Can Founders Cash Out At Time of Venture Investment?

Q: Can the founders sell off their shares to the company and get paid from the investment which has come in the company at the valuation rate of the round?

A: (Jason). Most likely, not. VCs are reluctant to allow founders to cash out, as the money going into the company is normally needed to operate / grow the company. Furthermore, many VCs have stories where they did allow founders some liquidity, they are no longer motivated, etc. and the company spirals. There are some very visible examples that most VCs talk about when this discussion comes up and they have not been “happy endings.”

  • Right now, founder cash-outs do happen in Silicon Valley. I don’t know how often. But definitely often enough to consider it as part of a deal.
    I see two general circumstances where it happens:
    * The company is cashflow positive and doesn’t really need the venture round. A cashout helps get the deal done.
    * The VCs want to own more than the founders want to sell. A cashout helps the VCs buy a few more points.
    I’m sure there are other general cases.