Connie Loizos wrote a piece a couple of days ago titled, “Concern Grows Over Founders Cashing Out Too Much, Too Early.” Evidently investors in the Valley are allowing founders to ‘cash out’ as they are making their first investments. Investors like Paul Kedrosky think the practice is insane suggesting, “It [isn't] just an alignment issue; it just shows terrible judgment.” I couldn’t agree more. I have heard all of the arguments on the other side, but I would never participate in a deal where the founder cashed out before I did. Of course I clearly don’t understand how to make it in the Valley and these are the deals investors are doing.
So what about the opposite type of deal? What if an employee of a startup wanted to buy MORE stock in the company he was helping to grow? If it was my company I would be pumped! Buy as much as you want in my opinion. How about in the Valley? You would fire him. That is exactly what happened to Michael Brown a former Facebook employee. After he joined the company he decided to ‘double-down’ on Facebook and invested $100,000 of his own money at a $50 billion valuation. Facebook’s response? First they suspended him and then terminated him. Evidently the company has a prohibition on buying company stock. Again, I understand all of the potential implications and reason you may not want this sort of activity to go unchecked, but come on. Surely Facebook could have figured out a way to forgive Michael Brown, right?
