"Secondary liquidity", where you can sell some of your shares in a round, is more and more common now

Should you sell if you can?

The answer to me is simple: Are you OK if it turns out you never get another chance to sell?

If the answer is Yes, don't sell

Otherwise, sell

— Jason BeKind Lemkin (@jasonlk) October 23, 2020

These days, if you raise money at a >=$80m-100m valuation, and are oversubscribed, most bigger Silicon Valley VC firms will offer to provide some founder liquidity.

It’s not out of the goodness of their hearts. It’s so they can buy more. Bigger funds want to own as much as they can, and if they can get another 2%-3% more than otherwise, secondary liquidity is a way to get it.

Some advice here though:

• Founders taking secondary liquidity at lower valuations creates signaling risk — especially CEOs. If a founder is willing to sell shares at $30m … there is no way I believe you are trying to build a $1b+ company. You are selling way, way too cheap.
• It’s much, much, much better to be asked. If a founder really wants to sell at almost any price, it’s a flag. But if the VC offers first, and the founder “reluctantly” agrees — it’s not such a negative signal.
• You can’t or at least shouldn’t sell too much – as a %. It’s important the founders only sell an immaterial stake, at least on a percentage basis. Don’t sell more than 5% of your shareholdings. Too much sends a signal you aren’t all-in. But selling 1% of your 1,000,000 shares is clearly immaterial.
• Some, not all, investors will get nervous if the absolute $$$ are too much. Selling some shares at $100m for a downpayment on a house? Doesn’t create anxiety. Cashing out $5m in a hot deal? Who >wouldn’t< worry?
• Don’t force it. If it’s going to happen, it will happen organically. If you force it, it won’t work. At least, very rarely.
• Fewer rules for non-founders. Ex-employees can sell everything, if there’s a market and the company allows it, at any price. If we are doing a round at say $15m pre, and an ex-employee wants to sell $500k in stock — all of her stake because she’s left — that’s great for me. I’ll buy it all, and there is zero signaling risk or issues. She’s not a founder, or even, an employee anymore.
• In a super hot deal, no one will care. For now. In a super hot deal, VCs will break their own rules. They’ll throw secondary money at you. But that doesn’t mean if it’s too much, they won’t resent you or judge you later. They will. Be cognizant of this if you “break the rules” because you are super hot.
• Be cool. Do what’s right by the company first. Then, it will all work out. Everyone will get nervous if it doesn’t feel like secondary liquidity is your secondary priority.

And importantly, these core guidelines are for founders.  Founders know.  They have tons of legal inside information.

Ex-employees don’t have that inside information.  Tiny angel investors that never get updates don’t have that inside information.  And they also have no control over what will come.

So the less inside information you have, and the more anxiety you’ll have if you never get another chance to sell — the more you should err on selling in a hot round if you can.

(note: an updated SaaStr Classic post)