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Founders cashing out

Stashed in: 106 Miles, Tech biz, Groupon, Airbnb, Funding, @arrington, Pants on fire!

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Good article in the paper today about founders cashing out, often quite shortly before a liquidity event. Is this bad for all of us entrepreneurs? Or should we cheer them for getting theirs?

I never begrudge people getting "theirs", but there does come a point when "theirs" is being greedy and coming at the expense of others.

When it is a sign that companies are being built with just enough lifespan to survive long enough to cash out then it is bad for everybody.

The dot com 1.0 boom pattern did not seem sincere. Even though every founder was standing up in public and saying "I think that even at $9999 a share, I think the inherent value in will mean that the price will only go up." you know most of them were privately wishing they could liquidate large chunks while the moment lasted without scaring every other investor.

This is at least more honest. As long as you read it as "I'm telling you to invest, but note that I know 3000% more about this company than you do and I'm cashing half my chips." then you can reset the odds accordingly.

If the common shareholders have gotten a significant cash payout, what's to keep them from taking unnecessary risks?

Well, if the potential value of their remaining holdings still dwarfs the payout, they'll be just as rational about risk-taking as before. Perhaps more rational, if the payout has assuaged the typical non-diversified young-person-without-a-nest-egg's loss-aversion.

That's the conventional wisdom: let the founders take money off the table and they'll be more likely to go long.

On the other hand, the founders of Apple, Microsoft, Amazon, and Google, waited until their companies went public to receive those kind of payouts.

Paying out the working founders of a private startup is a new phenomenon.

Paying it as a dividend on common instead of selling shares is an even newer phenomenon.

This might have unintended consequences. It might make some founders less rational about decisions.

I've never heard of a private company offering a dividend to common shareholders but not preferred shareholders.

The first thing that comes to mind is: Why are they in such a hurry to cash out?

Also: I don't know about the exact composition of their board of directors... but my board seats have always been in the nomination of the common shareholders. This means that I have two responsibilities:

1) First and always, every board member must be fair and equitable to ALL shareholders. This is a legal responsibility, and any board member can be held accountable by legal action for failing to meet this fiduciary duty.

2) In addition, my special responsibility has always been to represent the interests of ALL the common shareholders. This usually does not include OPTIONHOLDERS and current employees who have not exercised any options... their interests are somewhat different and should ideally be represented by the CEO ex officio. The penalty for failing to meet this responsibility is losing my nomination to the board seat.

This is all by way of saying that typically a board member must always think first and foremost about being fair and equitable to all shareholders. The system should be set up so that board members who obviously act only in the interest of one class of shareholder are held to account. In the case of AirBnB, it's hard to conclude that one class of shareholder was not given special treatment over all other classes.

I hadn't seen any of the reporting saying that commons were getting a dividend but not preferreds. (Are you breaking new inside info about the AirBnB round here?)

It is strange. I'd never heard of it -- until I'd seen it mentioned in the Groupon S-1. (And I thought it was very fishy there, because I have a strong suspicion Groupon is a dishonest-to-the-core organization.)

But if it's tax-efficient, and serves the goal of rewarding all existing shareholders a bit, and the new money coming in is OK with it, I don't think it's necessarily bad. I would be concerned if, because the unusual dividend was a secret, only known to the management, other employees with options who *could have* exercised vested options, and *would have* if they'd known of the special dividend, were not given the chance to do so. Then info-assymetry is used to benefit management at the expense of other (potential) shareholders.

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