Cloud Ave: Founder Liquidity and Growth Equity

InsightaaS: Cloud Ave. is a site that examines cloud through both a technology and a business lens. In this post, Derek Pilling of Meritage Funds comments on a trend that he’s observed towards “an over-sized component of the financing allocated to existing shareholder liquidity.” It’s natural for founders to want to profit from their invention, but Pilling illustrates the line between “reasonable” founder liquidity in a growth equity investment, and addressing the company’s capital needs.

I’m seeing more and more growth equity financings come to market with an over-sized component of the financing allocated to existing shareholder liquidity. I’ve seen enough of these transactions to consider it as a trend and to wonder what is motivating it.

Founder Liquidity in Context

Whereas liquidity isn’t typically a feature of venture financings, it is  often – but not always – a feature of growth equity financings. A modicum of liquidity for key management team members or founders can act as lubricant for a growth equity investment, particularly where the management team founded and has successfully bootstrapped a successful business. The founder liquidity component of a financing can de-risk a management team’s personal balance sheets, enabling the team to rationalize the dilution and loss of control that are inherent in taking growth equity capital. So, how much liquidity is reasonable?

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