TechFunded
Insights from a Seasoned Startup Lawyer
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Building a High Profile Web/Software Company

Cashing Out

There are quite a few routes to cashing in on your idea or business.  The quickest and easiest is to sell early.  Most larger tech companies have a budget for building their business by acquiring smaller companies.  Depending on the value that you bring to the table, whether that is a technology, talent, community, etc., you may be able to get a quick return if that’s what you are looking for.  By positioning yourself for visibility, you better attract early interest.  This may be by virtue of your website, yours or other blogs, showcase conferences, etc.  Good open source projects also fit here, where companies can acquire you in support of their open source initiatives.  Almost all acquisitions will come with a job, since the talent is almost always an important part of what they are acquiring.

If you’re not acquired early, there are more options for cashing a little out before your final liquidity event.  In each round of serious financing – Series-A, Series-B, Series-C – you may be allowed to sell some shares.  This is negotiated up front and if you’re interested in it you should look for investors that are either in for or will allow a secondary sale.  There are two ways a secondary can take place: (1) you sell your shares direct to buyers in a transaction that takes place just after the financing, or (ii) the company purchases your shares and the resells the to the investors as part of the financing.  If the investment is a second round of funding or later, you may be asked to discount the price on the shares that you sell.  If the transaction is structured as (i), then your shares are somewhat less valuable as they carry no preference, or a lower preference from an earlier round.  If the transaction is structured as (ii), you’ll be asked to discount just the same, since the later round now has a larger pool.  Discounts are usually 10% to 20% – depending on the difference in preference.