Earlier this week Buffer announced that they were raising another round of funding and that the co-founders were taking some money off the table (see We’re Raising $3.5m in Funding: Here is the Valuation, Term Sheet and Why We’re Doing It). While it used to be frowned upon for entrepreneurs to sell some of their stock before the entire company is sold, now it’s becoming more common once the startup achieves scale and profitability.
Here are a few thoughts on entrepreneurs taking money off the table:
- Set expectations early with potential investors that some of the proceeds from the next round will go towards founder and early employee equity redemption
- Evaluate what percentage of equity to sell and at what desired price (remember that common shares will often have a huge discount to the preferred equity that’s setting the companies valuation)
- Plan which employees, if any, will get to sell stock and how that will be shared with the entire company
An entrepreneur I know took some chips off the table several years ago in an effort to diversify his assets. As part of the process, the VCs pitched him on doing it because they wanted a larger ownership stake. Well, the business went south and his taking money off the table made all the difference.
Entrepreneurs, if presented the opportunity, would do well to take some chips off the table, especially if it’s at a reasonable valuation.
What else? What are some more thoughts on entrepreneurs taking chips off the table?