Dear SaaStr: What is the highest % equity that a departed / non-working co-founder can own that VCs are comfortable with?
VCs will be worried about a founder that has left with more than 6–8% of the company or so:
- At a minimum, VCs will at least try to get an agreement the departed founder will vote their shares with the majority on key issues (fundraising, IPO, M&A, etc.) and try to minimize their ability to use their votes to the disadvantage of the rest of the shareholder base. They may make this a requirement in any term sheet.
- VCs generally also ask the ex-founders to leave the board, if they are still on it. Often more by restructuring it in the financing than explicitly asking them to step down.
- VCs may sometimes grant the founder-CEO that stayed and is running the startup more options / shares (on a new vesting schedule, and as part of the pre-money) to rebalance equity if the departed founder has an equivalent amount. There are some nuances here, but it’s pretty common.
- VCs may be OK buying out some of the ex-founders’ shares if the round is larger ($20m+). This is easier when there’s a lot of interest in the round. But if there is, new VCs may be fine buying the ex-founder out, in whole or in part, often at a modest discount to the round price since it’s Common.
But most VCs won’t really care how much money the departed founders make, not really — so long as the VCs make the same amount regardless. 😉
So if the control issues can be neutralized, VCs won’t care as much.
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