Guidance on Selling Equity During a Venture Round, Advice from Microsoft's CTO - Tactician #0034

12/01/2024

GUIDANCE ON SELLING EQUITY DURING A VENTURE ROUND

Jason M. Lemkin, found of SaaStr, on how to approach selling equity during a venture round in “Dear SaaStr: Is it Normal for Series A, B and C Investors to Buy Up Previous Seed Investor’s Equity?”

• Founder Liquidity in Good Times and High Valuations:

  • "At least when times are good, if you raise money at a >=$80m-100m valuation, and are oversubscribed, many bigger Silicon Valley VC firms will offer to provide some founder liquidity. It’s not out of the goodness of their hearts. It’s so they can buy more and/or win the deal."

• It's Better to Be Offered Liquidity Than to Ask for It:

  • "It’s much, much, much better to be asked. If a founder really wants to sell at almost any price, it’s a flag. But if the VC offers first, and the founder 'reluctantly' agrees — it’s not such a negative signal."

• Limitations on the Percentage of Shares to Sell:

  • "You can’t, or at least shouldn’t, sell too much – as a %. It’s important the founders only sell an immaterial stake, at least on a percentage basis. Don’t sell more than 5% of your shareholdings. Too much sends a signal you aren’t all-in. Selling 1% of your 1,000,000 shares, though, is clearly immaterial."

• Different Rules for Non-Founders Selling Shares:

  • "Fewer rules for non-founders. Ex-employees can sell everything, if there’s a market and the company allows it, at any price. If we are doing a round at say $15m pre, and an ex-employee wants to sell $500k in stock — all of her stake because she’s left — the investors likely will be happy to buy it all. There is zero signaling risk or issues. She’s not a founder, or even an employee anymore."

• Different Standards in Super Hot Deals:

  • "In a super hot deal, no one will care. For now. In a super hot deal, VCs will break their own rules. They’ll throw secondary money at you. But that doesn’t mean if it’s too much, they won’t resent you or judge you later. They will. Be cognizant of this if you 'break the rules' because you are super hot."

• Prioritizing the Company's Interests in Decisions About Liquidity:

  • "Be cool. Do what’s right by the company first. Then, it will all work out. Everyone will get nervous if it doesn’t feel like secondary liquidity is your secondary priority."

ADVICE FROM MICROSOFT’S CTO

Lenny Rachitsky, Founder of Lenny’s Newsletter, interviews Sam Schillace, Deputy CTO at Microsoft and the creator of Google Docs in “How to be more innovative | Sam Schillace”

• Embrace Failure and Stay Optimistic:

  • "You cannot dance if you can't, if you're afraid to embarrass yourself. You cannot succeed if you're afraid to fail. Like, there's just that's just how it is. You have to have that sense of play. You have to have that sense of, it's okay if this doesn't work. I'll iterate on it."

  • This insight emphasizes the importance of not fearing failure and using it as a stepping stone towards success.

• Utilize AI as a Fundamental Component, Not Just a Feature:

  • "Most of the industry right now is focused on, when you talk about somebody who's working in AI, it's somebody who's creating models... I'm an app builder. I'm a tool builder. And so, I don't create models, I consume them."

• Adopt a Mindset of Continuous Learning and Adaptation:

  • "You just have to run. It's like, it's like, how do I run this sprint without getting out of breath? You don't. You're going to be out of breath. Run hard."

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