I don't see this as troubling at all - actually, the opposite.
In the 90's, people cashed out by taking their companies public. Now, for a variety of reasons including the new burden of complying with Sarbanes-Oxley, founders are waiting much longer to go public. So they are cashing out by selling some of their founder shares to private investors.
This is in the interests of the investors because it aligns their interests with those of the founders. Say you started a company, it's kicking ass, and you face a choice. Plan A is a $100MM acquisition offer. But there's also Plan B, an ambitious expansion. Plan B gives you a 50% chance of $1B in two years, and a 50% chance of failure. If you had no assets before you started the company, the only sane thing to do is to sell out. (Not that I am suggesting that sanity should always rule the day.) But your investors probably prefer plan B. If they let you cash out $5MM or $10MM of your stock, then they make your risk tolerance more like theirs, and you can both get excited about Plan B -- which, assuming your startup is actually producing something of value, is better for the world, too.
And it's probably also better for the investing public that tech startups don't make it to IPO until they are a bit more fully baked.
Just to clarify one thing, the founders in the AirBnB case were not selling anything to investors -- they were taking a dividend, which is even worse for the early employees, because the founders get rich without dilituing themselves, precluding the other employees from doing better in a subsequent round.
Yes, I know. I should have mentioned that in my comment, but my point was that the agreement as originally written did not line up with the OPs comment.
That, or the motivational carrot to drive to success has been reduced.
It's purely observational on my part, but a founder who is sitting comfortably vs. a founder who is not -- I've seen the difference, and it very often comes down to motivation, drive and determination.
Each situation is different, but given the hungry founder (like, actually hungry) vs. the comfortable founder -- I'll take the hungry founder almost every time.
There's clearly a level of financial uncertainty where a founder is LESS productive. But, there are ways (which don't necessarily overlap) a founder could spend "excess" money which don't inhibit drive at all.
Probably the lowest hanging fruit would be to eliminate actual debt (founders may have student debt, credit card debt from earlier in the company, etc.); getting rid of debt probably won't change behavior. Maybe other health-related things. Actually, a lot of this could just be handled as "generous startup perks" vs. payouts; if I knew I could always fly in domestic E+ or upgrade-to-F on my preferred airline, and stay in a decent hotel, I'd be a lot more into taking back to back business trips all the time.
Taking care of someone else's expenses (e.g. kids, parents, or other dependents) probably won't reduce motivation, either. Fixing things which inhibit a founder's productivity (paying for a housekeeper, driver in some cases, closer apartment to the office, ...) seems like a good idea.
It's probably a bad idea to pay someone enough to become an investor, or to buy/build a house (oh god no for BUILDING), indulge in expensive AND time-consuming hobbies, etc.
The gray area is when founders would actually take an outright sale, but are given a choice of $5-10mm now and continue instead; that's enough to possibly reduce drive, but not as much as selling out.
One option might be to put some of the payout into a "lockbox", where it's safe for reasons of diversification, but not accessible. e.g. you sell, get $1-2mm into your 401k, or into an account which is inaccessible (but safely invested) for 5 years. That way, your downside risk is covered if the company tanks, but your lifestyle doesn't change.
Although, anything like this will make Bay Area luxury car dealers very sad. :(
The thing is, at that stage, do you really think anyone will abandon half a billion dollars just because they've already taken out 5 million? I wouldn't, at all.
If I cashed out a few million, what would I do with it? I'd pay my debts, buy a respectable place to live, eat healthy meals, buy a car, and buy generous gifts for all the people who've helped me along the way. Maybe most important, I'd show my friends and family I made the right decision.
But a few million is not nearly enough to buy everything I want, and there's no way I'm going to ditch such a high-potential project just for a quick payout. In fact, now that I've tasted wealth, it's more likely that I'll make sure I keep it.
The hungry founder fears staying hungry. The comfortable founder fears becoming a hungry founder and staying hungry - and I think the latter is a much more prominent fear.
It's not like someone driven solely by money (think Gordon Gecko) is going to say 'okay okay, I have $5 million, that's enough for me!'
Also, if living comfortably was a founders goal, why would they start a company instead of getting a steady job working for a comfortable 6 figures at an established company?
A) That phrase is a classic copout to try and draw attention from the fact that you're generalizing based on your own biased opinions with no evidence.
and
B) It was immediately followed by further reinforcement that you believe your opinion holds in "almost all" situations.
You didn't actually admit that every situation is different, you used oratorical sleight of hand to try and make people agree with your sweeping and unsupported statements favoring the greedy, self-serving worldview of VCs.
Wow, great job at parsing out my intentionally sneaky statement. I appreciate the reference to oratorical sleight of hand, I've never been awarded that honor.
If you can reach that logical summary based on my comment that I trust a hungry founder over a sitting-comfortably founder, then we don't have much to talk about.
BTW, I'm not a fan of the VC crowd -- I'm a fan of the early-stage employee crowd. The one who loses out in this conversation about 99% of the time.
i sure hope no investor is ever so foolishly naive as to accept claims like "50:50 chance to grow the business by an order of magnitude...in the next 2 years" without the heaviest grain of salt.
More realistically, chances are that any contract between them and the founder(s) states clearly that a sale within the first n# of years can only occur if the offered on the table is m%, m being >= 100 (more likely, m >= 120, 150 or more).
If OTOH only a fraction of the offer has been invested, then it is nearly guaranteed that they will be highly motivated to sell.
If the company is growing fast, it is not in the founders' interest to sell themselves so short. In fact, i doubt there exists empirical evidence that would support the likelihood of such a situation. VCs are logically only far less motivated to keep a business operating (after all, likely their only tie to it is financial) than the owners themselves -- whose baby, after all, it is. So when the founders are ready to bail, a sane investor would immediately pick up on the ominous implications regarding the future viability of the business and try to moderate their personal exposure as much as possible.
In the 90's, people cashed out by taking their companies public. Now, for a variety of reasons including the new burden of complying with Sarbanes-Oxley, founders are waiting much longer to go public. So they are cashing out by selling some of their founder shares to private investors.
This is in the interests of the investors because it aligns their interests with those of the founders. Say you started a company, it's kicking ass, and you face a choice. Plan A is a $100MM acquisition offer. But there's also Plan B, an ambitious expansion. Plan B gives you a 50% chance of $1B in two years, and a 50% chance of failure. If you had no assets before you started the company, the only sane thing to do is to sell out. (Not that I am suggesting that sanity should always rule the day.) But your investors probably prefer plan B. If they let you cash out $5MM or $10MM of your stock, then they make your risk tolerance more like theirs, and you can both get excited about Plan B -- which, assuming your startup is actually producing something of value, is better for the world, too.
And it's probably also better for the investing public that tech startups don't make it to IPO until they are a bit more fully baked.