates.
For instance, in one startup, the founder secured $400,000 in liquidity during a Series A round and $750,000 during a Series B round, while early employees remained committed to low salaries and uncertain futures.
The Hidden Secret of Founder Liquidity
Founder liquidity remains secretive because it undermines the narrative of founders being ‘all-in.’ Stories of founders living on the edge, mortgaging their homes, and surviving on instant noodles are compelling and inspire loyalty and respect among employees. If it became known that founders could reduce their financial risk, perceptions and valuations of startups might change.
A Notable Example: WeWork
Adam Neumann of WeWork is an extreme example of founder liquidity. He managed to cash out over $2 billion, while none of the WeWork employees were able to leverage their equity. Neumann mitigated his risk by selling as much secondary stock as possible while the company’s valuation soared, but left nothing for his employees.
The Unfair Reality
The problem isn’t that founders gain liquidity; it’s that only they gain liquidity. There are cases, like Hopin, where founders pocket tens or hundreds of millions through secondaries, only to later sell the company for less than the liquidation preference stack, leaving employees with zero dollars for their equity.
The Need for Transparency and Education
Every new round announcement by a venture-backed company should come with education and transparency about liquidity. Without transparency, there’s no opportunity to correct misconceptions. Whether a founder has gained liquidity is crucial information for employees. It allows them to assess if they are taking on more risk than the founder.
Conclusion
Founder liquidity plays a vital role in the startup ecosystem. However, when this practice is kept secret, it creates an unfair reality for employees. Transparency and education within venture-backed companies are necessary to address this issue.
Source: stefantheard.com, “Silicon Valley’s Best Kept Secret: Founder Liquidity”