Do Companies Ever Buy Back VC Shares?

Question: Have you heard of cases where companies buy back shares from a VC, much like buying back shares from a founder?

Our Take:  Yes, but the situations usually aren’t pretty.  If the company has the cash to buy back shares from the VCs (at  their cost or above), then the company is doing well and it would be strange to see a VC wanting to sell their shares.  Secondly, cash is “king” in startups and there are better uses for companies to make of their money. 

Most likely the case is that the company is not doing well, the VCs want out and they are getting a fraction of their investment on the dollar.  These are very distressed sales and usually one sees the company or its founders paying the cash and trying to take back the company to restart its efforts. 

Note, there are some real serious legal issues regarding tender offers that one must concern themselves with with company-backed buy backs.

  • During last year, I was lucky enough to witness a buy back of shares that had been sold to a much larger company (firm A) to aid the growth of the company (firm b) I was working for. As said in this post it was not a pretty process, and cost the MD of my company a lot of money. This case was one of firm b was doing well and the MD who had founded the company, had only sold part of it to allow him to move to larger better premises. I know that firm A really did not want to sell back the shares but after negotiations the deal was done at a hefty price to firm B
    It did though release the ties and many costs involved with the part ownership of firm b. I have now left the company but from what I have heard this buy back has enabled the firm to go from strength to strength and turnover is at an all time high. My message from this is that If you can afford to do it do!

  • Actually, I’ve had this happen three times. In all three cases, the cause was that the VC and executives were fighting. In all three cases, the execs bought out the VCs as a means of moving forward either with new VC money or their own.
    In case A, the execs were personally liable for the investment. That was dumb on both parts.
    In case B, the VC was a known prick, although bright and sparky.
    In case C, I wasn’t privy to reasons.

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