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LIFE HAPPENS

How high-performing startups keep their teams patient,
energized, and focused on the long term.

 

 


All of these moments represent that little thing called “life.” And “life happens” every day for the extraordinary people building today’s largest and fastest-growing startups.

When life unexpectedly knocks on their door, it can be critically important on the personal front and unavoidably distracting on the work front. Allowed to linger without a solution, the pressure build-up might cause a leader or a team member to pursue a financial path that isn’t in the best interest of the company (e.g. finding a broker to sell or pledge one’s stock without company consent; reluctantly resigning for a higher-paying job at a public company; acquiescing to acquisition offers in order to create a wealth event for the team and their families).

These are the very reasons Founders Circle exists.
And they are why our partners are thrilled to announce the launch of Fund II.

Fund II is $208 million, earmarked for aligned-liquidity programs designed to help solve for life’s needs while instilling patience and re-energizing the team for the good work that lies ahead.  

The companies we work with are much more than two engineers, some code, and a dog. We aim to serve the very best technology startups, backed by the very best venture firms. These breakaway-growth companies (#breakawaygrowth), as we call them, have reached or exceeded the 40 Rule: revenue of at least $40 million, along with annual growth and gross margins of at least 40 percent.

They’re typically five to seven years old when the pressure valve of life starts rising for founders and early employees, who most likely started with the company while residing in a crummy one-bedroom apartment. They didn’t care at the time, because they mostly lived at the office. But now they’re married, have kids, and are bursting at the financial seams. Their aims are simple: to provide their families with a few comforts and to retire obligations that have accumulated.

Nobody understands this dynamic tension better than the corporate-development and recruiting groups at companies like Amazon, Apple, Facebook, Google, and Microsoft, who possess a rich currency to attract the best talent from fast-growing companies. The high salaries and signing bonuses they can offer employees, as well as the acquisition terms they can offer executives, can knock a startup off its tracks.
 

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The siren calls of a public company’s
buyout or recruiting teams can be hard to resist.

Founders’ thoughts and emotions extend well beyond what’s good for themselves and their families. They wring their hands over wealth opportunities for their team members and their families too. Is remaining independent more important than allowing everyone to financially prosper from their hard work? Such was the case of one mobile-ad network we’ve spoken with, when considering whether to accept Google’s offer to bolt the startup onto its extraordinary platform.

Few would argue that we’re in a talent bubble. Large technology companies, growing at an impressive clip themselves, require new talent to fuel those ambitions. And there’s no better fuel source than the incredibly skilled team members leading today’s breakaway-growth companies. Recruiters know full well that these employees are earning startup salaries and are sitting on fully vested stock options.

Employees, from this class of startup, love their companies and their jobs. They have no desire to leave. But life happens and must be paid for. And it’s hard to ignore an enticing compensation package. Such was the case for one of the very best engineers at an athlete’s social network. Its CEO told us  that Facebook had poached him with a signing bonus that exceeded his annual salary.

Attractive acquisition and job offers from major tech companies have become the norm. To solve for team members’ liquidity needs, managers of high-performing startups are facilitating secondary stock sales.

 


Here are a few wonky data points to illustrate this increasingly common strategy.  

82 breakaway-growth companies have organized aligned-liquidity programs worth more than $3.6 billion over the past two and half years. On average, participating companies are 8 years old, have 436 employees, and have reached a funding stage of Series D or beyond. They tend to ply their trade in the software, media, consumer, and commerce sectors, where the average deal size in the first half of 2016 has been $45.39 million, according to Nasdaq Private Market.

Considering a backdrop of breathtaking private valuations and, in some cases, declining public valuations, one might conclude that sellers are rushing for the pay window. But the highest-performing startups aren’t motivated to allow employees to cash out and head to the beach. They aim to structure programs that provide team members with just enough liquidity, rarely exceeding 10 percent of their vested common stock, to deal with important matters at home so they can return their attention to matters at work. They want to take away the bite of those distracting life moments, just when the company most needs their patience and determination.

These companies often desire to remain private and independent for several more years, as they work out kinks in the business. Companies going public today are, on average, 11 years old (Jay Ritter, University of Florida) and today’s breakaway-growth companies want the flexibility to IPO at a time of their choosing. And to stay strong until their IPO, they need to retain their most precious assets—their team members—in an environment where an employee’s average tenure is no more than 2.5 years at any one company (HackerLife).

It has been a privilege for us here at Founders Circle to have invested, through Fund I, in nearly 1,000 people across 24 breakaway-growth companies. By helping them relieve life’s pressure valve, we’ve also helped managers and directors orient everyone toward the company’s long-term needs.

We’re looking forward to doing the same with Fund II so that, when life happens, startup teams can just take it all
in stride.

 

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