By Robert Shelton and Richard Seal, Co-founders, Shelton and Seal Wealth and Estate Management.
This article was originally published in the Spring 2018 edition of Silicon Slopes Magazine.
As a founder you pour your heart and soul into a company. Your extreme clarity and hunger for success has brought your company much growth. You have taken that leap of faith from having a steady job to tackle the fear of starting up your own company head-on. On a regular basis, you have put in disproportionate hours to salary to help your business thrive. The results you have seen are directly correlated to being laser-focused on bringing to pass the success of your company.
This level of success has not come easy. Not only have you made many sacrifices, but also your family (and especially your spouse) have made sacrifices. They have been there, patiently supporting ideas and dreams that you have had and witnessing them becoming a reality through a company. They have seen you take as little from the company as needed to allow the company to grow. You haven’t taken very many raises over the years, but the personal financial demands on the family continue to grow.
The big question you ask yourself is, “Would it be okay to take some money off the table and seek out some founder liquidity?” To understand the specific financial challenges associated with founder liquidity, we conducted in-depth research with founders and their trusted advisors in Silicon Slopes. We selected each for his or her ability to provide valuable insights into founder liquidity issues they personally faced while competing in today’s technology sector.
Reasons Founders Might Consider Taking Some Money off the Table
One extraordinary founder and now managing partner at Peak Ventures that we interviewed is Sid Krommenhoek. Sid has a very unique perspective having founded four startups, with two of those being very successful, and now he is on the investor side through venture capital. Sid provided great insights into why a founder may want to look at some liquidity. “I’ve seen founders go from being single to married to having three kids in my time being invested with them. The demands on you financially grow with each year,” said Sid.
Sid also talked about how successful founders can have great clarity and extreme focus on their business. He went on to mention that personal financial concerns can worry founders and distract from focus on the company. Some of these distractions can include the following:
- Sending your kid to the school that would be the best for them
- Buying a home that meets the needs of your family
- Living in a community that would be the best environment to raise your kids
- Living closer to where you work for an easier commute and more time efficiency
- Providing the best child care
- Anything else that keeps you from being laser-focused on your business
Founder liquidity is not just a Silicon Slopes issue, but an issue for founders across the nation. We recently interviewed a colleague in Washington. He had just helped a founder to get the liquidity needed to save the founder’s marriage. The founder had a very supportive spouse, but due to the growing family, needed to purchase a home that would be more functional. Through taking some money off the table, it provided the personal capital to purchase a home that met the needs of the family and freed up the ability of the founder to continue to focus on the growth of the company.
Three Essential Questions to Ask
1. When is the right time to take some money off the table?
According to Sid, the best time to consider liquidity for a founder would be when the company is “less of a startup and more of a stable company.” The business should be in a place where it has sufficient capital to continue to grow. It would be a little strange and “atypical” to see a founder seeking liquidity prior to the completion of a series A funding. Over the past few years, however, the pendulum is swinging more favorably to the founder. It is best to consult with those trusted advisors that you have (see question number 3).
2. What should be the motivation for seeking liquidity options and how much should I take?
You should not be looking for liquidity just because you have “earned the right.” It would be best to take a liquidity option for things that might be distracting to your focus. Think of the things that made you hungry and motivated you to success. Be sure that the amount taken doesn’t become such a big meal that you lose the hunger. Think of having only a baked potato instead of a full steak dinner. Take enough to help with the concerns, but not so much that you lose the drive and desire for continued success.
3. Do I need trusted advisors to help structure the right liquidity option?
Some things in business you can scale; having trusted advisors is not one of those things to scale. You want to surround yourself with trusted advisors who will sit down and collaborate with each other on a regular basis. You want to make sure that you have the right strategy that will meet your needs and not create a bigger problem for you down the road. You will want to leverage the collective wisdom of the group in creating the best solution for you. This is not something that is just unique to a liquidity event, but should happen on a regular basis. Sid mentioned that his professionals still meet annually to ensure that he has the right strategies in place to help accomplish his family’s goals.
Founders of Snapchat, Groupon, Four Square, Zynga and many other companies have taken early liquidity from their companies. Each had different reasons for seeking liquidity. Early liquidity may offer the solution to various personal financial distractions you may have. It is important to work in a collaborative way with your trusted advisors when seeking out an early liquidity option. The different options have pros and cons to each and your advisors would be best to help you navigate which options would be best for you.
Robert Shelton and Richard Seal are managing partners at Shelton and Seal Wealth and Estate Management, LLC. Registered Representatives of and securities offered through Berthel Fisher & Company Financial Services, Inc. (BFCFS). Member FINRA/SIPC. Investment advisory services offered through BFC Planning, Inc. Shelton and Seal Wealth and Estate Management, LLC, BFCFS, and BFC Planning, Inc. are independent. The interpretations and organization of these ideas are the confidential thoughts of Shelton & Seal and do not represent the opinions of BFCFS.