It was recently reported that the co-Founder of WeWork Adam Neumann took over $700 million off the table from investors long before the company had gone public.
How do these Founders go about getting cash out of their startups long before the startups ever cash out themselves?
Investors will often dangle the option of providing some Founder liquidity only when the deal they are trying to get into feels incredibly competitive.
This happens only rarely, and only amongst investors who are open to providing some Founder liquidity (some are very against it!).
Generally speaking, it only helps the investor by allowing them to get into the deal but provides very little upside to the company as the capital is being used for the Founders personally, not the company as a whole.
Most often, the liquidity is targeted to a few people in the company who are considered key stakeholders, and whose personal gain will often sway which investor they take money from.
The moment that capital has to be distributed to more people, it becomes a slightly different transaction. You'll see some early liquidity go to employees when a company is pre-IPO, but even then the practice is locked down pretty tight.
Of course it does!
While an argument could be made that the Founder has invested more, and likely over a longer period of time, the fact is we're getting a check and other employees are not.
There's not a lot of ways to sugar coat that.
Once the capital has been invested, it's nearly impossible to change the terms of the deal. Existing investors have very little incentive to invest additional capital into Founder liquidity because they are already in the deal.
The only option for existing investors to ever provide liquidity is if there's a future funding round that's competitive and other investors are providing liquidity.
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Wil Schroter is the Founder + CEO @ Startups.com, a startup platform that includes Bizplan, Clarity, Fundable, Launchrock, and Zirtual. He started his first company at age 19 which grew to over $700 million in billings within 5 years (despite his involvement). After that he launched 8 more companies, the last 3 venture backed, to refine his learning of what not to do. He's a seasoned expert at starting companies and a total amateur at everything else.