I always recommend founders consider doing a secondary transaction and taking some money off the table, if they can:
- This applies to Series B or later only. If you’re doing a seed round and asking the investors about secondaries, it might be seen as a red flag move.
- Back in the day, I sold some of my shares through secondaries. Those shares could have been worth a lot more when the company exited. Funny enough, I didn’t even use the money at all, it was just kept in the bank. But the psychological factor alone was well worth it.
- What do you do with the money? If you’re under any sort of personal debt, pay off the debt first ASAP. You can’t focus on running the company if you’re under a personal financial stress. Or you can buy something nice (but small), and get back to work.
- How much do you sell? It really depends, but personally I’d say less than $1mm. Somewhere around a down payment for a house (not the whole purchase price) or kids’ college money would be reasonable, IMO (in California, this means something like $500K-700K; again there’s no hard rule and everyone’s situation is different.)
- Let’s say the company is doing a Series B round at $100mm premoney value, founder has 25% shares, then selling 1% = $1mm pre tax = ~$650K after long term capital gain tax, state tax, and other fees, while still keeping the founder share reduced by only 1%
- Again this 1% could be worth $10mm if the company reaches Series C and becomes a unicorn, but it’s not how the math is supposed to work, you have to factor in the psychological factor and again my personal opinion is it’s well worth it
- If you’re selling, other people (eg other cofounders and early employees) should also be given a chance to sell – up to x% of their respective shares
- Don’t try to re-up the shares immediately by asking the board to give additional stock options so you can make up for the shares sold. You sell, you keep less ownership – plain and simple. Don’t be greedy. CEO stock options are usually reserved for hired guns (professional CEOs who might come in later), or there might be exceptions made for founders who’ve been with the company 7+ years and pretty heavily diluted, but the latter is exception not norm