Allan Leinwand did an interesting guest column on GigaOm yesterday about VC’s providing some founder liquidity at early rounds. This picks up on a Venturebeat story from Friday about a related topic, “FF” class stock that is deliberately designed to allow for partial founder liquidity. As Allan points out, this is also being driven by many consumer internet companies simply requiring less money to build – a trend that has been widely discussed.
We’re seeing more of this trend here at Lightspeed, especially with consumer internet companies since they take so little money to start. This has not been the case as much in other sectors. We’ve recently closed on one financing where founder liquidity was a portion of our investment (company had been in business 4 years) and are in the process of closing a second (company has been in buinsess 1 year). In both cases, our goals were (i) to increase our ownership, and (ii) to better align our incentives with the founders, who were then able to focus on building a big company (vs looking for a quick liquidity event). The founders wanted to diversify their risk since their net worths were largely tied up in the fortunes of their company which was private (and illiquid) and still risky. Plus, its expensive to buy a house in San Francisco! Everyone felt like it was a good result.
The challenge, as always, is in finding the right balance. Founder liquidity makes the most sense when the founders have already built something with real value through sweat equity and some seed money (ie its not a powerpoint presentation or a site still in closed beta). With consumer internet the biggest risks are often around consumer adoption as there are so many “good ideas” that “should work”. If a team has taken some of that risk out with real traction, it makes it much easier to contemplate the founders taking some money off the table.