Steve Jobs was sacked by the board at Apple because he would not (or could not) make the transition from an outlook of ‘what’s good for the business‘ to ‘what’s in it for us‘. Which goes to show that though an entrepreneurial mindset is vital to building a startup, you need a business outlook to sustain it to the point of profitability.
Many entrepreneurs get a kick out of building something new but may not necessary be great managers of businesses. As the company grows, things get more complicated –meetings, discussions on strategy and growth, staff management, profit, investors asking for returns, etc.
This can also be exciting on some level but in most cases, the startup founders lose focus. And this point, it’s wise to either loose management control or sell your startup stakes.
Now, here are some arguments in favour of selling your startup stakes.
1. To balance risk
Despite how most startups are portrayed in the media, this is by far, the most common reason for their selling stakes. The alternative for not selling may mean bankruptcy, the team disbanding with no outcome, lack of productivity, or unhappiness for them.
A startup may want to diversify its portfolio and balance its risk going forward. And so, the sale of stakes gives it the security to try again. Hopefully this time, under less pressure, with more ideas, a safety net if it doesn’t work out, and the opportunity to skip rounds and keep more of the next attempt.
Yes, you could keep going with the way things are, but young companies die all the time from competition, cash burn, changes in the marketplace, capital environment killing the IPO, and so on.
2. Short-term reward
The startup may be doing great, but the short-term reward on the offer is significantly greater than the perceived long-term value from not selling.
Economic forces are at play here. In the absence of restrictions or barriers, capital flows will be at its highest potential. In other words, startups are lured by the opportunity to sell stake to enjoy the fruits of their labour, and pursue fresh opportunities that are remunerative.
This could also help them setup their own investment vehicles/family office/investment fund to manage the fortunes amassed from the success of their business venture.
3. Taxation
Sometimes, transfer of stakes may be for better tax planning. Generally, it means anticipating higher taxes on capital gains in the future, and avoiding paying more money to the government.
Finally, when considering selling your startup stakes, get as much advice as possible. Understand what the amount of stake is, in relation to the overall capital as it exists today.
In addition, find out: Is the company going to ask you for certain rights – a right of first refusal, a drag along right, a requirement to vote alongside the founders on certain things? Do you want to create some kind of redemption mechanism so if the shares are not worth anything after X period of time, you can get paid in cash? Clarify these things well before hand.
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