1/ I have some thoughts and feelings on VCs selling early. I want to share them because I think it's really hard for companies to talk about this topic publicly. An investor pressured us to facilitate it for them several years ago. We did. It created a lot of pain.
2/ I’m not trying to call that investor out or to vent. I just want to share my experience with the hope that it helps other founders.
3/ First- I applaud this CEO (I don’t know him or the situation) for having the courage to talk about such an important topic. It inspired me to share our experience.
open.buffer.com/buying-out-inv…
open.buffer.com/buying-out-inv…
4/ Selling early can mean a wide range of things. In this case I mean putting pressure on the CEO to proactively find the VC an exit plan before a typical agreed upon timeline (i.e. ~5 yrs).
5/ There are also cases where a Series [A] investor is given the opportunity to sell into the Series [C] a few yrs later because the company is doing super well and there is excess demand. That doesn’t create much - if any- pain for the company. I’m not talking about that.
6/ I’m talking about times where the co hit a speed bump and the investor wants to bail. At the worst time the investor raises their hand and says “you know how you’re dealing with a ton of fires right now? Well lets add this to the pile. Thanks, I'll be at a music festival.”
7/ In these cases the misbehaving investor pressures the CEO to find them an exit path. At the worst possible time.
8/ While they typically don’t have the *legal* right to push the CEO to find them a buyer early, VCs can make life very difficult for a startup CEO. Negative word of mouth, poor behavior on board, etc. If you haven’t run a startup before that may not sound important.
It is.
It is.
9/ Why is it harmful when the VC pressures the CEO to help them sell early?
10/ First – perception issues (signaling). A current investor knows more about a company than almost anyone except for people at the company itself. Them wanting to sell is almost always a bad signal.
11/ The new investor cant know as much as the selling investor. So most new investors get very spooked by this decision as does the market if they learn about it.
12/ The exception is typically when the new investor doesn’t respect the selling investor much. We were lucky - that was our situation. If it had been one of our top tier investors, that would have been dramatically more painful (and perhaps killed the company).
13/ Those perception issues don’t just impact the relationship w/ new investors. They also impact the board (“should I sell too?”), current employees (“why is one of our investors selling?”), new team members that might hear about it, and even the founders (“what does it mean?)
14/ Second- distraction. Investors selling *early* is a MASSIVE distraction. They might ask the CEO to talk to new investors, to prep new materials for those investors. I got more emails from the rest of my board during that period about that topic than any other topic.
15/ The CEO has to talk to current board members and team members that get spooked etc. It is hundreds of hours of work for a startup CEO that doesn’t have a line of secondary buyers around the block (which all but 20 startups in the world don’t have)
16/ That distraction is compounded big time if the VC selling is lazy/selfish enough to say something like “I want your help in finding me a buyer.” Now that CEO is stuck between a rock and a bigger rock. Don’t help and the investor makes life very difficult for you.
17/ Do help and you just took on another part time job that adds no value to your life other than getting this guy out the door.
I felt lost.
I felt lost.
18/ Look I’m going to level. If I read this TS and hadn’t seen it happen in real life, I wouldn't think this is real. No way a VC would act like this. Not because they are above it but because in the real world that VC would crush their reputation.
19/ VC is a repeated game. Others would hear about this and never work with that investor again.
Nope.
This happens, and sometimes the same investor does it over...and over...and over again. In our case we know of several times the investor pulled this.
Nope.
This happens, and sometimes the same investor does it over...and over...and over again. In our case we know of several times the investor pulled this.
20/ For me when this happened I felt embarrassed that one of our investors wanted to sell early. I’ve already talked about some of this investor’s bad behavior in the past (some of which is chronicled below). But it still was embarrassing to be dumped.
21/ I felt scared. Scared about what this meant for us. Was I misunderstanding how bad the situation was? (It took place in the middle of the pivot…. already a really hard time) I was scared that this would make the situation even worse (it did).
22/ I felt frustrated. Frustrated that the investor couldn’t just wait. We had two world class growth investors coming into the round. Why couldn’t our investor see what they saw- that the future was super bright?
23/ I felt hurt. The way the investor went about it was horrible. Effectively two weeks before the intended close of the growth round, the investor said he wanted to sell 50% of his stake.
You know, because you can just find an extra $5m easily in 2 weeks…..after a pivot.
You know, because you can just find an extra $5m easily in 2 weeks…..after a pivot.
24/ At the pivotal point (pun intended), weeks before projected close I received 2 emails in a 3 hr span asking to talk. Subject line on both “Give me a call.” My response, while on a plane to Asia, asked what it was about and if we could talk over email. Here is what I got back: 
25/ Pro-tip for any newbie investors, or people that just want to have empathy. During a really stressful time, the email entitled “give me a call” without context, just heightens the stress.
26/ Here was my response, anonymized and unedited:
27/ (the extra color there is that we kept hearing- at an increasing pace- about side conversations he was having with other investors, potential investors in the round, and saying different things to different people, most of which was counterproductive. I & the board were upset
28/ I don’t share my response because I’m proud of it. I probably wish I had dealt with it differently. I share it so that others can see how 1 CEO dealt with the situation. I did a ton of second guessing during that painful period.
29/ I didn’t know who I could talk to and i didn’t know what “normal” looked like, if anything.
I hope getting this example into the world helps.
There isn't a playbook for this kind of junk.
I hope getting this example into the world helps.
There isn't a playbook for this kind of junk.
30/ I felt bullied -if that is an emotion. Eventually he got what he wanted and sold in the round. But we had to give up a lot to make it happen, put a ton of effort in (he put in very little) and it caused meaningful pain.
31/ In retrospect I took it too personally. I regret that, not because I regret my actions with him, but because I regret the impact I allowed it to have on my own mental health- which in turn impacted my ability as a CEO.
32/ Maybe there are other lessons that I missed from the experience. But I’m sharing in part because I think the entire event is very stigmatized and I wish other CEOs wrote about it more.
33/ I am not naming him on purpose because I don’t want to use my platform to hurt his LPs and his portfolio companies. I want to use my platform to help entrepreneurs (and maybe other investors) by sharing my experiences, especially the painful ones.
34/ My goal in this TweetStorm was not to vent. My goal was to help get more difficult experiences out in the world so that other entrepreneurs going through hard times know they aren’t alone.
Candidly I don’t have advice- this type of situation is just really hard.
Candidly I don’t have advice- this type of situation is just really hard.
