Questions

Should startup founders sell their common shares to future or current investors,and when to do that?

I am really curious about this topic, and I am researching as much as I can. I want to start a tech startup, and I am just getting familiar with how the startup and vc world actually works. I came to articles and blog posts about founders taking money off table when fundraising, or pre-ipo or when there is huge round of investment from VC's. What is your opinion of this? Is this good thing to do? I am not asking for a very early or young startup, but successful one. Should founders ask the board or future investors for this? Without alarming them or sending red flags.

2answers

Go to thisweekinstartups.com and scroll down to find the Startup Basics button.

Felix Dennis was crystal clear in his book How To Get Rich that giving up equity was crazy. I agree with him.

If, and only if, a co-founder can strongly impact the growth and effectiveness of the business...then I might consider it. Otherwise, pay bonuses or revenue share.

In the VC world, many idea creators have been taken out by venture capitalists because of the contract they signed. Eyes alight with the funding capital, the founders signed the VC agreement and ignored a clause. The clause said if certain performance figures were not met at specific times, equity defaulted to the funder. The startup did not grow as expected and the targets were not met. After a time, the VC firm owned the startup and the founders discovered themselves either ejected from the business or having become employees.

An IPO is a different animal. Again I recommend the Felix Dennis book as he describes his foray into that world and how ridiculous and constraining it was.


Answered 2 years ago

Generally additional shares are issued to the investors instead of transferring the equity of founders.


Answered a year ago

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