Ask HN: Founder selling some shares
Writing from a throwaway account for obvious reasons. I am Founder at a small but fast-growing startup, and my and co-founder we got an offer to sell some of our shares and continue to build the company with the old and new investors. Both of us are worried that it is going to alienate some of the team members who will see me and my partner make a (small) windfall. It won't be anything big by any means, but we fear that it will upset some of the folks who have been with us through the trenches. We obviously mean to continue building the company and do right by all the employees in the long run. Either way, are there any founders here who have been through similar situations and can offer some words of advice?
50 comments
[ 3.0 ms ] story [ 96.8 ms ] threadIt's not rare where I live to have founders rent crappy houses and employees buy their place because banks will not touch founders from a risk perspective.
Fact is, if you explain to early employees the truth and they get upset than they MAYBE aren't in it to win with the team, because if they are they would see you as a founder needing to be able to function in everyday life as critical to the business succeeding. But this is the exact reason I usually have seen founders hide the fact they do this and try to hide even purchases or say they came from a family member. Personally, I prefer the transparent method myself, but understand why people hide it so often.
I'm 53, have worked pretty hard all my life. It's time to pass the mantle. I've allocated 40% of the stock in my company for the people that will pull the cart, will draw down to 51% as long as I'm CEO and will then drop to 10% in an MBO when the time is right. I do not want to become a backseat driver. The consultancy arm is small and quite profitable, we do our own investments and have more work than we could reasonably deal with, and a very impressive array of customers.
I've been getting paid but about 1/2 of what I was making when I was still running the whole thing by myself, I see that as an investment and as a way to make the company less dependent on me as a person. To turn a one-man consultancy into a scalable company has been a major challenge but I think we have the hard part behind us.
Our profit allocation is: 1/3rd shareholders, 1/3rd employees, 1/3rd investments. That gives us plenty of opportunity to dogfood our processes, and ensures that people get paid for their efforts.
> Are you planning on leaving?
Not immediately, but somewhere in the next couple of years. What will happen is we will split the investment and the consultancy branches, I will continue to run the investment part and my partners will run the consultancy, maybe some will join the investment part, time will tell.
> Why divest?
Because of (1) diversification, (2) the stock already being issued and (3) it being more tax efficient both for me and the rest of the partners here.
Accelerated vesting in case of a liquidity event has been put in place as well, there is a tax liability there but it is manageable.
Two ways to go about this though, one is 100% transparent to the (at least early) employees and tell them exactly what is happening. Second is not to tell them anything about your personal situation as frankly as long as the business is moving forward appropriately and has enough money to reach the next milestones there is no issue. Under the second scenario you only mention the raise going directly to the business as that is all that is relevant to the team. The personal share sale is just that, private and personal. In no way will you be getting wealthy off doing this, you will simply get some living money which you have probably foregone over the past few years, more so than early employees likely.
If you do it transparent, I'd present it exactly in the manner above. e.g. "Look, we are taking another X round and as part of the round we are selling a small amount of founders equity to relieve some of our personal life pressures so we can stay 100% focused here". Be honest, you gave up making money to do a startup willingly but that doesn't mean life stopped moving forward and you have bills to pay just like everyone else. Honestly if they can't understand it they may not be there for the right reasons anyway and it will be some insight to the early team members. Early employees might be below market, but likely aren't so far below that they are getting hurt, and if so they'll leave soon enough, rightfully and understandably.
I'm not sure what the situation looks like, but I've seen startups where the founder(s) have 50-90% of the company and then the first engineer who built the entire tech stack from the ground up has an illiquid ~1-2%. That is pure exploitation.
And founders can't sell their own equity and turn around and pay bonuses to employees out of that, it would involve an accounting nightmare that no investor would like to see on the financials in later rounds. Not to mention that money would be taxed so many times no one but the government would win.
You owe it to your employees to take everything off of your "mental plate" that doesn't relate to building the company. Your primary objective should be ensuring the business does well, employees are treated well, progress is being made etc.
Paying rent, worrying about food costs, etc should never be a primary concern if you have investors (for the investment's sake as well) and especially if employees are also shareholders (the value of their equity is at risk if you or other key members are personally at risk).
I've heard that usually around the Series A is when investors make the founders take some money off the table so they aren't living out of their car, eating ramen everyday, or dropping their child-care responsibilities, among other risk factors.
With all that being said, you can do good by your employees by offering liquidity to the earliest employees who have stuck it with you for X number of years or through some significant specified milestones.
Your investors want you to shoot for the stars... it's hard to do that when you're worried about rent, bills, etc.
Additionally, your EMPLOYEES benefit from this too as you're now thinking like investors and want to grow the company.
People should understand that building a successful independent company is easier when the founders don't have to worry about their financials.
From our perspective, it seemed like a slight vote of no confidence in the company and a little unfair to us that we didn't get the chance to sell shares whereas they did. You lose a bit of that "we're in this together" vibe that makes it organically motivating to work at a place.
Just my 2c, but consider arranging a situation where employees can sell up to a percentage of their options as well. A small percentage makes the eventual payoff palpable and will reduce resentment. You'll likely need to sustain the high levels of motivation for your fast-growing startup to continue it's success.
It is. But it is not a bad thing: founders have very little besides their shares in the company in the world. Banks won't touch them when they apply for a mortgage or a car loan. Employees have safety nets that founders have to do without. Reducing some of the risk to sleep better is actually good for the company.
That 'vote of no confidence' is always there, start-ups are risky by nature. It's perfectly ok to de-risk a bit after carrying the vast bulk of that risk after some time has passed.
> and a little unfair to us that we didn't get the chance to sell shares whereas they did.
So, found a company yourself. See what you feel like after you've been slogging for a decade or so without any net. It is always super easy to berate the position of someone else when you yourself are taken care of.
> You lose a bit of that "we're in this together" vibe that makes it organically motivating to work at a place.
You lost something that you never had in the first place. Founders, employees and investors never have exact alignment of their goals.
> Just my 2c, but consider arranging a situation where employees can sell up to a percentage of their shares as well.
Employees typically have so little stock that this makes no sense, but in the few cases where employees have a significant amount of stock it might make sense.
Also, in many companies employees do not hold their stock directly, but as options and those options may not have been exercised yet.
>So, found a company yourself. See what you feel like after you've been slogging for a decade or so without any net. It is always super easy to berate the position of someone else when you yourself are taken care of.
>> You lose a bit of that "we're in this together" vibe that makes it organically motivating to work at a place.
>You lost something that you never had in the first place. Founders, employees and investors never have exact alignment of their goals.
Don't startup employees normally take below market wages and work crazy hours to get the company going? They're not in as deep as the founders but they are making sacrifices for the company.
It's not like they are talking about taking on more investment here and everyone's getting diluted. It's the founders giving themselves a little personal enrichment ahead of all the other agreements that the employees agreed to.
Why would you expect the employees to continue to make the sacrifices to keep the company going if you do this?
I'm not sure if I managed to make my point coherent enough, but 'below market wages' versus being up to your neck in debt are not exactly equivalent.
Some of the founders that I know have gone so far as to sell their personal belongings in order to get the company its initial funding. So sure, early employees make sacrifices too, but those are usually not at the same level. It is 'I am making less than I could' vs 'I risk all that I have built up over the last decade or more'.
> It's not like they are talking about taking on more investment here and everyone's getting diluted.
Well, that is not necessarily mutually exclusive. You can take on more investment and take some money off the table at the same time. Usually investors frown at this early on in the life of a company but after 3-5 years it is relatively common practice.
> It's the founders giving themselves a little personal enrichment ahead of all the other agreements that the employees agreed to.
No, it is the investors ensuring that founders can concentrate on the company rather than on their personal financial issues, which is good for everybody.
As for the agreements: if employees agree to be treated different from founders then that is their choice, you do not have to accept those terms. In general I never understood why early hires feel that 0.001% of the company is a fair compensation compared to founders that got together the week before and each put up $50 for their shares, but that's a totally different issue. Once you agree to that it's a done deal. Regret is hardly ever a valid reason to review a signed contract.
> Why would you expect the employees to continue to make the sacrifices to keep the company going if you do this?
I don't expect employees to make sacrifices at all. I expect employees to run the numbers, do the best they can by themselves and to (collectively if necessary) negotiate to the best of their ability. If they are unhappy with the way the founders comport themselves they can always use their most powerful option: vote with their feet.
To me it sounds like a case of utterly misplaced jealousy: if you think that founding a company and taking on the bulk of the risk is easy then you should found a company yourself. If you are unable to run the numbers and you'd rather have a CEO that can't get a mortgage or buy transportation vs one that is 100% focused on what matters then you are acting against your own interest and the company interest through pettiness.
That all started when - as an early employee - you agreed to a deal where you are not treated the same as the founders when it comes to the stock that you hold. In my company all employees and important freelancers hold the same class stock as my own, they paid for it (no options) and if I sell they have a right to go along with each sale.
But that does not mean every company is run like that and I can afford to do this because I already have a few successes behind me. Even so, if you are going for a worse deal then I assume that that is because you saw something positive in the longer term.
Well, yeah. If you're already comfortable with under-compensating early employees feel free to continue shirking them.
If you don't let employees cash out some of their stock, the good ones will leave. Remember, every company on the face of the earth is looking for good Sw.Eng., PM, DS these days; it's a seller's market, good people will just pack up and go on to the next gig.
Then again I come from a working class background, so I may have a different perspective.