Snapchat’s early cash-out

By Felix Salmon
June 26, 2013
Dan Primack is awesome when he's angry, and boy is he angry today, reacting to the news that Snapchat's two co-founders have cashed out to the tune of $10 million apiece as part of its latest funding round.

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Dan Primack is awesome when he’s angry, and boy is he angry today, reacting to the news that Snapchat’s two co-founders have cashed out to the tune of $10 million apiece as part of its latest funding round. “This is desperate lunacy,” he writes, adding that these kind of deals “should scare the hell out of venture capitalists”:

The LP-VC-founder alignment has now been skewed, because only the last part of that triangle is now in the money…

Don’t I want entrepreneurs building for the long-term, rather than ones just waiting for the first decent exit opportunity? Entrepreneurs who care as much about their vision for its own sake, as they do for the dollars that vision can represent?…

VCs in general have gotten a bit too comfortable handing out millions of LP dollars to individuals who don’t really need it. Maybe that’s because certain VCs no longer view $10 million as the fortune it really is.

I agree that little good can come from these deals, from the VC point of view — but I’m less angry about it than Primack is.

For one thing, the LP-VC-founder alignment has always been skewed, with VCs getting by far the best deal. Most VC-backed companies fail; historically, that has meant the founders walking away with nothing. And LPs have not done very well either. Only the VCs seem to get paid no matter what. By allowing founders to sell equity outright in early rounds, VCs are allowing them to monetize crazy early valuations — just as they themselves monetize those crazy early valuations by using them to market their next multi-billion-dollar fund. Is it bad that the pendulum is swinging back a little bit from capital (VCs) to labor (founders)? No, it not.

Secondly, it is absolutely understood in the founder community that the deal you make, when you accept your first dollar of VC funding, is that you will be building for growth and exit, rather than trying to create something which you will bequeath to your children. If you want “entrepreneurs building for the long-term”, you want entrepreneurs who aren’t taking VC money in the first place.

Thirdly, especially in Silicon Valley, it’s downright silly to expect entrepreneurs to “care about their vision for its own sake”. This is the home of the pivot, of the serial entrepreneur, of the fail-fast culture, of A/B testing, of trying many different things until you find one which works. This isn’t about vision, it’s about the ruthlessness of the market. Indeed, founders who care too much about their vision, rather than about maximizing VC returns, are liable to get unceremoniously ejected.

Fourthly, if VCs have reached the point at which they no longer think of $10 million as being a particularly large amount of money, then it’s about time that a few founders could join those ranks as well.

Finally, we’re living in a world where VC-backed companies almost never IPO any more, and where private exchanges like SecondMarket and SharesPost are becoming an increasingly important source of liquidity. I had lunch with the CEO of Green Dot yesterday; it was funded by Sequoia Capital in 2003, and Sequoia is still the single largest shareholder in the company, ten years later, with no final exit in sight — despite the fact that Green Dot went public back in 2010. In that sense, IPOs have become just another funding round. If companies are privately raising sums of money which five or ten years ago could be found only in IPOs, then you have to expect founders to start getting liquid around those rounds, just as they used to do during IPOs.

From a personal-finance perspective, of course, it makes all the sense in the world that Snapchat’s founders should diversify their net worth away from being 100% invested in the highly volatile and illiquid equity of their company. VCs and LPs are all perfectly sophisticated when it comes to managing their personal wealth; founders should be allowed to be just as sophisticated. Otherwise, accepting VC money starts too look far too much like indentured servitude.

So good on Evan Spiegel and Bobby Murphy for cashing out: they created a great product, and now they’re rich. That’s how Silicon Valley is supposed to work. And if the current valuation doesn’t work for the latest tranche of investors, that’s more the LPs’ problem than it is the problem of Snapchat’s co-founders.

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