10% is for freedom to innovate

Last night I attended a really interesting Cocktails and Conversations event at Kicklabs, an incubator where tech startups get to hang out, in a very cool space right in the heart of San Francisco.

There was a panel discussion about how founders and early investors can turn some of their sweat equity into liquid equity. One comment struck me as have the most important piece of information in the whole evening … “we expect founders to realize some of their equity early”.

Now this might seem counter-intuitive. One would think that a founder, who has just received an injection of cash from an Angel or VC, would want to show their commitment to the enterprise by not diluting their stake any further. And one would expect the VC’s to think the same thing. But it turns out that the VC’s do want founders and principal shareholders to liquidate some of their holdings if they need to.

The logic goes like this: for the past 3 to 5 years the founders have been living off pot-noodles to get their business going. Now they have an injection of cash and the support of outside investors. Those investors want the enterprise to succeed and for significant returns to accrue eventually. If the founder is feeling constrained personally and/or financially that is going to detract from their ability to innovate and lead. So releasing some equity, getting some liquidity, being able to address the life events (baby, braces, down payment on a house) that are causing the entrepreneur to be torn between work and life, is in the VC’s and the business’ interest.

The question is though, how much equity is reasonable to release. The VC’s last night seemed to agree that 10% of the founders’ stake was the maximum.

So if you are eating pot noodles and your partner is worried about having somewhere to live think about speaking to your investors about liberating some of your holdings. If they believe in you they may well buy the shares themselves and take a stronger position in your company. And then talk to your broker and your attorney and get their ideas on how to turn your equity into something more diverse and practical.

Your investors want you to succeed. You need to feel free to innovate if you are going to succeed. This is what it means to Empower Change. When you do something for yourself it has the effect of doing something for the business. This makes the investors happy and helps you to succeed. Your success will lead to you being able to do more for yourself, your partners and your investors. This becomes a pattern for growth and success.

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