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Cashin’ Out: How to create liquidity out of your startup’s stock. Four Steps

By September 29, 2021March 5th, 2023No Comments

One of the greatest rewards of the startup growth stage, is recognizing revenue. It means your company is making an impact with your customers. However, it does not always mean you’re able to pay your personal expenses. And if you’re raising capital, expect many investors to see you being compensated out of the investment proceeds as a red flag. They believe a livable salary will de-motivate you from achieving your benchmarks.

This makes no sense. Hundreds of millions of people go to work every day, because they are paid to do so. They do this without owning equity. You generated revenue and created traction without being paid. Here’s what you need to know about creating liquidity in your stock for yourself and your investors.

#1 Find the Right Investors.

Investors are generally risk adverse for good reason, but sometimes it can become madness. They take more equity than they should. They seek board seats, plural.  They will not want you take a salary but instead sell shares to them if you want liquidity.

Stay away from these people.

Find investors who believe in you, your vision, and want to help you, and build a relationship with you. Part of the belief is seeing you are compensated while growing the company, because it means you worrying less about paying your personal bills, so you can go 100% in on the benchmarks to create equity value in your company.

#2 Sell Shares to Your Investors.

After finding the right investors and meeting your benchmarks, you can approach your investors, and request that they purchase shares from you. Your company doesn’t have to be making tens of millions of dollars in revenue to cash out, but if you want to cash out to create greater financial security and keep going, it’s better to do so after you’ve scaled and been bought out by investors who understand the complexities of your company and have worked with you for a while, and your shares are worth more, and giving up less percentage.

#3  Tender your Shares in the Rapidly Expanding Secondary Market.

Private exchange firms like Equity Bee, Sharepost, and even Carta will allow you to list your shares in a private secondary market, where an accredited investor may purchase your shares in the same way that you and I would buy stock through E-trade or Fidelity. This provides liquidity for both you and the employees who have been granted stock options. Selling warrants on the private secondary market adds another layer to this. Warrants are rights to buy stock at a specific price. For example, you could sell the right to buy your stock for $1 per share so they can own the stock at a strike price of  $10 per share for example. This way you own the stock until the warrant is exercised at $10/share, and by the time it gets there if ever, you could be near an acquisition or pre- IPO stage.

#4  Be Acquired by a Corporation.

It’s not uncommon for larger corporations to acquire startups. If you believe you’ve done everything you can with the resources and funds you’ve been given, being acquired is a viable alternative, and your investors or CFO should be able to assist you in making this happen. When Google bought YouTube in 2006, many people thought the price was outrageously high. However, Google bought the company with its own stock, which was trading at $200 a share at the time. This is important to note since Google went public 2 years earlier at $85 a share. Making a purchase with its appreciated stock meant it was in the best interest of its shareholders (no dilution), including the founders. was a good move. YouTube was scaling quickly as being on the cutting edge of video streaming search but engaged in several copyright infringement suits at the time when Google made its offer. Today, Google stock is worth $2,800 per share, which means the YouTube founders’ shares would be worth more than $23 billion if they held on to them.

Everything we do as entrepreneurs today are VC centric, whether we know it or not.

It’s time to be Founder centric and have the roadmap to building the life you want to live, and do what you love, on your own terms.

By doing so, everyone wins.

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