For startup entrepreneurs, one of the ultimate goals is getting acquired for a boat load of cash. The bigger the purchase, the bigger the success, irregardless of how large the business or how many customers it might have.
Part of the getting bought is finally reaping the rewards for hard work, the long hours and the modest salaries. It’s the way of the world; you work hard, you’re successful, you get to be rich.
But….things seem to changing or, at least, the rules of engagement are changing.
A growing number of entrepreneurs – DropBox, GroupOn, Airbnb – are being allowed to sell their pre-sale/pre-IPO shares as part of a private financing. And we’re talking mega-bucks as opposed to pay the mortgage money.
This is a bad development because it handsomely rewards entrepreneurs for getting the job mostly done but not all the way done. It is great for the entrepreneur but probably not as good for the startup because you have to believe the motivation and fear that drives entrepreneurs could easily disappear once they have lots of cash.
The other danger is if entrepreneurs are rewarded while employees don’t get to share the wealth Case in point is the fiasco that surrounded Airbnb’s $21-million reward to the company’s founders, which ignored employees until the proverbial shit hit the fan.
As well, you have to wonder about the approach being taken by investors. By letting founders cash out in a major way, how does it impact the way these founders are going treat the new investment? After all, the founders have their cash so if the business doesn’t go as well, it’s not going to matter as much, if at all.
Don’t get me wrong, there are situations in which letting founders cash out some of their equity during a financing makes sense. If a founder, for example, had a $500,000 mortgage hanging over his head and a partner bugging them about their financial security, it might make sense to give the founder one less thing to worry about so he/she can focus on growing the business.
That said, we’re talking about relatively small amounts of money as opposed to millions of dollars that would ensure they would never have to work another day, which is tempting if you do have a startup to operate.
It is difficult to tell why VCs have embraced the idea of giving founders significant amounts of money before an exit but it is a troubling trend.