[tptacek]

Isn't the conflict - of - interest here just enormous? The best interests of the company, and in particular the employees, is the funding round with the least onerous terms. If all a VC needs to do to get a board to accept worse terms is to kick back some money to a few strategic board members, where does that leave everyone else? And while I'm sure Rand Fishkin (who I do not know from Adam) is not jacking up his company in this case, what about appearances?

[webwright]

I think it's pretty common for founders to take some money off the table in B+ rounds, so I wouldn't sweat appearances much here. It's also not uncommon for early angels to see liquidity (partial or total) in later rounds as well.

It's not a kick-back, it's a stock sale. If Rand takes a million off the table, he's selling a million bucks in stock (and reducing his ownership accordingly). This actually helps other shareholders a touch in the B round because the company has to issue fewer new shares (causing early investors to get diluted less in the new round).

But yeah-- theoretically an investor could sell broadly crappy terms to some founders by buying out a mess of their shares. If founders want to screw their employees, they can often find a way (see Skype).

[tptacek]

I wouldn't want to be read as suggesting that every time founders "take money off the table" that they're getting a kickback; only that this is a vector for kickbacks.

[bostonpete]

> This actually helps other shareholders a touch in > the B round because the company has to issue fewer > new shares

I'm not following this logic. If a founder sells their own shares in a B-round and pockets the proceeds -- that doesn't do anything to allow the company to issue fewer new shares because none of the money from those shares went to the company.

[nasmorn]

It helps in the sense that VCs often need to invest a certain minimum sum of money or prefer to invest more thus giving better terms in this case. If the company isn't strapped for cash it can be beneficial to allow the VC to attain a higher share through selling founder or angel shares instead of just diluting all parties equally.

[webwright]

Option A: Series B investor buys shares from the Company. Company issues new shares and the Series B guy owns 20% of the company. This dilutes everyone else's ownership (for him to own 20%, everyone else's stake has to come down).

Option B: He buys all of his shares from existing shareholders. This requires no additional shares so people who are NOT cashing aren't diluted at all.

I'm just guessing here-- I've never taken money off the table. But I can't imagine it working any other way.

[skmurphy]

Option B puts no money into the company. In option A existing stockholders are diluted but the company has more cash. So "taking money off the table" comes at the expense of what the company can raise. If there was additional demand for the stock (as evidenced by someone willing to pay for the shares in Option B) then this could have resulted either in a higher stock price (and less dilution for more money) or more funds raise (possibly with more dilution).

[ig1]

I always assumed that money off the table tended to happen much later than B rounds, isn't this an exception because they're doing so well anyway ?

[pak]

Facebook's investment from Jim Breyer in 2005 came with million-dollar bonuses for Zuckerberg, Moskovitz, and Parker. Just sayin'...

[danssig]

Facebook isn't the place to go for examples of moral soundness. Just sayin' ...