In July, David Byttow and Chrys Bader won the startup
lottery, reaping millions of dollars in cash from the company they founded. But
they didn’t sell their San Francisco company, stage an IPO or generate any
revenue—the typical route to technology riches. The pair had only launched
their startup, maker of a messaging app called Secret, seven months earlier.
The co-founders together made about $6 million from selling some of their
shares in the startup to venture capitalists as part of a $25 million, early
round of financing.
Founders typically hold onto their shares for at least a few
years until their company has gained traction, or wait for an IPO or outright
sale. But venture capitalists are so eager to get into the deals they are allowing
some funding to be used to cash out the founders rather than build the
business. For founders, selling stock so early can be risky—if the company ends
up being wildly successful, the shares could be worth far more.
Such deals, while rare, are increasingly rippling through
Silicon Valley, say venture capitalists, as entrepreneurs gain the upper hand
in a frothy startup market. Venture-capital firms are hungry to own as many
shares as possible—a 20% or higher stake—so in some cases they are letting founders
take money off the table by selling to VCs, even before a product launches.
Some tech founders are bagging millions of dollars in early
funding rounds as competition among investors drives up valuations for the
hottest startups.
When Snapchat Inc. raised an $80 million “Series B” round in
June 2013—more than a year before the messaging app began selling
advertising—co-founders Evan Spiegel, 24, and Bobby Murphy, 26, pocketed about
$10 million apiece, according to people with knowledge of the deal. That round
valued the company at about $800 million—more recently, investors have pegged Snapchat’s
valuation at $10 billion and the app now has more than 100 million users.
Nowadays, however, investors say there is so much money
chasing deals that the action has trickled down to earlier rounds. As soon as a
startup has the markings of a hit—no matter how young—everyone pours in,
scrambling for their percentage points.
While the notion of an entrepreneur getting rich long before
the company makes its first dollar seems ludicrous outside of Silicon Valley,
some founders and investors say it can make it easier to resist tempting
acquisition offers. By selling so early, entrepreneurs are also taking on the
risk that the shares they are unloading today could be worth far more down the
road.
Joel Gascoigne, CEO of Buffer, recently raised a $3.5
million “Series A” round, of which $1 million went to the company’s coffers and
$2.5 million went to Mr. Gascoigne, his co-founder and a handful of early employees.
Mr. Gascoigne, who pays himself about $170,000 a year, said he wasn’t desperate
for the money but it will help focus on building the company in the long-term.
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