The news is out today that Foursquare’s founders Dennis Crowley and Naveen Selvadurai took home $4.64m of their recent $20m Series B. As I’ve written a couple of times before I think this sort of cash out deal can be really helpful in aligning the interests of management and investors.
Last year I quoted Mark Zuckerberg on what ‘getting a bit of liquidity’ meant for him:
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.
Not ‘worrying about the short term’ has two important benefits. Firstly it takes the pressure off compensation discussions, which can get intense, particularly if the founders have been working in startups for a while with payout or have recently switched from a high paying corporate job, and/or they have families and school fees to worry about. Secondly, if founders already have some money on the side they are going to feel less compelled to accept the first half decent exit that comes along and will be more willing to hold on for the big result.
Cash out deals are much easier in larger rounds at higher valuations. Otherwise it can be hard for the exec to take out a meaningful amount and still have the majority of her wealth tied up in the startup. (Leaving the majority of wealth tied up in the shares of the startup is important for VCs both as a sign of confidence in the business and for ongoing motivation.)