HACKER Q&A
📣 buzzthro

What are some liquidity options for a founder before an exit?


My co-founder and I are discussing options for achieving some cash liquidity in exchange for our equity midway through our startup journey. We imagine we can sell some of our common stock to investors. Some questions on this:

* Can this founder equity sale only be done at a fundraise or can it be done anytime? What's the typical practice or HN's recommendation here?

* What price can we expect to get per share?

* Let's say at some point in time say after 'X' years, there is an acquisition offer and the founders are fully vested. Would liquidating our equity as part of the acquisition be more lucrative than if we decided to continue building our company and selling shares to investors for liquidity?

Sorry if a lot of this is common knowledge but I'm a complete greenhorn in this.

  👤 ac2u Accepted Answer ✓
If you're a particularly hot startup with an already high valuation you might be able to find a private banker who will loan you the money secured against your ownership. Although this comes with interest you have to weight it up against the potential tax savings of taking a loan while keeping in mind the recourse options involved should the valuation of your startup go to zero.

Other than that, taking liquidity mid way through is sometimes called taking money off the table. Some VCs might even encourage it. The reason this is that while you, as a founder, may be over the moon at taking say, 5 million in VC and selling the company years later for 15, your VC wants the companies they invest in under a fund to 100-1000x in value.

Most of the returns in a successful fund come from 1-2 companies. So VCs need every one of their portfolio companies swinging for the fences so that one of them can be the unicorn.

You'll notice that they need to get lucky only once with one company whereas you're a sample size of one.

That's why VCs might want to dissuade you from taking what might be a great outcome for you (a 3x ROI) and swing for the fences, they dissuade you by letting you take money off the table early so that you can be happy at the bare minimum you captured some of the upside and can now swing for the fences.