Image via CrunchBase
At DFJ Esprit some of our biggest successes have come from cash out deals where the founders have taken some money off the table at the same time as we have invested to fund growth. It worked very well for us at BuyAt and more recently at WAYN I believe it has had a positive impact on the dynamics around the board table and the prospects for the business.
Not all VCs think cash out deals are a good idea though, with many believing that if entrepreneurs take money out of the business they might lose motivation, and that it is much wiser ‘hold their feet to the fire’.
At the weekend I came across the following quote from an interview with Zuckerberg explaining why he is allowing employees to sell some of their shares to one of Facebook’s investors. It sums up the argument nicely:
One of your investors is buying shares from employees—letting them cash out early. I’ve heard you were not crazy about this. Is that true?
No, I’m really happy that people have a chance to do this. Back in the early days I had the chance during one of our funding rounds to get a bit of liquidity. It meant that in making decisions about Facebook I didn’t have to worry about the short term. I could just work on making Facebook as good as possible, and optimize it for 10 to 20 years out. To the extent that other people have the chance to do that now, it would be a healthy thing.
Perhaps this isn’t surprising because as I wrote last year the guys at Founders Fund, one of the early investors in Facebook have a similar opinion.