Dear SaaStr: What is considered a fair or happy medium secondary amount for the founders to take off the table at a Series B VC funding round?
Secondary sales done right truly align founders and the company and incent them to go long. See Brian Halligan’s (co-founder and Chairman of HubSpot) great learning and example here:
“Make a large pie & take a bite along the way: One thing Sequoia did in our Series D round was allow us to sell some of our common shares to them as part of the round. This turned out to be a great idea for me and Sequoia. It “stiffened” our backbone when it came to acquisition interest and kept us focused on building a company our grandkids would be proud of. This had the added benefit of aligning our interests very well with our investors. …In retrospect, it was likely one of the worst financial decisions I’ve ever made, but I don’t regret it as it did the trick in the moment and the pie’s plenty big.”
“Secondary” liquidity for B2B founders has been part of the VC toolkit for funding later stage founders since at least 2010-2011 or so. I got a significant offer as we approached $10m ARR back in the day at Adobe Sign / EchoSign (seemed like an important milestone back then!) — and I should have taken it.
But secondary liquidity got abused by founders (and VCs enabled them) in the Boom Times of mid 2020 to late 2021, too much was done too early, and there are many regrets.
Now secondary is back but bigger than ever. Tender offers from OpenAI, Stripe, etc. have become part of the New Normal.
I’ve come up with a set of rough guidelines over the years for founder secondary liquidity (i.e., selling some of your shares in a round) that’s worked well outside of those Crazy Times:
- If valuation is >= $100m-200m
- And the company is doing $20m+ in revenue or more (i.e., a real company), the more the better,
- And the founder sells < 5% of their holdings,
- It’s not that big of a deal, and probably a good idea. If it makes things less stressful for the founders, that’s better for everyone.
Where I get anxiety is if it’s neither of those two cases. If the founder is selling > 5% of their stake, they’re not just getting a little liquidity … they’re selling out a material amount of their stake. That’s worrisome. In fact, it’s always a flag of a founder that doesn’t 100% believe if they sell more than 5% of their holdings IMHE.
And if the price they is selling is less than $200m pre or so in The Age of AI, it sort of tells me they aren’t really building a Unicorn. Again, it tells me, they see a real ceiling. And they may be right.
But if you think you are building a Decacorn, why sell > 5% of your shares at < 1/100th the exit price?
No one would. It’s just getting good. Anyone would want to hold in that scenario, other than to get some capital to buy a house, pay for kids’ college, etc. Certainly any founder crazy enough to be really trying to build something huge wouldn’t want to sell too much as 10% of the price they’ll ultimately get.
Actions speak louder than words.
So I am 1000% in favor of founder / secondary liquidity. But if it’s too much (as a %), too early (valuation), I do get worried.
My advice generally then is either wait until the next round (take less dilution, make more on the secondary sale). Or maybe, sell your company, if you can, if you don’t really believe. Or maybe, just raise a little later so the math pencils out better.
And if the founders still want to do it anyway, it’s 100% fine by me. I’ll just worry a little 🙂
More here: https://www.saastr.com/7-guideli…
(Go Long image from here)
