Friday, February 28, 2014

Angel Etiquette

Below is a brief set of rules to follow that will help you be a great angel.  Let me know if I missed any on Twitter!

1. Always put the startup first.
This seems like a "no duh" statement but there will be times when your interests as an angel diverge from the startups interests.  If a conflict of interest arises (between yourself and the startup and other thirds parties - e.g. VCs, other startups, potential acquirers etc.) always err on the side of doing the right thing for the startup.

Examples include:

  • Decreasing your own investment in a startup's round to make room for another investor who will help the company.
  • Helping a startup get acquired if it is the founders' wishes even if it does not serve your economic interest.
  • Supporting the company's interests against the VCs interests [0].

Intriguingly, it turns out that in the long run what is best for the startup is also best for you.  As your reputation grows, so to do the set of entrepreneurs who want to work with you.  

2. Be up front about conflicts of interest.
If you have a conflict of interest (e.g. are an investor in something the entrepreneur deems could be competitive) be up front about it as soon as you can with the entrepreneur.  Sometimes it is hard to tell before meeting live as an introductory email will not cover future paths or other details.

Sometimes conflicts of interest emerge over time and are impossible to avoid - e.g. one company may pivot into another company's market.  Other times, two companies are truly directly competitive.  But most times, entrepreneurs may be overly sensitive to potential future conflicts of interest [1].  Be up front about the potential conflict and talk it through or clear it with companies you are already involved with.

If you get a pitch deck out of the blue with detailed proprietary information, and the company asking you to meet is competitive with one of your portfolio companies - do *not* forward it on to the company you are involved with.  The entrepreneur reached out to you in good faith and using this against them is in poor taste.

3. Don't demand updates - ask how you can help.  
As an entrepreneur you should find a handful of investors to update regularly.  If you have raised a series A, your board member(s) will serve this function.  But pre-series A the forcing function of regular updates to a select group helps keep you on a cadence and clear path as a company.  It also means there is a set of people who are familiar with your business and more able to be helpful.

As an angel, leave it up to the entrepreneur how they want to update their investors.  Do not demand detailed updates from entrepreneurs simply for the sake of wanting to know what is going on.  Instead, ask how you can help and an update usually naturally follows.  Else you are just wasting the founders time - time that is better spent iterating on product, writing code, or closing sales.

Many founders get stuck in a "work cocoon" and forget to reach out to their investors for help.  Sometimes this help can save the founders a lot of time or make them change direction.  By proactively asking how you can help, you may save the entrepreneurs a lot of grief without wasting their time asking for a detailed snapshot of their metrics.

If a startup asks for help, follow up quickly and make what they request happen.  This may include closing a candidate, chasing down a sales lead, or providing feedback on a term sheet.  Whatever it may be, do it fast.

4. Sign documents (and generally follow up) quickly.
Turn any deal documents (investments, M&A, etc.) within 24 hours.  This will reduce stress for entrepreneurs.  (I have been guilty of violating this one lately as my own startup takes up crazy amount of time.)

5. Don't nickel and dime the startup.  Be gracious during acquisitions.
Some of the worst angel behavior [2] (and founder behavior[3]) I have seen has cropped up during small acquisitions.  During an acquihire, the entrepreneur and team are committing the next 4 years of their lives to the company buying them.  The angel will at best make their money back or 2X their money.  I have seen brand name professional angels push and browbeat entrepreneurs to go to a worse company to get slightly more money for themselves.  While this incremental return does not really impact their portfolio's returns, it means the entrepreneur gets stuck working somewhere crappy for multiple years.

Acquisitions are times of high stress for founders.  This is the worst possible time for an angel to be a jerk, but some angels push for more upside for themselves at this moment.  This does not mean angels should allow themselves to get screwed during an acquisition (this can happen too).  It just means you should keep clear headed and focused on what is fair and then communicate what you think to the stressed out entrepreneur.

6. If needed, be a psychiatrist.
Startups are hard.  Sometimes founders just need to vent.  Or co-founders need someone to help mediate.  Some of the best investors can help founders during this time of trouble.  Michael Dearing is a great example of an amazing startup whisperer.

7. Be honest.
Entrepreneurs sometimes need blunt and up front advice.  For example, as a first time manager entrepreneurs may make a mistake in how they are dealing with an employee issue.  Or, maybe the VC who is courting them is not trustworthy and the entrepreneur should know about it.   Blunt and honest opinions can go a long way in these moments.

When giving feedback or advice, remind the entrepreneur you are just sharing your opinion based on experience - it is up to her to take the information you provide and decide for herself.  Generic startup advice is often wrong.  Don't be intellectually lazy and just pattern match - instead, try to understand the nuances of the founders' business and give advice based on context.  Be sure to explain the assumptions underlying your advice in case your assumptions are off.

8. Celebrate the founders.
Successes are hard to come by.  If the entrepreneurs hit a big milestone, offer to bring by a bottle of champagne or case of beer.  Or, organize a party or drinks for your portfolio if you have a large enough one.  Starting a company is hard - celebrate key moments with the entrepreneurs and their teams when you can.

Thanks to Sam Altman, Avichal GargHarj Taggar, for comments and feedback on this post.

[0] Angels (especially "professional" superangels) sometimes feel they owe VCs more then they owe entrepreneurs.  This is because they have a portfolio of startups the VC may invest in, or the VC may pull them into a hot series A, if the angel is properly supportive of the VC.  Angels should always chose to do what is right for the company over what is right for the VC, even though this may hurt their long term economic interests relative to the VC.

[1] Most "someday in the future" conflicts of interest never materialize.   Founders are often very ambitious and paranoid about where their business may wander.  99% of these paths do not materialize and perceived general conflicts tend not to play a big role in your business.

[2] I have one ex-investor who still complains to me that I sold my company to Twitter.  He was not a believer in Twitter and sold his shares in the company as soon as he could, and missed out on the more then 10X the stock has seen since then.  Not sure how this is my fault?

[3] One company I know of sold to another private company for $18M.  The entrepreneur negotiated ~$15M for himself in retention, a few million for the rest of a 15 person team (so they effectively got hiring packages at best) and gave a pittance back to the investors relative to the money invested.   Entrepreneurs should do what's right for themselves, but they also should do right by their team as well as investors who pitched in.  I would be surprised if the team members stick around given their low compensation.

[Side Note] No one is perfect, and all angels will make mistakes at one point or another (I know I have made a number of mistakes as both an entrepreneur and an angel).  So, the above is meant more as what I look for (as an entrepreneur) in my investors, as well as behavior I have respected in investors I admire.

Related Posts
How To Sell Secondary Stock
Bad Advice

Wednesday, February 12, 2014

6 Traits To Look For When Hiring Executives

Hiring executives (VPs, COO, etc.) is one of the harder things for an entrepreneur to learn to do.   Hiring the wrong person can cause a mini-disaster at the company.  It often takes longer to spot a bad executive hire.  During that time, the executive can mis-set direction and start to degrade the culture or output of an entire functional area of your company.  Selecting for a common set of traits can go a long way in minimizing the likelihood of a bad executive hire.

When hiring an executive, I would suggest optimizing for the following traits:

1. Functional area expert.
  • Do they understand the major issues and common failure points for their function?  E.g. where does customer ops often keel over with scale and how do you intervene early?
  • Do people in their org respect their opinion and feel they can learn from?
  • Are they the right person for the current scale & trajectory of your company?  You can over hire for a position as well as under hire given the phase your company is in.  E.g. do you really need to hire Patrick Pichette, Google's CFO, to manage the finances of your pre-revenue 10 person team?
2. Ability to build/recruit/manage a team for their area.
  • Can they recruit exceptional people for this function?  Can they build a recruiting culture within their team?
  • Do they know how to motivate people in their function?  The incentives for a sales person are different from those for a product manager.
  • Can they effectively manage people from their function?  E.g. managing designers may require a different mix of approaches versus managing a customer support team.
  • Do they understand how to build out an organization with multiple layers if needed?  How deep of an organization have they managed in the past and how does it fit your current needs[2]?  
3. Collegial.
  • Do they play well with other executives who are their peers?
  • Do they set a collegial, mutually supportive environment in place for the company as a whole as well as their function?
  • Do they try to do what is right for the company even if it is not in their own best interest?
4. Communication
  • Strong communication across the company
  • Ability to get other executives and the CEO or founders on board (exec-to-founder communication may be is its own magical art depending on how introverted the founder is)
  • Ability to understand the underlying issues and communicate them within their team.
  • Ability to communicate to the board, external partners or customers, and other major stakeholders.
  • Has "cross functional empathy" which allows them to work with, and communicate effectively to, other functions they work with closely.[3]
5. Owner.
  • Has ownership of their function and makes sure it is running smoothly and effectively.
  • Owns problems and solves them.  "Black box" abstraction of their function so CEO can engage on it, but does not need to be involved day to day.
  • Understands that as a company executive they should think like an owner [1].
  • Culture fit.  Each culture is unique and like all employees some executives fit a culture and some do not.
6. Strategic & Smart.
Many people don't realize that almost every function can act strategically.  It is a good exercise to ask yourself as CEO.  What does a strategic X org look like? (where X can be HR, Ops, Product, etc...)
  • Thinks strategically and holistically about their function.
  • Thinks about how their function can be a competitive advantage for the company.  Most companies are only good at one or two things.  This is often sufficient to allow them to be successful so they don't strive to get better where they are weak.  Companies that can tackle more then one thing well tend to outshine every one else (e.g. Apple with hardware design, supply chain, and marketing).
Pro Tips
If you have not hired an executive for a specific functional area before, you can do the following homework:

  • Find the best people in the industry for the position you are hiring, and ask them for the specific traits you should look for.  E.g. when hiring a CFO, ask the best regarded CFOs for their advice in what to look for in a CFO.
  • Talk to other CEOs who have recently made a similar executive hire.  How did they go about the process?
  • Engage a search firm.  Often a search firm will help you find a strong set of candidates for executive hires.
  • Ask your board members for help in terms of the job req, contacts to pursue, or interviewing the candidates for a function - especially if the board members has had past operating experience in the function, or has worked with an excellent set of executives for the function in the past.

Thanks to Ali Rowghani for early feedback on this post.

[1] Optimally this is true of all employees.  But for executives who set the tone of their entire organization, this is especially true.
[2] "Current needs" is usually the next 12-18 months for a high growth company.
[3] Thanks to Mark Williamson for the "cross functional empathy" point.

Related Posts
5 People Who Destroy Your Culture
Should You Hire A COO?
Reference Check Candidates
How To Hire Great Business Development People
How To Choose A Co-Founder
How To Choose A Board Member
When And How To Fire An Employee At An Early Stage Startup
How To Fire A Co-Founder

Sunday, February 2, 2014

The Acquisition Blues

Founders of a small company who are acquired by a larger company are often unhappy.  The first year is often the hardest:

1. You are no longer in charge (or even influential).
As the founder of a startup you have enormous say in what happens at your company.  When you get acquired, you are suddenly no longer part of the inner circle of decision making.  Founders often feel disenfranchised and disempowered in the acquiring company.

2. Culture fit feels off.
The founders and the early employees at a startup are the foundation for the company's culture.  When acquired you go into a pre-set culture that you can not impact much.  This may lead to a feeling of cultural dissonance.  Maybe you had a team of hipster engineers in skinny jeans and you are surrounded by algorithms alpha nerds.  Or your team was all about Woz-style nerdy practical jokes and the new culture is uptight and sales-y.  Feeling culturally and emotionally in tune with the mothership may be hard.

3. You have to deal with politics.
Suddenly some random 9 to 5 middle manager is getting in the way of a product launch, hiring decision, or other key action.  You have to navigate the internal politics and winds of an organization over which you have little real control or say when all you really want to do is ship something cool.

4. You don't have a real say in your boss.
Although who you report to is negotiated during the acquisition, things may change rapidly at the acquirer.  Suddenly you may find yourself working for someone you never anticipated.  This person may be amazing, or they may be a semi-incompetent early employee that the founder still trust years after that persons proper expiration date at the company.

5. You run into (unnecessary) process.
Part of being at a startup is the ability to be nimble, make decisions, and just do stuff.  At a larger company there may be endless launch reviews, design reviews, and review reviews.  This can be frustrating to someone used to moving fast.

How To Survive To Your Cliff (And Beyond?)

1. Realize that your feeling are normal.  
Most founders go through a period of adjustment when they are acquired.  The first year is typically the hardest part as you adjust to all the changes.  Realize and accept that this is normal.

2. Get engaged with the culture.
Join the acquiring companies running club or community service day.  Get to know other people at the company and encourage the people on your team to do the same.  As you make friends at the acquirer you will find your happiness increase.

3. Be patient with your career and influence.
As you get to know the executive team of the larger company your influence will grow.  Realize that people need to get to know you and trust your insights before asking for your opinion on key items.

4. Get a hobby.
Founders often throw themselves entirely into their work.  But at a slower moving company this is hard to do and you may find yourself with an excess of free time.  This is a good opportunity to get back in shape, take a class in something, fix your house, or otherwise get re-engaged with life while still doing a great job at the acquirer.

5. Enjoy the standard benefits.
Larger companies have much better benefits.  They also have more momentum, so they absence/presence of any one person matters much less.  Some acquired founders adapt quickly to the new cultural mores of long vacations or decide to have a child once they are acquired.  They have more free time, their day to day has less direct impact on company survival, and the benefits are much better.

Related Posts:

Tuesday, January 28, 2014

5 People Who Destroy Your Culture

The old saying "one bad apple spoils the bunch" holds especially true for company culture.  Keeping around any employee who is a bad culture fit can destroy your team's working environment. If people think bad or counterproductive behavior is acceptable they will imprint on this and either start acting badly themselves or want to leave the company to work in a more positive environment.

Below are some of the typical types of people who can hurt your culture:
1. The Jerk
The Jerk may be an incredibly effective and productive member of your team.  Unfortunately they are also multiple of the following: prickly, arrogant, mean, dickish, short tempered, needlessly and constantly overly confrontational, credit mongering.  Even if they are productive in their own rite, they make the working environment hellish for the people around them and must go.

2.  The Whiner
The Whiner always point out the negatives in every situation.  When the team accomplishes a great goal  the Whiner points out all the bad parts of accomplishing the goal.  You do not want people on your team who are mindlessly positive.  However, ongoing negativity can really detract from the team environment.  Even worse, whining has a tendency to spread and your culture can flip to a "we can accomplish anything" mindset to one of massive whining and defeatism.[1]

3. Credit Taker
This person will take credit for others people work openly and unapologetically[2].  They will claim all the best ideas as their own and quickly disown or pawn off anything they came up with that did not work.  This creates two problems: (a) the Credit Taker gets promoted or otherwise rewarded inappropriately and (b) the people who really deserve the credit and rewards don't get them.  Like the Whiner, the Credit Taker's behavior will get emulated if rewarded or not addressed early.

4. Charming Do Nothing
Everyone loves this person.  They are fun, charming, and great at presenting stuff.  They always have an interesting idea or story.  Unfortunately, they don't actually get anything done, and in some cases pawn off work they are supposed to be doing on others.  All their energy and enthusiasm can make it seem like they are making great things happen (especially to the VP leading their overall group a few layers up in the organization), but really they spend most of their time shmoozing other people and reading news online.  Keeping this sort of person around signals to the team that charm matters more then substance and a lack of execution will be overlooked or even rewarded.

Once your team has more of a management structure, an additional bad seed may emerge:
5. Loyalty Monger
This manager promotes people who are personally loyal versus people who do the right things for the company.  They will also purposefully misallocate credit - e.g. tell the CEO that one of their mediocre minions accomplished something that a non-loyal member of their team actually did.  This may lead to the advancement of mediocre people over competent ones, as long as the mediocre people pledge the proper allegiance.  For some reason, this type of manager is often very good at upwards-management and tends to rise themselves, pulling a cohort of the mediocre loyal up the ranks behind them.  This screws up the culture in two ways:
a. Mediocre people are promoted and rewarded.  They then have a larger voice in your company overall including company directions and hiring decisions.
b. People learn to be rewarded for optimizing for the success of their Loyalty Monger manager over the success of the company (since it is their manager who provides them with rewards rather then the company).  This leads to behavior that does not put the company first.

It is sometimes hard to catch the Loyalty Monger as CEO as a 360 review yields lots of positive reviews from the people who have been improperly rewarded by them.  The way to ferret them out is to watch who leaves their group.  Often highly talented people focused on doing good for the company will do poorly under the Loyalty Monger.  Similarly, if the Loyalty Monger's top lieutenants get bad reviews from their peers (e.g. a product manager reviewed poorly by all the engineers and designers they work with) that may be a sign of a Loyalty Monger in your ranks.

What To Do About It
Jack Welch[3] used to use a 2X2 matrix at GE to classify his employees.

On one axis is culture fit, on the other axis productivity.  Welch's advice was as follows:
  • High Culture Fit, High Productivity.  These are your Stars.  Do whatever you can to promote, develop, and find more of these people.
  • High Culture Fit, Low Productivity.  Give these people a second chance due to culture fit.  If they can not become productive, you will need to let them go.
  • Low Culture Fit, Low Productivity.  Let them go quickly.  The lack of culture fit is the reason they should not be given a second chance.
  • Low Culture Fit, High Productivity.  These people are dangerous to your company long term.
For most managers, the hardest people to decide what to do with are the people who are very productive, but a bad culture fit.  As a manager you will be tempted to keep them around or even reward them, even though they make the lives of the people around them miserable.  However, you should do the exact opposite and let them go quickly.  These are the people pose the largest threat to your culture by providing bad behavior for others to copy.  Additionally, they will hurt your culture by driving out their most productive and well intentioned peers.

With culture fit, you should never compromise.  This bar should be the highest for the most visible and most productive of your team.

[1] In some cases, people complain a lot if they are overloaded or legitimately concerned about something.  In this case, as their manager you should ask why they are so unhappy/negative.  If it is work load or other issues, this is often fixable and a Whiner can be turned into a more upbeat and positive contributor.

[2]  One person I eventually worked with at Google claimed they "founded" the mobile team at Google on their resume/LinkedIn until recently, even though they joined the team when it had ~15 people.  This is akin to joining Dropbox at 15 people and claiming you co-founded it.

[3] I never thought I would ever quote Jack Welch.

Related Posts:
Should You Hire A COO?
Reference Check Candidates
How To Hire Great Business Development People
How To Choose A Co-Founder
How To Choose A Board Member
When And How To Fire An Employee At An Early Stage Startup
How To Fire A Co-Founder

Thursday, January 16, 2014

Do Acquisitions Always Kill Products?

When tech companies get acquired there is almost always a thread kicked up on Hacker News about whether the company's product will survive the acquisition.  In general, the type of acquisition the company goes through mirrors the likelihood its product will survive.  The matrix below shows likely outcomes[1].

[You can scroll the embedded Google doc below or view full spreadsheet here].

[1] These numbers are more or less made up.  I just ballparked things based on experience as well as the M&A Wikipedia pages for FB, GOOG, TWTR.  If anyone does a more rigorous study please let me know and I will update this post accordingly.

Related Posts:
What Is Your Startup Acquisition Really Worth?
5 Reasons To Sell Your Startup
M&A Ladder

Wednesday, January 15, 2014

Google Has Always Been A Hardware Company (Of Sorts)

Prior to the giant Nest acquisition, Google has long designed its own hardware to support its software businesses.  Indeed, before optimizing AdWords as a business model Google also bet on selling enterprise search via a hardware appliance.  Despite its traditional weakness in consumer electronics, Google has accomplished some pretty amazing things via specialized hardware designed for data collection (Street View, Google Books) or infrastructure.  Below is a list of some of these initiatives:

Mainstream Services
1. Search.
Google's search engine was launched on low-cost multi-core servers.  Google's approach to building distributed systems across a large number of machines spawned a variety of technology innovations such as Map Reduce.  Google has even gone so far as to build the networking switches in its data centers.

2. Book Search.
Reasonably early in its life Google built robots to flip through pages and scan books.  These books were OCRd and loaded into the Google Books index.

3. Street View.
Google built specialized hardware to sit on top of cars to photograph streets and storefronts around the world.

4. Search Appliance.
An enterprise search product sold as a box.

5. Nexus Phones.
Meant as proof points for the Android OS to push handset manufacturers to embrace what Android was capable of.

Emerging Services
1. Self-Driving Cars.
Hardware-based sensors coupled to algorithms and software to allow cars to self-navigate.

2. Google Glass.
Early wearable computing platform.  Below is a typical day in San Francisco for a Glass owner.

3. Robotics TBD.
Google has recently made a large number of robotics-related acquisitions.  The first application to be launched in this area is still TBD.

4. Loon.
Balloons carrying internet connectivity around the world.

5. Google Fiber.  
High bandwidth consumer networking deployments.  

Google's increasing interest in consumer electronics (Nexus, Glass, Nest) and big bets (Self Driving Cars, Loon, etc.) is likely to yield some substantial outcomes over time when married to Google's exceptional expertise in AI and consumer software.

It will be interesting to see what role the Nest founders play in Google's consumer electronics future and what areas beyond Nest they are tasked with (if any) over time.

As an aside, one interpretation of this deal is that Google wants to solidify the position of Android and Chome as the OS layer for mobile devices including those in the home and to create a de facto standard over time for how multiple "semi-smart" internet connected devices interact with one another.

Friday, January 3, 2014

How To Sell Secondary Stock

A number of early employees at startups have recently pinged me to ask about how to sell secondary shares.  Below is a short primer.

A Short Guide To Selling Secondary Stock
0.  Understand if you can sell some stock.
Check your stock option plan or other company documents to see whether you can sell secondary stock.  If your company has a general counsel, you can also ask them about the details of what you can or can not do.  Alternatively, some later stage companies have a person on the finance team dedicated to secondary transactions or the CFO may be the right point of contact.

From a process perspective, most companies will have a 30 or 60 day Right of First Refusal (ROFR).   This means the company can decide if it wants to purchase your shares instead of the buyer you negotiated a price with.   If not, the existing investors in the company also often have a ROFR and are asked if they want to buy your shares.  If everyone passes, then the original buyer can purchase the shares from you.  If the company or its existing investors want to exercise their right of first refusal to buy the shares, they will pay you the same price you negotiated with the buyer.  So even if a ROFR is invoked, you will be able to sell your shares.

Waiving the ROFR typically takes about 30 days but in some cases can be longer, so you need to plan for this when selling stock.

Remember, right before the IPO a company will often halt trading it is shares - which means you may not be able to sell for a few months before the IPO and then another 6 months after the company is public.

1. Decide how much to sell.  
The decision on how much to sell may be driven by a few factors including:
a. Are you leaving the company and need to exercise options?
Most companies require you to exercise your stock options within 90 days of leaving or you lose all the options you worked years to obtain.  In this case you need to start thinking of how to do a secondary sale shortly after leaving the company.  You will need to decide whether to sell enough to just cover taxes on the full set of options you exercise, or if you want to sell more to take some money off the table as well.

b. Diversify your portfolio.
If 99% of your net worth is tied up in company stock, you may want to take some money off the table to protect from a black swan event that will cut your net worth dramatically all at once.  I know a number of people from e.g. Zynga who saw their net worth drop 70% with the stock price.

c. Get cash you can use today.
Even if your company is close to going public, you may want some short term liquidity to allow you to buy a house, car, pay for your kid's school, or the like.  Remember, just because your company files does not mean it will quickly go public, and even after it goes public you may get locked up for 6 months of uncertainty.

d. Taxes.
There may be large tax considerations depending on the timing of selling your stock.  A number of people sold secondary stock in 2012 to avoid the tax hikes of 2013.  Talk to an accountant before making any sales.

Many people end up selling 20-50% of their stake pre-IPO for the reasons above.  If you really need the cash or just want security, you may sell your entire stake in a secondary transaction.

2. Find a legitimate buyer.
Buyers of secondary stock are diverse.  There are dedicated secondary funds, hedge funds, family offices, individual investors and angels, dentists, and a random assortment of yahoos who operate in this opaque market.

In general, you want to find a buyer who:
a. Has the funds available.
If you are doing a large transaction, ask for proof of funds or make sure the person or entity is a well known investor.  Some secondary funds will offer you a price, and then go raise money AFTER you sign a contract with them to fund the transaction.  Don't get stuck waiting for them to raise a fund to buy your shares.

b. Will move quickly.
Avoid situations where there are multiple decision makers between the purchase and the person offering to buy the shares.  E.g. some secondary funds will have a decision making committee that only meets periodically.

c. Has invested in private securities before.
If dealing with high net worth individuals (versus funds) make sure the buyer understands the secondary process, the risks involved, and the various steps needed to close a transaction quickly.

d. Won't be a pain in the butt to the company.
Adding a dentist from Ottawa to the company's list of shareholders may do your employer a disservice.   They may be willing to pay more for your shares than a professional buyer would.  But random buyers may bring volatile properties (e.g. they may sue your company for no good reason).  Only transact with random people if you don't mind burning bridges back to your employer.

e. Your company will approve quickly.
Optimally, you want buyers your company knows or is willing to add to the cap table quickly.  Some funds have had problems with the SEC in the past around secondary purchases, which means your company may not want them to buy your stock.

3. Figure out the price you want.
Private market transactions are highly illiquid and volatile[1].  There are always rumors of higher and lower prices somebody got on their stock.  Or, illegitimate buyers may suggest prices for stock that they cant or wont really pay to test the market.  Often these transaction don't go through and muddy the perception of the real market price.

To get a sense of the market for the stock:
-Ask colleagues selling stock what they are getting for their shares in transactions that have actually gone through.  This should be what transactions actually closed, versus offers they have received.  Unclosed transactions are often meaningless.
-Don't be too greedy.  Focus on speed of closing at a price you are comfortable with.  Unless you are selling a very large block, 5 cents a share won't make much of a difference if the stock is at $18 a share.

Rules of thumb:
-Common stock often has a discount to the last preferred stock price[2].  This is on the order of 30%.  E.g. if your company just raised at a $240 million valuation, you may expect to sell your common stock at $160 to $200 million.  If the fundraise took place many months before your sale, and the company has made progress since then, you can typically sell at the preferred stock price[3].  You should by all means ask for the last company preferred valuation, but investors may not be willing to pay[2].  As the company gets more valuable/later stage, the spread between common and preferred stock will disappear.

-IPO volatility.  There is typically a sharp run up in secondary prices you can get in the weeks before a company halts secondary transactions directly before an IPO.  In some cases these prices will be higher then the post-IPO stock price (see e.g. the first year of Facebook)[4].  If you want to sell, don't get overly greedy during this period.  Prices are rising so quickly you keep trying to hold out for an even better price.  Remember, the price is moving quickly because the company is about to stop all secondary trades.  So if you over optimize and don't sell you may prevented by the company from any selling for an uncertain period of time.  The root of uncertainty is that not every company that intends to go public will do so immediately.  I.e. post filing a company may wait for many months (or quarters) before going public due to market conditions.  Once the company does go public you will be locked up for another 6 months.  If the IPO gets delayed, you can end up with a bunch of illiquid stock and ongoing market risk.

-Expect things to move up and down in a semi-random fashion.  In a market with limited numbers of buyers and sellers prices may move all over the place.  If one of the founders dumps a large block of stock at a low price to diversify, it may depress prices for everyone.

-Don't forget taxes.  Talk to your accountant.  E.g. selling in one year versus another may impact the taxes you pay.  Similarly, if the stock when you bought it was a qualified small business, there may be very large benefits to holding the stock longer, or future tax breaks depending on how you re-invest the money you just made.

4. See if company wants to have their legal counsel run the transaction.
Many companies will have the Stock Purchase Agreement (SPA) they want you to use to sell their shares.  If not, you can use one of the major Silicon Valley firms to put together the paperwork.  Typically you will need a stock purchase agreement.  Sometimes, you may need additional paperwork such as a third party legal opinion that you legitimately own the shares you are selling (this is usually only needed if there is a large secondary market for a company's shares with lots of buyers and sellers.  At some point you can get people acting badly in the market and selling shares that don't exist).

5. Terms to include.
You want to make sure the paperwork for the secondary transaction includes basic items such as:
a. The buyer is obligated to fund the shares within X days of being able to do so.  I.e. if they do not wire money to you within a week of the sale closing you can void the transaction.
b. The seller is obligated to sell the shares and can't back out.
c. If the company blocks the transaction or exerts its right of first refusal (ROFR) the contract is voided.

I am not a lawyer and completely unqualified to give legal (or frankly, any other) advice.  So talk with your lawyers on this.

6. More complex transactions.
There are some secondary funds that will offer more complex transactions that will allow you to benefit from the upside of your stock in the future while cashing out today.  In some cases you take a loan out against your shares and then split the upside of the stock with the lender.  Alternatively, you outright sell them the shares, but have a contract in place that above a certain dollar amount you split the upside.  An example of this would be selling your stock for $25 per share, but then splitting any appreciation of the stock above $30 per share.  So if the stock sells for $32 you end up with $26 a share ($25 plus ($32-$30)/2).

Thanks to Naval Ravikant for reviewing and providing feedback on this post.

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[1] There are always rumors that a stock is selling for much higher and much lower prices.  In my experience, these rumors often turn our to be false.  Focus on closed transactions where money changed hands versus "a friend of a friend was offered $X but did not sell".

[2] The reason for this discount is that preferred stock gets paid out first if the company exits at lower then its last rounds valuation.  So while preferred stock has "insurance" that makes it more likely to get paid in full, common stock does not, hence the discount.   As a company gets more valuable and has more traction, the risk of a low exit goes down, and the gap in price between common and preferred shrinks and eventually disappears.

In some cases, as part of a financing round, a venture firm will buy common shares from founders at the same time it buys preferred stock from the company.   In this case, the venture firm will pay the same price for preferred and common as:
-It wants to help the founders partially cash out.
-The percentage of common it owns is low enough to not be material versus its preferred stock position.

[3] If you work for a super hot company that has made a ton of progress since its last round, and a lot of time has passed since the funding, then you can demand a premium to the last round of funding.  Companies also track their own internal valuation at board meetings and via 409(a)s, so you can also ask the company what price they think the company is now worth in order to set price.

[4] I know a number of investors who stopped buying secondary shares after they got "burned" by speculating on Facebook pre-IPO.