Finding the Middle Path: When Founder Liquidity Serves the Long Game
The strategic case for secondaries that strengthen rather than weaken founder commitment
“The path of the righteous man is beset on all sides by the inequities of the selfish and the tyranny of evil men” - Jules Winnfield, Pulp Fiction (1994)
In the ever-churning cauldron of startup ambition, few topics remain as quietly divisive as founders selling shares before their companies reach the promised land. The practice — selling a slice of one's holdings during fundraising rounds rather than waiting for acquisition or IPO — has evolved from taboo to commonplace. But like many trends that sweep through the startup world with the predictability of morning fog, this one warrants scrutiny rather than blind acceptance.
The calculus is seemingly straightforward: a founder who has subsisted on ramen and hope for years finally secures a handsome valuation. Investors are eager; the company's trajectory points upward. Why not, the thinking goes, sell a small percentage of shares to pay off a mortgage, secure a child's education, or simply sleep better at night? The practice is often dressed in the language of prudence: "taking chips off the table" or "securing financial stability to focus on the long game."
From my vantage point, having watched countless companies rise from obscure garages to household names (and many more dissolve into cautionary tales), I find this modern convention neither entirely virtuous nor entirely corrupt. It is, like most things in our business, a matter of timing, proportion, and character.
A founder who's sold even modest shares has made a quiet declaration about their confidence in the future. The question is whether that declaration strengthens or undermines their company's journey.
Let's first dispense with the extremes. A founder who rushes to cash out at the first whiff of a promising valuation is making a clear declaration. Not in words, perhaps, but in the unmistakable language of action: "I believe more in today's price than tomorrow's potential." Such founders are hedging against their own proclaimed vision. They are executing the ultimate contradiction in terms: shorting their own stock while publicly touting its limitless potential. No slide deck declaring "billion-dollar opportunity" can drown out this deafening vote of no confidence.
Equally misguided, however, is the founder who clings to financial asceticism long after it has ceased serving any purpose beyond personal mythology. Some entrepreneurs wear their poverty as a badge of honor, believing it signals commitment. But there is a meaningful difference between commitment and martyrdom. A founder distracted by genuine financial distress — unable to afford healthcare for a family member or perpetually anxious about basic security — is not a better leader for it.
The Three Principles of Balanced Liquidity
The question, then, is where wisdom lies between these poles. Based on decades of observation, I suggest three principles to guide this delicate decision.
First, timing is everything. A company at this juncture has typically proven something important: the product works, customers value it, the market exists. But it has not yet proven durability or defensibility at scale. It has not weathered competitive assaults or economic downturns. It has not demonstrated that its margins can withstand the pressures of growth. In short, the company still has everything to prove. At this point, a founder selling more than a modest fraction of equity risks appearing to lose faith just as the real challenges begin.
Second, proportion matters profoundly. The difference between selling 3% of one's holdings and 15% is not merely quantitative. It is a qualitative signal about one's confidence in the journey ahead. The former might alleviate crushing personal debt while leaving one's fortunes overwhelmingly tied to the company's success. The latter begins to resemble an exit strategy. I have observed that the most successful founders instinctively understand this distinction. They know that selling "too much, too soon" can subtly alter their own psychology — making them fractionally less bold, less willing to bet the company on necessary risks.
The venture world simultaneously evangelizes entrepreneurial risk while practicing meticulous portfolio construction. We demand founders bet everything while we hedge systematically.
Third, and perhaps most importantly, the manner of the transaction speaks volumes. Founders who negotiate secondary sales out of desperation or demand them as a condition of fundraising damage their credibility. Conversely, when investors initiate the discussion — offering a modest secondary component as part of an oversubscribed round — it becomes a vote of confidence rather than a vote of no confidence. The best founders never seem eager to sell. They appear almost reluctant, needing to be convinced that taking some liquidity now will enable them to lead more effectively later.
The startup ecosystem has a way of turning practical matters into moral narratives. We love our parables of virtue rewarded and impatience punished. But the decision to sell secondary shares should be evaluated pragmatically rather than morally. It is neither inherently noble to wait nor inherently suspect to sell. The question is whether the transaction serves the company's long-term prospects.
The Investor's Perspective: Beyond Conventional Wisdom
From the investor's perspective, the calculus is equally nuanced. Conventional wisdom once held that allowing founders to sell early was anathema — a surrender of sacred alignment. My experience suggests otherwise. I have seen cases where a judicious secondary sale strengthened a founder's resolve and commitment. One particular founder, facing a family health crisis, was able to focus entirely on building his company after selling a small portion of shares to cover medical expenses. The company eventually returned over 50x to investors. Would that outcome have materialized if the founder had been forced to choose between family and company? I doubt it.
Perhaps more tellingly, I have watched founders who achieved partial liquidity reject acquisition offers that would have provided a decent but unspectacular return. Having satisfied their basic financial needs, they could afford to be patient, to build toward truly exceptional outcomes. One such founder memorably told me, "Now that I'm not desperate, I can be greedy — for all of us." That company went on to generate billions in shareholder value.
But the benefits of early liquidity disappear when the amounts become excessive or when the secondary sale becomes a regular fixture of fundraising. A founder who has pocketed millions before the company has achieved sustainable success has, in a very real sense, already won. No matter how strong their character, their psychology has shifted. They are playing with "house money," and that mindset rarely produces the relentless drive that distinguishes legendary entrepreneurs from merely successful ones.
Founders who cash in significantly before their companies succeed are making a statement about their expectations — one that speaks volumes more than any pitch deck or board meeting assurance.
The Culture Question: Transparency and Fairness
We must also consider the impact on company culture. Employees — who typically have no liquidity path until exit — are keen observers of founder behavior. They can distinguish between a modest transaction that secures a founder's basic needs and an outsized cash-out that suggests the captain is eyeing the lifeboats.
Cap table transparency, or more often its absence, becomes a particular landmine here. I've watched companies implode when employees discovered founder secondaries through whisper networks rather than straightforward communication. The damage isn't necessarily from the transaction itself but from the perception of secrecy — the sense that decisions affecting everyone's equity are happening behind closed doors. I have seen companies where premature founder liquidity created a corrosive sense that "the rules are different at the top," undermining the esprit de corps essential to startups.
The most thoughtful founders recognize this dynamic. They communicate transparently about their secondary transactions and often push to extend similar opportunities (proportionally) to early employees. Some even create programs allowing early team members with vested options to sell a portion of their equity during major rounds. Such approaches reflect an understanding that liquidity isn't simply about money — it's about the psychology of commitment and the mechanics of alignment.
The Investor's Test: Long-term Alignment vs. Short-term Relief
For investors considering whether to facilitate founder secondary sales, I recommend a simple test: Would you prefer a founder who is all-in but occasionally distracted by financial pressure, or one who has addressed basic security needs but remains overwhelmingly invested in the outcome? In most cases, the latter serves the company better. The key is ensuring that "basic security" doesn't expand to encompass luxury or excess.
The Risk Myth We Don't Talk About
The venture capital world has always been defined by its contradictions. We worship at the altar of risk-taking while carefully hedging our own bets through portfolio diversification and meticulous portfolio construction.
The startup world simultaneously evangelizes entrepreneurial risk while practicing meticulous portfolio construction.
We celebrate the mythology of the all-in founder while structuring our firms to guarantee our personal comfort. The dissonance becomes particularly stark when one considers that the typical venture partner draws a comfortable annual management fee regardless of portfolio performance, while demanding founders subsist on below-market salaries with binary outcomes. The same investors who might question a founder's commitment for selling 5% of their shares have typically diversified their personal wealth across multiple asset classes. Perhaps it's time we extended to founders the same pragmatism we apply to ourselves.
The truth is that most great companies take a decade or more to reach their potential. Expecting founders to maintain financial precarity throughout that journey is neither realistic nor conducive to the best outcomes. A modest secondary transaction at the right moment can transform a sprinter into a marathoner — and in the startup world, it's the marathoners who create the most value.
When used with discipline and clarity, secondary sales can fuel the next decade of company building. But used carelessly, they can quietly end the story before it's properly written.
But make no mistake: the operative word is modest. Founders who cash in significantly before their companies have truly succeeded are making a statement about their own expectations — one that speaks volumes more than any pitch deck promise or board meeting assurance. And investors who enable early cash-outs aren't just betting on the founder — they're betting that momentum alone can carry the rest of the journey.
Ultimately, secondary sales are neither inherently virtuous nor inherently problematic. They are a tool — one that can strengthen alignment or weaken it, depending on how it's wielded. The decisive factors are timing, proportion, and character. Finding the right balance transforms what could be a moment of founder retreat into a foundation for greater commitment to the journey ahead.