Fair Founder Secondary Sales in Series B Funding Rounds
Balancing liquidity and long-term commitment in VC deals
1The Purpose of Founder Secondary Sales
Secondary sales allow founders to sell some shares during funding rounds, providing personal liquidity while maintaining long-term commitment. This practice became common around 2010-2011 for later-stage SaaS companies. When done right, it aligns founder and investor interests, helping founders resist premature acquisition offers and stay focused on building substantial companies. However, excessive secondary sales can indicate reduced commitment.
2The HubSpot Example
Brian Halligan, HubSpot's co-founder, shares how Sequoia allowed common share sales during their Series D. This 'stiffened their backbone' against acquisition interest and aligned interests with investors. While Halligan considers it potentially one of his worst financial decisions, he values how it reinforced their long-term vision. The key was timing - this occurred when HubSpot was already demonstrating significant traction, not in early stages.
3The 2020-2021 Bubble Effect
During the 2020-2021 boom, secondary sales were often abused, with founders taking excessive liquidity too early. Many founders made millions before reaching scale, leading to reduced commitment. Some became partially or completely disengaged, creating ongoing challenges for their companies. This period serves as a cautionary tale about premature secondary transactions that don't properly balance personal and company needs.
4Current Market Realities
The market has normalized from the 2021 frenzy, requiring more disciplined approaches to secondary sales. In today's environment, investors scrutinize both the percentage and timing of founder liquidity events. The focus has shifted back to ensuring secondary sales genuinely align long-term interests rather than serving as early windfalls that might reduce founder motivation.
5The 5% Guideline
For companies with $100M+ valuations generating $8-10M+ revenue, selling 5% of founder holdings is generally acceptable. This amount provides meaningful liquidity without significantly reducing stake. It can decrease founder stress without signaling reduced commitment. The key factors are company maturity (revenue scale) and the percentage being modest enough to maintain substantial 'skin in the game.'
6Red Flags in Secondary Sales
Sales exceeding 5% or occurring below $100M valuations raise concerns. Selling more than 5% suggests a founder may not fully believe in the company's potential. Similarly, selling at lower valuations indicates doubts about achieving unicorn status. These actions contradict the behavior of founders truly committed to building massive companies, who would prefer to wait for higher valuations.
7Alternative Approaches
For founders needing liquidity but facing suboptimal conditions, alternatives exist: waiting for the next funding round (to sell at higher valuations), considering an acquisition (if commitment is waning), or delaying fundraising to improve valuation math. These approaches better preserve founder equity while addressing personal financial needs in a way that aligns with company growth trajectories.
8The Investor Perspective
While supportive of reasonable secondary sales, investors view them as signals of founder commitment. The percentage and timing communicate confidence in the company's future. Investors prefer seeing founders maintain substantial ownership, especially when building toward significant outcomes. Well-structured secondary deals create alignment, but excessive sales raise legitimate concerns about long-term dedication.
Original article: SaaStr — Fair Founder Secondary Sales in Series B Funding Rounds