Once Rad is out, will he end up with 10% equity? I'm asking to figure out whether he'll get rich from Tinder's meteoric success, assuming the company continues to do well.
(Is it even possible for Rad or any other founder to cash out their shares before a liquidity event like IPO or acquisition? I know the answer used to be "no," but Airbnb seems to have changed that in recent years, and I'm quite unsure how it works now.)
From what I understand Tinder was never actually a startup, just a side project at IAC, and IAC has owned the company from the start. I'm not sure there are actually any legitimate "founders" or if the early engineers on the project ever had any equity beyond just employee based stock compensation.
There's many ways for private stockholders to liquidate shares:
- Founders can often sell shares during fundraising events, either through a pre-allocated block of shares called Series FF, or by having the company use a portion of the raised capital to buy back some of their shares at the same price.
- Any private stockholder can simply sell shares on the secondary market. However, most often, the company has the "right of first refusal." That means that the sale must be presented to the company before going through, and the company has the option to buy back those shares at the same price instead of letting the sale happen.
- Stockholders can also cash out by building derivative contracts where they "sell the upside" on their shares at a specific price. Think of it kind of like selling a stock option. ESO & Equidate are examples of companies / funds that facilitate this.
As a shareholder who would very much like to liquidate some shares in 3 different private companies, I'll say this has not been my experience. Maybe if your company is 99th percentile you can pull these tricks, but for the remaining 99% unregistered shares are completely illiquid due to a combination of SEC regulations and lack of ability to obtain/share the key data any potential buyer would require.
One of the biggest problems with bootstrapping startups is even after there's revenue, growth, and value, there's just no liquidity.
Email me (find it in my profile), I'd love to chat about your situation. I'm pretty involved in the field, so I'm curious if I could hook you up with any avenues to liquidate.
How common are mid-stage small software companies with co-founders looking to sell some shares? I'm not talking about anything near large enough to warrant registration. It doesn't seem like a lot written about this topic, because the focus is always on acquisition.
Obviously there's strong pressure from many directions to keep the cap table simple, keep the shares closely held, etc. But after many years of bootstrapping it can't be that uncommon to want to capture some of that value.
And to answer the first question, he probably has all of his equity.
If there was no vesting schedule for his shares, he would already own them regardless of when he left.
In the case he did have a vesting schedule (which is a best practice), it was likely 4 years. So assuming the company was founded 2 years ago, then he'd have vested half his stock, which would mean that is his regardless of when he left. Then, when leaving he probably made an agreement with the company to accelerate the vesting of rest of the stock in exchange for any or all of the following: maintaining his board position, agreeing not to sue the company, helping future guidance for the company, or other stuff.
It is also possible that he had a previous agreement with the company that if he was fired from his job that all of his stock would automatically vest (this is a fairly common provision a founder will want when they allow outsiders onto the board).
"Altogether, $946.8 million, or roughly 86% of the funds raised across the three investments, was paid out to Groupon directors, officers and stockholders. Just $151.4 million was retained by the company to use as working capital and for general corporate purposes."
(Is it even possible for Rad or any other founder to cash out their shares before a liquidity event like IPO or acquisition? I know the answer used to be "no," but Airbnb seems to have changed that in recent years, and I'm quite unsure how it works now.)