Expensive SaaStr: What is taken into account a good or completely satisfied medium secondary quantity for the founders to take off the desk at a Collection B VC funding spherical?
Secondary gross sales performed proper really align founders and the corporate and incent them to go lengthy. See Brian Halligan’s (co-founder and Chairman of HubSpot) nice studying and instance right here:
“Make a big pie & take a chew alongside the way in which: One factor Sequoia did in our Collection D spherical was permit us to promote a few of our widespread shares to them as a part of the spherical. This turned out to be an amazing thought for me and Sequoia. It “stiffened” our spine when it got here to acquisition curiosity and stored us targeted on constructing an organization our grandkids could be pleased with. This had the additional benefit of aligning our pursuits very effectively with our traders. …Looking back, it was seemingly one of many worst monetary selections I’ve ever made, however I don’t remorse it because it did the trick within the second and the pie’s loads massive.”
“Secondary” liquidity for SaaS founders has been a part of the VC toolkit for funding later stage SaaS founders since at the very least 2010-2011 or so. I acquired a major supply as we approached $10m ARR again within the day at Adobe Signal / EchoSign — and I ought to have taken it.
However secondary liquidity acquired abused by founders (and VCs enabled them) within the Growth Instances of mid 2020 to late 2021, an excessive amount of was performed too early, and there are a lot of regrets. We’re coping with quite a lot of drama from that in the present day, with founders who made tens of millions or extra earlier than actually attending to scale — and are actually half-checked out. Or completely checked out:
We’re extra again to regular now. So what is smart … in a extra regular world?
I’ve provide you with a set of tough pointers over time for founder secondary liquidity (i.e., promoting a few of your shares in a spherical) that’s labored effectively exterior of these Loopy Instances:
- If valuation is >= $100m,
- And the corporate is doing $8m-$10m+ in income or extra (i.e., an actual firm), the extra the higher,
- And the founder sells < 5% of her holdings,
- It’s not that massive of a deal, and doubtless a good suggestion. If it makes issues much less annoying for the founders, that’s higher for everybody.
The place I get anxiousness is that if it’s neither of these two instances. If the founder is promoting > 5%, they’re not simply getting just a little liquidity … they’re promoting out a fabric quantity of her stake. That’s worrisome. In truth, it’s at all times a flag of a founder that doesn’t 100% imagine in the event that they promote greater than 5% of their holdings IMHE.
And if the worth they is promoting is lower than $100m pre, it type of tells me they aren’t actually constructing a Unicorn.
In the event you assume you might be constructing a Unicorn, why promote > 5% of your shares at < 1/tenth the exit value?
Nobody would. It’s simply getting good. Anybody would wish to maintain in that situation, aside from to get some capital to purchase a home, pay for youths’ school, and so forth. Definitely any founder loopy sufficient to be actually making an attempt to construct one thing large wouldn’t wish to promote an excessive amount of as 10% of the worth they’ll in the end get.
Actions communicate louder than phrases.
So I’m 1000% in favor of founder / secondary liquidity. But when it’s too a lot (as a %), too early (valuation), I do get apprehensive.
My recommendation typically then is both wait till the following spherical (take much less dilution, make extra on the secondary sale). Or possibly, promote your organization — when you don’t actually imagine. Or possibly, simply elevate just a little later so the maths pencils out higher.
And if the founders nonetheless wish to do it anyway, it’s fantastic by me. I’ll simply fear 🙂
Extra right here: https://www.saastr.com/7-guideli…
7 Tips on Promoting A few of Your Inventory in a VC Spherical
(Go Lengthy picture from here)