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Fremont: With angels and venture capitalists investing even more in very early-stage and early-stage companies, there is a growing trend of the founders taking the money off the table or taking a portion of the money raised for themselves. Raising money from a venture capitalist is easier than raising money from public markets through IPOs, as raising money from the market requires a company to reach a significant level. Generally companies raise funds from VCs to expand their markets, to hire more people, for product development and marketing initiatives, and to leverage its portfolio. So is it ethical for the founders to take the money off the table for themselves?
"I don't like that, and I don't do that. However at time, founders do that, but I would not encourage the founders to use the funds for themselves, rather use it for taking the company to new heights," says Vinod Khosla, the Co-Founder of Sun Microsystems, the founder of Khosla Ventures, and a self-confessed venture assistant. A VC would pool in money to your business after the seed funding round as a growth funding round with an expectation to generate a return though an eventual realization event. Thus, using it for the company is the ideal thing to do. Even after the company gets the fund, it would be put into its account for use at a later time. If a company pays out all its employees equally, the step would act as a differentiator, a cue to retaining employees, and keeping the employees happy, rather than filling the pockets of a few people, just because they took the risk to start the company in the first place. It is not just the top executives that lead the company to its success, but it is the sweat and blood of every single employee of the company, that made the company where it is today.
According to Wall Street Journal, when Groupon raised $1.1 billion, $956 million went into the pockets of the insiders and only the remaining 14 percent was actually used for its operations. Foursquare raised $20 million in its series B round, but its founders took home about $4.6 million. Airbnb's latest venture capital round included a $21 million cash-out to its founders. The venture capitalist Chamath Palihapitiya passed out on Airbnb's recent $112 million round with the justification that he backed out not because of the cash-out, but because the company failed to distribute the funds across all its employees. He agreed in the end when he was informed that a liquidity program was being developed for the employees in the next round of funding.
According to reports by VentureBeat and TechCrunch, a big chunk of the $200 to $300 million round of funding by Dropbox, has been set aside for the founders. Likewise, half of Twitter's recent $800 million fund was earmarked for its early investors and employees. After the incident that happened with Groupon, the company was cautioned to avoid paying off its executives from the venture funds, as it was making enough profits to give them a good deal.
Companies are of divided opinion whether the founders should cash out on the raised capital--the ones in favor state that taking money off the table puts the founders in a more relaxed state, where they can focus on going out and building the next company. It helps the founders to get a positive net worth, gives them a bit of hedge to cover their risks, acts like a reward for the hard work that they have put in, and helps them retain control and grow the business. Also, the money taken acts as a deferred compensation and reimbursement of expenses borne by the founders.
The arguments against state that cashing out is unfair to the employees, as even they have put in their sweat and blood to bring the company to its present state, so the pocketing of money by the top executives is equivalent to overlooking the efforts of the employees. The founders might become relaxed as they have the money, which might reduce the passion required to take the company to newer heights. If the founders use the money for themselves, they could wind up with tax problems, miss an opportunity to put more money in the company, and maybe risk their chances of raising equity financing. If all the money is taken out, it would lead to shortage of liquidity in a later stage.
It all depends on the personal decisions of the founders whether they want to cash in on the available opportunity or wait longer to get rewarded on their efforts made.It is a known fact that taking higher risks are associated with higher payoffs, it is upto the founders,but if the money is equally distributed among everyone in the company, maybe the step
would be viewed differently.
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