How VCs Think About Departed Co-Founder Equity Stakes

Q: What is the highest % equity that a departed / non-working co-founder can own that VCs are comfortable with?

Single digits.

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.
  • 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 grant the founder-CEO 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+). There’s often more capital than shares available. If so, 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 regardles. 😉

So if the control issues can be neutralized, VCs won’t care as much.

Published on April 12, 2021

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