Silicon Valley’s Best Kept Secret: Founder Liquidity

🌈 Abstract

The article discusses the practice of "founder liquidity" in the startup ecosystem, where founders are able to sell a portion of their shares during funding rounds to secure personal financial stability, while their employees remain "all-in" without access to similar liquidity. The article argues that this practice undermines the narrative of the founder taking on significant risk and challenges the perception of the startup risk landscape.

🙋 Q&A

[01] The Narrative of Founder Risk

1. What is the common narrative around founders taking on risk when starting a company?

• Founders are celebrated for leaving stable jobs and pouring their lives into an "uncertain" and "high-risk" venture, which justifies the enormous equity stakes they hold compared to early employees.

2. How does the practice of founder liquidity shift the risk landscape?

• Founder liquidity allows founders to "take chips off the table" and secure personal financial stability, while their employees remain all-in without access to similar liquidity.
• This practice is often kept under wraps and undermines the narrative of the founder being "all-in" on the venture.

3. Why is the practice of founder liquidity often kept secret?

• If it were widely known that founders could de-risk their financial position while their employees remained all-in, it might change how startups are perceived and valued.

[02] Founder Liquidity in Practice

1. What are some examples of founder liquidity in practice?

• The article provides examples of founders, such as the founder of WeWork, who were able to cash out significant amounts of their equity during funding rounds, while their employees were not offered similar liquidity.
• In one scenario, a founder was offered $400,000 of liquidity at Series A and $750,000 at Series B, while this information was not revealed to employees.

2. How did the author react when they found out about their founders' liquidity?

• The author's initial reaction was positive, thinking the founders deserved it, but then they wondered why employees didn't have access to liquidity as well. The author saw it as a "secret" that seemed odd.

3. How does the author's perspective on risk change after becoming a founder themselves?

• The author realized that they could have been a founder six years earlier and would have been taking a similar amount of risk as they did as the first employee at a startup. The author now intends to be transparent about liquidity and more generous with equity for early employees.

[03] Transparency and Equity

1. What does the author suggest should be done to address the lack of transparency around founder liquidity?

• The author suggests that every internal announcement of a new funding round should be accompanied by education and transparency around liquidity, so that employees can assess whether they are taking on more risk than the founders.
• The author encourages employees to ask about founder liquidity when new rounds are announced, to make this a common practice and force transparency.

2. What are the potential outcomes if employees realize they are taking on more risk than the founders?

• Employees may ask for more compensation, congratulate the founders and move on, or start "yelling" about the unfairness of the situation, as they are taking on significant risk without access to liquidity.