April 13th, 2022 | By: Wil Schroter | Tags: Funding
Yes, there are Founders who take personal money off the table during funding rounds, and no, you probably won't be one of them.
For the unfamiliar, there is in fact a practice whereby investors are sometimes willing to directly purchase shares from existing stockholders (like the Founders) in order to create some liquidity for them personally. It's called a "Secondary Sale" and it simply means the proceeds go to the Founder, not to the company proper.
The problem is most Founders just hear "investors will give me money personally" and assume it's a regular practice. It's not, at all, but it's also not something that's very well explained to Founders either. So, here's how this actually works.
A few things have to happen for us to get a taste of that sweet, sweet secondary money. First, our deal has to be incredibly competitive, meaning lots of investors want in, and they are willing to sweeten the deal a bit (to steal it from their competition) by offering us a little something personally.
Second, the startup needs to be far enough along in its growth that it's even reasonable to bring up this conversation. That means it likely has significant traction (customers, revenue) that indicates this stock will be worth a lot of money to an acquirer or potential IPO sooner than later.
The thing is, there's no version where we've met these conditions and we're not aware of it. Trust me, by the time a startup is cruising at this speed, to the point where it could or should be talking about a secondary sale, it's pretty obvious. If a bunch of investors aren't stepping over each other to invest, chances are we're not there.
But what if we are there in some capacity — who do we even ask about a Secondary? Do we look like a schmuck for even posing the question?
It takes some finesse. The best way to approach a Secondary Sale topic is directly with one of our existing Board members (not the whole Board!) to take their temperature on the idea. If we are way off the mark, chances are they will tell us. Also, they are going to have a big say in whether that even comes to pass anyway, so the check-in is necessary.
We need to get them on board with this approach. We don't want to go down this road solo and "hope it works out." We need at least one ally on this special ops mission so that it feels like a banded unit making the request.
So how do we actually present the ask? Well, our 'ask' needs to balance confidence in the business with a clear understanding of the need. A good presentation would be:
"I'm very excited about the future of this company, but I'd like to create a small bit of liquidity to help out with some important personal milestones in the near term."
That usually means buying a house, starting a family, or paying off some past debt — or all of them. Everyone understands that, so tying the ask to a specific need helps paint the picture for the ask. Just asking for some money without any reason seems a bit suspect.
As funding rounds are getting bigger and more frequent, the topic of Secondary Sales is starting to come up more and more. Just understand that they are still a bit of an anomaly and many investors are not cool about them. If you feel like your startup funding round is getting very competitive and the numbers justify a little something for yourself, yes, it's worth asking. But probably not worth betting money on the outcome!
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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.