Questions

Is it unusual for a founder to seek to cash out some equity as part of a fundraising round?

I own a 100% shareholding of a company generating reasonable profits and am currently raising a round of funding primarily to scale and fund growth. In addition to a capital injection into the company, due to personal circumstance I need to release some of the equity personally. Is this common? How would this be viewed by potential investors?

4answers

Angel Investors will understand that you have a need to draw a salary... but the idea of taking their cash and putting it to personal use would be a "no-go".

If you were on your Series C of Venture Capital, raising $100M and you wanted to sell $3M of shares to buy yourself a nice house, for instance, that might be okay. But if you're raising $500k and you want to pocket $50k of that to clear your credit card debt (for instance), that would be a deal-killer.

Two reasons: (1) it shows the investors you're not great at managing your own funds, and (2) it's hard enough for a company to survive and grow with the investment that Angels provide — they definitely expect every penny to go into the company's growth.

That said, if your profits are strong and the reason for the equity sale doesn't set off 'red flags' (i.e. family medical expense?), maybe you can get away with it.

But remember: investors get pitched by hundreds, even thousands of candidate companies. That's your competition. Some of those companies look just like yours, and *don't* have a founder who's looking to use some of their cash for an early exit. So, it would be a significant strike against.


Answered 5 years ago

I learned the hard way that this is a very difficult problem to negotiate, and have lost out on investment deals because a co-founder was looking to take money out of the business.

If this is an unavoidable necessity for you, and an obstacle to potential growth, then you might be able to frame it in such a way that it is less of a negative - For example, if you can get some cash out of the deal now to clear a debt, it means the salary you need to draw from the startup can be reduced by 25% over the next 2 years.

The key question comes down to the potential investors - If they have been introduced to you, and the investment is being sought on the back of an existing relationship then this type of negotiation might be OK. However if you're dealing with VCs or angels with multiple competing investment offers, limited time to pitch and no complementary relationship then a need to withdraw cash from an investment round will raise red flags.


Answered 5 years ago

Possible, but potential deal killer. You need to be careful to wait for the appropriate moment to bring up this request and, then, only if you have leverage in the negotiation.


Answered 5 years ago

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