Not all founder liquidity is good founder liquidity.
Whenever the topic of founder liquidity is raised, defenders of the practice talk about helping entrepreneurs “pay the mortgage.”
In other words: A company gets founded in 2002, generates revenue, the CEO pulls a modest salary but the challenging exit environment means that they remain distracted by personal financial obligations. So VCs feel it’s often best to remove this distraction, either by buying back shares themselves or letting early employees sell shares on the secondary market.
This makes perfect sense to me, even if I feel that certain VCs support founder liquidity more as a marketing pitch for new entrepreneurs than as an ROI strategy.
All of this brings me to Brightcove, the enterprise that yesterday filed for a $50 million IPO. For the uninitiated, Brightcove was once considered one of Boston’s hottest up-and-coming tech companies. Its founder Jeremy Allaire previously was credited with creating Flash (after Macromedia bought his first company Allaire Corp.), and Brightcove seemed to be the enterprise version of YouTube.
But then the company stumbled repeatedly, and apparently has yet to make a profit in its seven years of existence. Nonetheless, early employees last year sold around $7.2 million worth of stock back to lead VC firms Accel Partners and General Catalyst. Included in these sales was CEO Allaire, who sold around 35% of his shares for $4.86 million, according to the S-1.
I don’t know the specifics of Allaire’s home, but this must be way beyond paying the mortgage. It also seems to veer into a place where alignment of interests come into question. Allaire already is getting paid a $300,000 salary in 2011 (33% raise from last year), plus the possibility of a $135,000 bonus (80% increase). In other words, he’s gotten rich on an unprofitable company that has underperformed expectations and now is offering up a piddling IPO that looks more like a financing event than an exit avenue for its VCs (who have invested around $90 million).
It’s the type of thing that appears to give legitimate founder liquidity a bad name…