Can founders cash out?

Most founders only cash out a small percentage of their shares. If they’ve built a company that’s substantial enough to even make a secondary possible, they’ve poured blood, sweat and tears into the business.

When can startup founders sell their shares?

As a founder starts and grows a company, the founder may consider selling her shares in the company prior to an exit via a sale of the company or an initial public offering. Such sale, typically called a secondary sale, helps a founder meet needs for necessary expenditures or reduce her risk tied to the company.

Do founders sell shares in Series A?

The Secondary Sale typically happens at Series B and later. We sometimes see it at Series A, but it is less typical. The reason is three fold. At the earlier stage, the company has not achieved sufficient growth and investors may not feel like the founders should be rewarded.

Do founders get preferred stock when raising capital?

Founders don’t get preferred stock. But it’s nearly impossible to raise venture capital without issuing preferred stock, or preferred shares. In most cases, VCs today won’t hand over a dime in exchange for common shares, the form of equity extended to founders and employees. Preferred stock, unlike common stock, is exactly what the name implies.

Is your equity stake in a startup worthless?

The story is all too common in Silicon Valley. A high-profile startup sells for tens of millions or better. It’s not the home run many were hoping for, but it appears to be a solid single or double. And yet, after the dust settles, employees, and sometimes founders, find that their equity stakes in the company are essentially worthless.

How can founders mitigate the downside of preferred stock?

There are two important things you can do as a founder to mitigate the possible downside of preferred stock. The first is to hire a good advisor — someone with experience who knows the landscape and the players. The second is to execute on your startup’s plans, hit the key milestones and benchmarks and build a great product.

Do VCS give preferred stocks to founders?

In most cases, VCs today won’t hand over a dime in exchange for common shares, the form of equity extended to founders and employees. Preferred stock, unlike common stock, is exactly what the name implies. Its owners receive preferential treatment over other investors in specific situations.