Dear SaaStr: What is the highest % equity that a departed / non-working co-founder can own that VCs are comfortable with?
Single digits.
VCs will be worried about a founder that has left with more than 6–8% of the company or so:
At a minimum, VCs will at least try to get an agreement the departed founder will vote their shares with the majority on key issues (fundraising, IPO, M&A, etc.) and try to minimize their ability to use their votes to the disadvantage of the rest of the shareholder base. They may make this a requirement in any term sheet.
VCs generally also ask the ex-founders to leave the board, if they are still on it. Often more by restructuring it in the financing than explicitly asking them to step down.
VCs may sometimes grant the founder-CEO that stayed and is running the startup more options / shares (on a new vesting schedule, and as part of the pre-money) to rebalance equity if the departed founder has an equivalent amount. There are some nuances here, but it’s pretty common.
VCs may be OK buying out some of the ex-founders’ shares if the round is larger ($20m+). This is easier when there’s a lot of interest in the round. But if there is, new VCs may be fine buying the ex-founder out, in whole or in part, often at a modest discount to the round price since it’s Common.
But most VCs won’t really care how much money the departed founders make, not really — so long as the VCs make the same amount regardless. 😉
So if the control issues can be neutralized, VCs won’t care as much.
A related post here:
Dear SaaStr: How Do I Leave a Startup When I’m an Integral Co-founder?
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Dear SaaStr: What is the highest % equity that a departed / non-working co-founder can own that VCs are comfortable with? Single digits. VCs will be worried about a founder that has left with more than 6–8% of the company or so: At a minimum, VCs will at least try to get an agreement the… Continue Reading
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