
Ask HN: Founder selling some shares - throwaway182212
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&#x27;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?
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ta_tunestub
FWIW, This same type of event DID demotivate me and a lot of my co-workers who
were early employees at a startup (now 1000+ person company). The company
raised a round and the founders sold off some of their shares. We knew because
they bought nice cars/houses after the event. Our shares got diluted.

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.

~~~
jacquesm
> From our perspective, it seemed like a slight vote of no confidence in the
> company

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.

~~~
lovich
>> 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.

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?

~~~
jacquesm
> 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.

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.

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mutru
We made a similar arrangement a year ago, and it didn't cause any significant
issues. We chose to be transparent about it, and every employee was allowed to
sell the same percentage of their shares (as long as they're vested) as the
founders. Most chose not to sell.

People should understand that building a successful independent company is
easier when the founders don't have to worry about their financials.

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Maro
Why don't you make it fair, like "everybody can sell X% of their vested
shares". You can even be nice to employees and do it like "everybody can sell
max{Z pieces of stock, X% of vested}", and set Z so that people will be happy,
but it's still not too much. The co-founders have more, so they'll get more $,
but everybody is okay with that. I had this happen at one of the companies (I
was an employee), it was totally cool.

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.

~~~
landon32
For sure agree with this—letting your employees get a (very small) windfall
themselves might make it easier for them to justify hard work and
(potentially) lower pay. It also just shows you really care about your
employees.

~~~
jacquesm
Depending on how long they have held the stock it may be a very small amount
of money. Typically a real pay-out would require having held the stock for 3
years or more at a minimum, so this would benefit only the earliest employees
in most cases.

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mwerty
Suggestion: let them sell X% of their vested shares as well. Ive heard of a
company that did this with X=10. You could buy it from them too if investors
do not see the value in cashing them out.

~~~
madeuptempacct
I just read all the solutions here, and this seems fair. That way they have no
reason to be upset - they can take some profit now, or risk holding.

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askafriend
This is 100% normal, and very common.

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.

~~~
burtonator2011
Agreed... this is called "partial founder buyout" btw and helps align
investors and founders.

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.

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sbinthree
This is standard now, so that the founder can buy a Tesla and a house and get
focused on the long term to maximize the company without taking the first
buyout. Employees job is to do the work, trust them to understand. Don't buy a
Ferrari and you'll be fine.

~~~
closeparen
No one pays employees enough to buy houses; it’s pretty surprising that you
don’t have to make a successful exit to earn that much as a founder.

~~~
greenyoda
Depends on where you live. There are lots of places in the U.S. where you can
buy a house on a developer's salary. Not all startups are located in areas
where the cost of real estate is ridiculously high.

~~~
closeparen
We’re talking about startups, it should be pretty clear what geography is
implied. You can live in those places but getting VC funding in one of them is
an anachronism if it’s possible at all.

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edoceo
I'm a founder too. If I did this I'd expect my employees to be mad. Bad
visually. Why are they buying your personal shares and not shares from the
company.

~~~
jacquesm
Risk balance. Founders are essentially non-diversified investors. All of their
wealth is tied up in a single investment. It is very sensible to take at least
some money off the table after initial value has been built to ensure that you
don't end up in poverty if things go South. Doing that reduces the chances of
things going South because you have one less thing to worry about.

~~~
Hydraulix989
Employees are as well.

~~~
jacquesm
Employees have employment contracts, can apply for mortgages and credit to buy
cars. Start-up founders tend to have a hard time with those things, especially
if they went heavily into debt to be able to fund their start-up in the early
days.

It'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.

~~~
davismwfl
This is accurate, non-founders don't have a clue how hard normal everyday
things can be, like even buying a crappy used car for a fair interest rate. I
got downvoted in my other comment likely because I pointed out I would be
suspect of early employees that get upset.

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.

~~~
jacquesm
In my company we are radically transparent regarding stock deals, hires, our
financials, order pipeline and so on. So far that seems to work well, time
will tell what it does in the longer run. It's an experiment of sorts. We also
do not have class 'B' shares and do not have an ESOP but issue stock directly
to employees (or sell founder shares). It's a bit of an odd duck as companies
go because the ramp-up to the point where others could join was 8 years.

~~~
edoceo
8! When I made my first comment I assumed you were younger. This may make
employees less mad, due to company age but I'm still not clear why the company
doesn't just issue more shares rather than owners selling theirs. Have you
been getting paid? Are you planning on leaving? Why divest?

~~~
jacquesm
Good questions.

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.

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paladin314159
Depends a lot on the situation. If the two of you bust your asses and the
company is on a great track to liquidity for the employees, I'm sure people
would feel fine (though in that case, why not just pay yourself enough
salary?). If there's still massive risk that employee equity goes to zero, as
an employee I would be pretty turned off by the fact that the founders want to
cash out.

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neonate
Why don't you share some with the employees?

~~~
Hydraulix989
This. I think this makes the most sense. Your earliest hires took a risk as
well by turning down big $$$ from Google, etc. to partake in sharing your
vision and gave you this opportunity to cash out by building your company to
this point.

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.

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DeonPenny
This is the sneaky little secret behind being a founder. It's not only common
it's expected. No one wants you worried about money while running the company.
If you're in the valley most seasoned employees know that it happens.

~~~
caoyng
It is not common or expected unless the company is very successful. For most
companies, investors will be disappointed if you want to sell before an exit.

~~~
DeonPenny
I've never worked for a company successful or not that hasn't. Maybe it's
different in other places in the valley but I've seen founder buy houses while
their company fell apart. I don't think I've met a founder who hasn't after
their series B

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cameldrv
I wouldn't do this without providing a pro-rata opportunity for the employees.
The employees, as small minority shareholders basically have to trust you to
treat them fairly and equally, understanding that you, as larger shareholders
will obviously be getting a multiple of their payout. If you cash out without
giving them the same opportunity, you've broken that trust. You say that "We
obviously mean to do right by all the employees in the long run", but they
don't know that for sure, and the best guide they have to what you'll do in
the future is what you're doing now.

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WhompingWindows
Why not take the small windfall and offer to buy a portion of your employees'
shares or give them a bonus?

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davismwfl
There is no issue with this, taking some life pressure off founders is not
bad, it lets you focus where you should. Could it upset some early employees,
yes it could, but I'd argue done properly it won't and done properly anyone
who gets upset should raise your eyebrows about why they are there.

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.

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picodguyo
If your company is actually growing, you should not sell shares. They will be
worth more later and the optics are bad. Much better to adjust your
salary/bonus to address personal cashflow issues.

~~~
petesmithy
This is bad advice. No one should have all their (paper) net worth tied up in
one investment. Selling secondary shares is just sensible, even assuming you
believe in your company.

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clubm8
Another perspectivemight be that selling a small amount of shares gives the
founders the financial stability to weather any storms. Let's say they sell 2
mil worth. Small in the grand scheme of things, but invested wisely can cover
food, modest rent in an apartment etc for life assuming they do odd jobs.

Then again I come from a working class background, so I may have a different
perspective.

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ganoushoreilly
Make sure to have a lawyer go over your operating agreement to make sure that
you are selling your shares in accordance with your operating agreement. Also
consider the risks of control. Depending on structure, you could inadvertently
lose control if you have it now. That said, taking cash off the table is never
a bad Idea if it means giving yourself breathing room.

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pbiggar
If you don't take some money out, everyone on your team will be worse off.
They need you to lead to company and make their equity worthwhile - they don't
want you worrying about rent/mortgage/school/whatever, and they especially
don't want you to sell the company too soon because you don't have any money.

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rajacombinator
Gotta look after yourself first. I’d suggest not making any immediate
lifestyle changes or flashy purchases to minimize morale impact. Furthermore
if you’re still putting in the effort that will be obvious to employees.

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arthurofbabylon
Ignore concepts of “fairness” and think purely about cause and effect.

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caoyng
This is only acceptable if your company is very successful and it is clear you
have made a lot of value for your team and your investors. If the success
isn’t there, it will cause lots of problems. If you take money off the table
when everyone else’s success is still in question, you’ll lose the trust of
your team. A founder selling 5% of their stock could be a lot of $, but 5% of
employee #2s is likely much less so the impact of their participation is much
less.

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crb002
Offer to buy some shares of employees and spread some of the cash for Xmas if
any have vested.

