100% no question that employees who hold vested shares should be able to participate in secondary sales at the same rate as founders. I understand and support founders being able to do this; I don't support and understand *only* founders being able to do this.
Yeah, I generally agree. In my experience, boards object to it because it's a logistical headache (which, it is, but worth the cost to me) and because "it's not how things are done." Which I also don't agree with, but so much of startup mechanics (investing terms, vesting schedules, etc) are just doing the standard thing, so it's harder to do things that break the mold than I thought it would be.
Logistical headache because of the number of people involved and complexity of cap table? I can also see complexity due to the dual class structure with founders being class A and most employees being class B.
All of the above, I think? When it’s just one or two big sellers, it’s pretty easy to work out. But with lots of people involved, you’ve got a bunch of sellers who might are uncertain on how much they might want to sell, you’ve got to get buyers willing to commit to buying with a bit of that uncertainty, there’s a share class issue, there’s just managing the whole transaction. It’s a lot more moving parts. So at that scale, it usually happens with a tender offer, where some investor makes a bid at a particular price that people can choose to accept within some timeframe.
enjoyed this post, a bit different than what I've read of yours (mostly on SQL / AI / technical thought writing), and if those writings and conversations were "out there", this post was like gaining a glimpse into an alien's dining room in a far off galaxy, with all of the granular detail of a meal that I had never even known existed!
Although, of course, I am somewhat familiar with start ups, Silicon Valley (mostly from the TV show, which was amazing), but this particular ethical dilemma is far removed from any of my typical business experience, for I'd say "most of us" (in Middle America), which is simply from the perspective of a sliding scale of "dollars per hour" to work. Sometimes it's high, usually it's low, but I've never had to open myself up to the many ethical dilemmas of founders cashing out their shares.
I guess this comment is not much more than to say...wow that was interesting and a nice glimpse into how the other half lives.
Thanks! And a lot of these decisions are still pretty uncommon in Silicon Valley; the average startup that raises one or two rounds of money and then slowly fades away typically wouldn’t ever attract enough VC interest to find someone who wants to buy secondary shares. But for hot companies, or in crazy boom-times like 2021 or during the current AI hype, it can definitely happen.
(Also, HBO Silicon Valley, seems like satire, but waaay too realistic.)
So true! “If you gambling at a casino for years, with all of your chips on the table the whole time, the stress will eventually eat you alive. Nothing is more terrifying than knowing you could still walk out a loser; nothing will burn you out faster than wondering if your payout for years of work will be years of regret. Like, sure, stay motivated; stay ambitious; all of the clichés. But there’s a fine line between being hungry and being starved, and you’ll make good decisions and be a good leader on only one side of it”.
Some of my favorite posts - getting real life down to earth views on this stuff. Love it.
The VC “drive by advice” made me laugh.
Secondary sales seem totally reasonable if open to everyone - or atleast a group of people objectively defined somehow — and frankly seems like a smart idea to me. Like the first rule of IPOs - sell your stock (or so I hear). I wonder what the legal environment may be in the future for secondary sales? Any inkling of changes here?
Also the limited number of founders I know seem to see money as a byproduct. As one friend says - I’m not motivated by the money - but it is how I keep score. Motivation definitely varies by person and money is part of the equation, but I think it’s tied to proof of winning vs comfort on a beach for most founders. Therefore I bet many are not lacking in motivation because of a windfall.
On the legal stuff, I have no idea, but I doubt there’s be much change there. So long as they aren’t defrauding people, private companies are given a good bit of leeway here (that’s kinda the point of being private). The only way I can see the legal stuff meaningfully changing is if there’s some enormous scandal.
And on founder motivations, agreed, that was another thing I didn’t understand (and a point that got cut): It assumes that founders are in it for the money, despite so many VCs talking about how they want people who care about impact, etc. It’s being selectively cynical - when I’m promoting this company, they’re in it for the “right” reasons; when I’m arguing for my interests, it’s because money changes people.
And yeah, that is very true. Fundraising is an entirely different game than the other company stuff, and there are definitely some people who are good at one and not the other.
just had a conversation about whether or not we should commit to paper that mark and i opt into a rule that we're not allowed to sell any more in secondaries (flat and not %) than the next largest amount of secondaries sold by anyone on the team
I mean, I generally wouldn't put anything like this in official bylaws or whatever. If the intent is to force you to behave in ways you believe to be ethical, just behave in ways that you believe to be ethical. And having weird terms in various contracts or on your cap table can often just trim into a headache later, because it creates weird complexity or becomes a thing that someone tries to misuse.
I think the issue with secondary sales is that they misalign incentives between founders and investors.
Absent secondary sales, founders can only make a fuck-ton of money by building a successful business. But with secondary sales, founders can make a fuck-ton of money just by building a business that looks good to investors, without actually building the business.
In theory, all businesses that look good to investors are potentially successful businesses. But in practice... there are a lot of ways unscrupulous founders can take advantage of the gap between good businesses and good investor slide decks to make money by screwing everyone else.
I'm confident there were a lot of founders that made 7, 8, and 9 figure sums in 2020-2021 knowing full well they were taking advantage of a bubble and had low chances of building viable businesses.
Like, apply that to public stocks. "In theory, someone who owns a share of X can make money by selling to someone else who things that X will be a great business. But in practice, sometimes X just looks good, it turns out it's not a great business, and so the person who buys X doesn't make as much money as they thought they would."
If the founders steal the money and never try to build a business, that's different; it's fraud; you'll get sued into oblivion; etc. But if the investor just make a bad bet, that's...just how the world works?
Sure, but both the information asymmetry and the need for alignment between executives and investors in private markets is much higher than at established public companies.
There's a wide spectrum of scumminess between fraudulently stealing the money and being perfectly aligned with long-term investors. Skin in the game moves founders towards the latter.
But also, yes! Executives do this sort of thing all the time, even in public markets! (Boeing, G.E., etc.) It's just that established companies can often carry on and make lots of money for a long time even with awful executives. And if investors get cold feet, at least they can sell, often for artificially inflated valuations...
There is always a tension between investors and executives. Most executives are smart, sophisticated, and good at telling compelling stores that may or may not be true. Investors hope that executives will deploy these talents for the benefit of shareholders, instead of for their own personal benefit. But executives who can do the first can almost always do the second, so good investors in private markets (where so much depends on the quality and alignment of the executive team) are almost always a bit paranoid about ensuring executives are working faithfully on their behalf.
Anyway, I'm confident I'm not making novel arguments to you, and I'm not saying secondary sales are morally wrong. But I would hypothesize that a culture that discourages large secondary sales by founders will have more successful businesses that one that encourages them, as well as stronger norms of integrity (at least, in the capitalistic sense of fealty to investors). Looking around silicon valley the last 10 years makes me pretty confident in this thesis, but I've been out of the game for a little while. Maybe I'm nuts.
I stumbled across this post a couple weeks ago. I'm definitely not saying that you were a bad person for selling some stock in your startup. Just that Taleb-ian skin in the game is important, and that avoiding overly enriching the founders of speculative businesses is probably good for the long-term health of the startup eco-system.
Yeah, I mean, I think that all makes sense in an abstract way. In my experience though, there's very little risk of startups scamming investors via secondary sales. Like, it's difficult mechanic to pull off. You have to start a company that gets very hot, raise a huge round, and - at the moment, when everyone says you're killing it - decide that you know something they don't and sell out.
In practice, it's really hard to run a scam from the beginning that gives you the opportunity to sell meaningful secondary. And if you do get to that point and realize that maybe it is kind of scammy (or more likely, unstable, like Hopin), there's a decent chance you'll have become more of a true believer than investors. Like, I think Adam Neumann still fully believed in WeWork. He got rich of secondary, but not because he was executing step two of his scam; he got rich because he wanted to diversity and get rich immediately. But he still seemed all in, until he got fired.
Which is also a bit part of the point - most people who sell secondary sell, at the absolute most, 25 percent of their stake. The Hopin guy made $100m from secondary - but had something like $750m of net worth in Hopin. WeWork was the same. For me, I only sold a couple percentage points of my stake. So even the people who get extremely rich from these sales are still mostly invested in the companies. (And, it's a weird argument to say that rich people aren't motivated to run companies, since investors would throw every dollar they have at Elon Musk, Zuck, Bezos, Sam Altman, or any other hugely rich person if they started another company.)
100% no question that employees who hold vested shares should be able to participate in secondary sales at the same rate as founders. I understand and support founders being able to do this; I don't support and understand *only* founders being able to do this.
Yeah, I generally agree. In my experience, boards object to it because it's a logistical headache (which, it is, but worth the cost to me) and because "it's not how things are done." Which I also don't agree with, but so much of startup mechanics (investing terms, vesting schedules, etc) are just doing the standard thing, so it's harder to do things that break the mold than I thought it would be.
Logistical headache because of the number of people involved and complexity of cap table? I can also see complexity due to the dual class structure with founders being class A and most employees being class B.
All of the above, I think? When it’s just one or two big sellers, it’s pretty easy to work out. But with lots of people involved, you’ve got a bunch of sellers who might are uncertain on how much they might want to sell, you’ve got to get buyers willing to commit to buying with a bit of that uncertainty, there’s a share class issue, there’s just managing the whole transaction. It’s a lot more moving parts. So at that scale, it usually happens with a tender offer, where some investor makes a bid at a particular price that people can choose to accept within some timeframe.
Hi Benn,
enjoyed this post, a bit different than what I've read of yours (mostly on SQL / AI / technical thought writing), and if those writings and conversations were "out there", this post was like gaining a glimpse into an alien's dining room in a far off galaxy, with all of the granular detail of a meal that I had never even known existed!
Although, of course, I am somewhat familiar with start ups, Silicon Valley (mostly from the TV show, which was amazing), but this particular ethical dilemma is far removed from any of my typical business experience, for I'd say "most of us" (in Middle America), which is simply from the perspective of a sliding scale of "dollars per hour" to work. Sometimes it's high, usually it's low, but I've never had to open myself up to the many ethical dilemmas of founders cashing out their shares.
I guess this comment is not much more than to say...wow that was interesting and a nice glimpse into how the other half lives.
Thanks! And a lot of these decisions are still pretty uncommon in Silicon Valley; the average startup that raises one or two rounds of money and then slowly fades away typically wouldn’t ever attract enough VC interest to find someone who wants to buy secondary shares. But for hot companies, or in crazy boom-times like 2021 or during the current AI hype, it can definitely happen.
(Also, HBO Silicon Valley, seems like satire, but waaay too realistic.)
So true! “If you gambling at a casino for years, with all of your chips on the table the whole time, the stress will eventually eat you alive. Nothing is more terrifying than knowing you could still walk out a loser; nothing will burn you out faster than wondering if your payout for years of work will be years of regret. Like, sure, stay motivated; stay ambitious; all of the clichés. But there’s a fine line between being hungry and being starved, and you’ll make good decisions and be a good leader on only one side of it”.
Some of my favorite posts - getting real life down to earth views on this stuff. Love it.
The VC “drive by advice” made me laugh.
Secondary sales seem totally reasonable if open to everyone - or atleast a group of people objectively defined somehow — and frankly seems like a smart idea to me. Like the first rule of IPOs - sell your stock (or so I hear). I wonder what the legal environment may be in the future for secondary sales? Any inkling of changes here?
Also the limited number of founders I know seem to see money as a byproduct. As one friend says - I’m not motivated by the money - but it is how I keep score. Motivation definitely varies by person and money is part of the equation, but I think it’s tied to proof of winning vs comfort on a beach for most founders. Therefore I bet many are not lacking in motivation because of a windfall.
On the legal stuff, I have no idea, but I doubt there’s be much change there. So long as they aren’t defrauding people, private companies are given a good bit of leeway here (that’s kinda the point of being private). The only way I can see the legal stuff meaningfully changing is if there’s some enormous scandal.
And on founder motivations, agreed, that was another thing I didn’t understand (and a point that got cut): It assumes that founders are in it for the money, despite so many VCs talking about how they want people who care about impact, etc. It’s being selectively cynical - when I’m promoting this company, they’re in it for the “right” reasons; when I’m arguing for my interests, it’s because money changes people.
Ya - that all makes sense. And to be fair there is a wild spectrum of things that motivate people - it’s one of my favorite questions to ask someone.
So much pointers for digging into how VCs really work on this one. But first, great piece, Benn.
Like. Really. Great. Piece.
If I took one thing from here, it seems raising funds is an art separate from building great companies. I'll now explore this even further.
Thanks! I'm glad you liked it.
And yeah, that is very true. Fundraising is an entirely different game than the other company stuff, and there are definitely some people who are good at one and not the other.
Maybe the most important post you've written yet Benn.
Thanks! Though in fairness, very little of what I've written is important.
just had a conversation about whether or not we should commit to paper that mark and i opt into a rule that we're not allowed to sell any more in secondaries (flat and not %) than the next largest amount of secondaries sold by anyone on the team
I mean, I generally wouldn't put anything like this in official bylaws or whatever. If the intent is to force you to behave in ways you believe to be ethical, just behave in ways that you believe to be ethical. And having weird terms in various contracts or on your cap table can often just trim into a headache later, because it creates weird complexity or becomes a thing that someone tries to misuse.
I think the issue with secondary sales is that they misalign incentives between founders and investors.
Absent secondary sales, founders can only make a fuck-ton of money by building a successful business. But with secondary sales, founders can make a fuck-ton of money just by building a business that looks good to investors, without actually building the business.
In theory, all businesses that look good to investors are potentially successful businesses. But in practice... there are a lot of ways unscrupulous founders can take advantage of the gap between good businesses and good investor slide decks to make money by screwing everyone else.
I'm confident there were a lot of founders that made 7, 8, and 9 figure sums in 2020-2021 knowing full well they were taking advantage of a bubble and had low chances of building viable businesses.
I mean, then be a better investor?
Like, apply that to public stocks. "In theory, someone who owns a share of X can make money by selling to someone else who things that X will be a great business. But in practice, sometimes X just looks good, it turns out it's not a great business, and so the person who buys X doesn't make as much money as they thought they would."
If the founders steal the money and never try to build a business, that's different; it's fraud; you'll get sued into oblivion; etc. But if the investor just make a bad bet, that's...just how the world works?
Sure, but both the information asymmetry and the need for alignment between executives and investors in private markets is much higher than at established public companies.
There's a wide spectrum of scumminess between fraudulently stealing the money and being perfectly aligned with long-term investors. Skin in the game moves founders towards the latter.
But also, yes! Executives do this sort of thing all the time, even in public markets! (Boeing, G.E., etc.) It's just that established companies can often carry on and make lots of money for a long time even with awful executives. And if investors get cold feet, at least they can sell, often for artificially inflated valuations...
There is always a tension between investors and executives. Most executives are smart, sophisticated, and good at telling compelling stores that may or may not be true. Investors hope that executives will deploy these talents for the benefit of shareholders, instead of for their own personal benefit. But executives who can do the first can almost always do the second, so good investors in private markets (where so much depends on the quality and alignment of the executive team) are almost always a bit paranoid about ensuring executives are working faithfully on their behalf.
Anyway, I'm confident I'm not making novel arguments to you, and I'm not saying secondary sales are morally wrong. But I would hypothesize that a culture that discourages large secondary sales by founders will have more successful businesses that one that encourages them, as well as stronger norms of integrity (at least, in the capitalistic sense of fealty to investors). Looking around silicon valley the last 10 years makes me pretty confident in this thesis, but I've been out of the game for a little while. Maybe I'm nuts.
I stumbled across this post a couple weeks ago. I'm definitely not saying that you were a bad person for selling some stock in your startup. Just that Taleb-ian skin in the game is important, and that avoiding overly enriching the founders of speculative businesses is probably good for the long-term health of the startup eco-system.
Yeah, I mean, I think that all makes sense in an abstract way. In my experience though, there's very little risk of startups scamming investors via secondary sales. Like, it's difficult mechanic to pull off. You have to start a company that gets very hot, raise a huge round, and - at the moment, when everyone says you're killing it - decide that you know something they don't and sell out.
In practice, it's really hard to run a scam from the beginning that gives you the opportunity to sell meaningful secondary. And if you do get to that point and realize that maybe it is kind of scammy (or more likely, unstable, like Hopin), there's a decent chance you'll have become more of a true believer than investors. Like, I think Adam Neumann still fully believed in WeWork. He got rich of secondary, but not because he was executing step two of his scam; he got rich because he wanted to diversity and get rich immediately. But he still seemed all in, until he got fired.
Which is also a bit part of the point - most people who sell secondary sell, at the absolute most, 25 percent of their stake. The Hopin guy made $100m from secondary - but had something like $750m of net worth in Hopin. WeWork was the same. For me, I only sold a couple percentage points of my stake. So even the people who get extremely rich from these sales are still mostly invested in the companies. (And, it's a weird argument to say that rich people aren't motivated to run companies, since investors would throw every dollar they have at Elon Musk, Zuck, Bezos, Sam Altman, or any other hugely rich person if they started another company.)