Zuckerberg on the merit of cash out deals

Image representing Mark Zuckerberg as depicted...

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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.

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  • mat

    It amazes me when investors take the attitude of wanting to hold founders' “feet to the fire” like this.

    In my last company we were funded with a mix of bank debt and investment. At the end of a round of funding we had the opportunity to remove the founder's homes as security on the bank debt. This had no impact at all on the investors, yet they wanted the houses “on the line” simply to “motivate” us. We got our way, but it created a rift with one or two of the investors that never healed.

    Even a small level of personal security for founders allows them to take a longer term view that is more aligned with investors. It also reduces “familiy” pressure for founders. The chances of a founder becoming less motivated when pressure is reduced is very low as the personality type that starts a business from scratch is not the type to cruise when financially things are a little easier. In fact, probably the opposite… not worrying about “losing the house”, or being able to afford a short vacation with the family actually re-energises a founder.

    Apologies for the rant… have been at the sharp end of this issue. This is one of the reasons why my current start-up (ProofHQ) has been bootstrapped to profitability without external funding!

  • Rant away Mat! I agree with you, which is why I wrote the post, and as you mention holding people's feet to the fire can create unhelpful levels of stress. This is the first time I've heard of anyone going as far as asking that founders put their houses on the line for no reason though.

  • mat

    Ah! To be clear. The house was on the line before funding, but post-funding they tried to block it being taken off even though the Small Firms Loan Guarantee scheme would have provided security.

  • Got it. Tks

  • Got it. Tks

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