| Unfortunately this article ignores the reasons that pre-exit liquidity for founders is so important. The average founder of a VC backed startup typically only owns around 10% of the startup at exit, and is actually not even likely to still be there at exit time in many cases. Between first funding and exit, the startup may go through a cram-down recap that washes out founder equity or at least a highly dilutive down round. This is much more common than the company simply going out of business. Another issue is that VC backed startups often raise too much capital and sell for less than the overhang of the liquidation preference. Noam Wasserman from Harvard Business School studies founder issues and says that 4 of out 5 founding CEOs get fired from their startup. Even if it's half that, it's still a sobering statistic. When startups sell for less than the liquidation preferences, a carveout is often given to current management to close the deal, but that may not include the founders. Founders also often work for sweat equity for years, and then get paid less as CTO or founding CEO than they would working at as senior engineer at Google (in contrast to many VCs who get multi-million annual salaries from their management fees even if fund performance is poor). All of the risks above is why the book "The Illusions of Entpreneurship" claims: "Even successful founders usually earn 35% less over 10 years than they would working for others. The typical, median, right-smack-in-the-middle entrepreneur is a failure. You have to hit the top 10% to have income as an entrepreneur better than what you would have gotten working for other people." The reason that pre-exit liquidity is so important for founders is because the chance of making money AT AN EXIT is so low, and because raising tons of venture capital often reduces the likelihood of a founder profiting from an exit. Update: I also forgot to say that VCs can usually block a sale, another big risk for founders. |