Crossroads: Deciding If and When a Founder Should Sell
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• Risk Profile – For most founders, the equity in the company is their primary asset and represents a majority of their holdings. Depending on how concentrated your holdings are you may seek partial or complete liquidity. If you are at a stage in your career where you seek to retire in the near future, you probably have a relatively low risk tolerance (relative to entrepreneurs!) and at least partial portfolio diversification may be prudent.



• Real Money – Liquidity objectives differ for every founder, so you should ask yourself how much is meaningful. Think of real money as a financial goal where it is so high that it is worth trying to secure at the expense of other potentially lucrative opportunities. It is a value after which your risk tolerance to achieve additional financial goals drops significantly. While it may seem academic at the moment, at some future date it won’t. Another factor to consider is that by selling some of your shares, you can attain a level of financial security knowing that you can be more aggressive in achieving a more ambitious goal for the balance of your holdings.



• Personal Growth – Another important variable is the founder’s personal objectives for the business and for themselves. A founder with aspirations to attain a certain level of market leadership and with the personal desire to help drive the efforts to achieve that vision will be driven to hold onto shares and realize their goal. A partial sale is consistent with this objective, but a complete sale will mean the founder will no longer play a key role (either economically or otherwise) in the success of the business. As you can see, the analysis with regard to personal growth is not just of financials, but of any accomplishment the founder is seeking to realize. As a majority owner this can play an important role in the decision process – though one always has to be cognizant of the economics and risks involved to weighing this factor,



• Changing Roles – One challenge for founder in this process is managing through the changes required by growth and scaling of the business. As the company scales, a number of areas need attention for founder-led businesses – a formal board, an advisory board, key executives must be reevaluated given new requirements, recruiting and investments will accelerate, and financial controls must be put in place. Most founder-led businesses undergo a transition from the founder driving most major decisions and activities, to a business where the founder is more of a leader and the business executives manage the business more independently. The founder may also bring in an investment partner – advisors, board members and executives with relevant prior experience – for support in achieving their ambitions and realizing their goals.

• Partial Liquidity – One option attractive to founders is to sell part of their holdings and place the cash in their personal savings to lower their level of risk. We often do this as part of our investments. We find that it helps the founder become less risk adverse and more willing to invest to keep pace with market growth. Obviously, bringing in an investor also helps with a number of the challenges and lowering the risk of success for the remaining shares. Often overlooked, this option can be compelling – there are many examples of founders who received an attractive price for shares upfront and then received many times that in three to five years after a successful growth period with an attractive exit.



• Timing – Timing is another factor to consider. While the evaluations do not align now, they may in the near future. Consider when a partial or complete sale becomes more compelling and evaluate whether you can afford to wait until then.



• Operational Changes – If the factors that are not aligned suggest that the business is not in sync with personal goals (for example growth and valuation do not match your personal objectives), perhaps the challenge is in the business. Consider the changes required in the business to bring these in line. While this may require more time, often changes like this can generate profound changes in the business with good outcomes.