A number of entrepreneurs have asked me recently about how VC’s view founders taking money off the table these days as part of a financing. Until the past 5-10 years, this was a non-starter for most VC’s. VC’s want to have strong alignment of interest and complete commitment to a deal if they are going to place their capital in. VC’s often use the “Cortes burning his ships (1519 at Veracruz)” analogy. If the entrepreneur has taken money out, he/she has one foot partly out the door and should things not go well, he/she has a cushioned exit. One could also argue that he/she is not as hungry or driven. It also emphasizes more the “making money” over the “changing the world” aspects of starting a business.
However, as VC’s raised larger and larger funds, they began to have trouble getting large enough chunks to work as new capital (too much dilution). So, they began to encourage entrepreneurs to take money off the table as a way to get $5m, $10m or even $50m more into a deal. As word got out, more and more entrepreneurs began to push for this ranging from a couple hundred thousand to several million.
The counter to the Cortes point is that having too much “on the line” (especially when family is involved) does not lead to healthy decision making either. Too much stress and fear of loss will result in some irrational moves.
So, while I am not a big fan of entrepreneurs taking money off of the table, one could argue that perhaps letting entrepreneurs take a bit off the table is healthy as long as it ends up providing more of a safety cushion for family versus a change in lifestyle. That said, it still begs the question: if the deal is so attractive and a must for a VC, why is the entrepreneur giving up 10x on that equity sold (or is he/she)?