It used to be that startup founders generally did not attempt to personalize cash in their efforts in their companies until at least they had become public or acquired.
As WeWorks CEO Adam Neumann has demonstrated – to the tune of $ 700 million, according to a report from the Wall Street Journal on Thursday – that the norm is changing. And you can attribute it to the massive inflow of capital to venture markets and especially to companies like WeWork.
"Traditionally, it would be unusual for this to happen," said Charlie Plauche, a partner with Austin, Texas-based S3 Ventures. "But traditionally, companies did not increase this billions in dollars by funding rounds before a listing."
The taboo on the founders cashed in before their companies were published, anchored in the desire to ensure that the founders were fully invested in the long-term success of the startups and not just trying to make a quick money. But the general ban on such features has gradually been lifted, and the practice of founders selling some of their efforts to their advantage while the companies are still private, has become more common, especially since the last financial crisis.
Several founders cash in, but Neumann stands out
Zynga founder Marc Pincus, for example, sold $ 1
However, Neumann's transactions are their collective size, especially for a founder who is still the start-up executive. As Journal reported, WeWorks Neumann has personally received $ 700 million from a combination of selling its shares in the company and taking out loans from what is backed by some of its remaining shares.
Read this : WeWorks founder and CEO Adam Neumann sold sold shares he owned in the company and took loans worth $ 700 million
"The extent of Neumann's sales is an extreme outlier" said Jay Ritter, a finance professor at the University of Florida who closely follows the IPO market.
It is impossible to determine without more detailed information about the transactions how much of his Neumann share sold in the movements. That's because they took place over the past five years, according to the report, and WeWorks valuation has risen over that time – from $ 5 billion at the end of 2014 to $ 47 billion at the beginning of the year.
Neumann, through a representative from WeWork, refused to comment on the report or transactions of Business Insider.
The influx of venture money contributes to the trend
Unlike the founders of past eras, but as a growing number today, Neumann has a controlling stake in this company despite not owning a majority of its shares. He may do so because the shares he owns own 10 votes each, while other shares only receive one vote, as The Journal reported. This control generally means that he can run the company as he sees fit and does not have to worry as much as another founder can as to whether his investors approve of their stock sales. Pincus, Spiegel and Kalanick were in similar positions.
But the size of Neumann's sales is also a function of the value of the company. And it is in turn linked to a large influx of late stage. Companies like Softbank have bought up stakes in older, more mature startups. The money – Softbank alone has invested out of its mammoth $ 100 billion Vision Fund – has given these companies the opportunity to stay private longer.
However, this trend has also contributed to shifting attitudes that the founders paid money in some of their efforts early, venture investors said.
Earlier, before the influx of the venture capital, the WeWork company's age and maturity had already been public. Founders often sell parts of their bets in a stock exchange listing; It used to be the first time many of them saw a fall from the company's success. Investors have come to see features that Neumann is in a similar light, Plauche said. Had WeWork been public now – as traditionally it would have been – he would have been able to make money anyway.
"In later stage companies, where the founder has liquidated liquidity events for several years and the valuation has grown, the payouts give much more meaning," Plauche said.
Investors are actually encouraging it. In some cases,
Another related factor in the increase of such payments is that they are often the only way for late-stage investors to get the interest they want in a particular company, investors said. In some of the more mature startups, the company does not necessarily need more money, or the existing investors will not expand their efforts by making it issue new shares. So the new investors can even encourage founders and early employees to sell their shares in secondary markets.
"It's just more and more late-stage investors who want to put money into work," Pauche said. "And at some time, the only way to do that is to provide liquidity to current holders than to put money on the balance."
But the trend goes over just more mature startups to those who were earlier in development, says Kristian Andersen, a partner with High Alpha, a venture studio in Indianapolis. Investors have come to believe, from observing the growing number of cash at more mature start-up, that there is not as much risk as they have previously thought of such moves, he said. And in fact, startups can benefit from founders who take a bit of the table, he said.
Newlyweds on later scenes tend to have a large amount of wealth unlocked in their stocks. Concerned that they could lose everything if they hit things, they could be cautious, Andersen said. Giving them money in some of their efforts before an exit can help them be a little more relaxed and more focused on the company's future than an IPO, he said. He still fears the founders of really early companies trying to make money. But for those on the companies that are continuing with them in the series B funding rounds and beyond – he thinks it's okay.
"Increasingly, you see investors at an early stage not only being comfortable with it, but in many cases encouraging it," said Andersen. He continued, "We have encouraged many of our CEOs to take some chips from the table when they take their turn."
Nevertheless, there are legitimate reasons to worry if and as the trend becomes more widespread. In some cases, a founder selling early may be a sign of lack of trust in the company or worse. In 2000, Nina Brink sold most of its initial stake, World Online, a few months before its original public offering at a fraction of its IPO price. The company's share price died shortly after IPO, and the company was sold months later.
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