What Is Founder Liquidity?

It is often said that businesses can have unlimited lives. That’s entirely true. What about the life of the founders? Founders may not always be tied to a business for eternity. They may decide to part ways with their businesses. This can happen through founder liquidity. Founder liquidity is the process whereby a venture capitalist lets go of his or her shares within a company.

These shares are acquired by another party thereafter. The investment that is made by this party is transferred onto the hands of the founder. This capital does not go into the company. It doesn’t add any value to the company. No impact is thereby generated when founder liquidity transpires.

Investors are always willing to sacrifice their capital in return for founder liquidity. This is because investors want to have ownership in a company. Such a company usually already has adequate working capital.

The acquisition of shares straight from a founder ensures that ownership is transferred directly to an investor. This, however, doesn’t change the value of a company. Founder liquidity is ordinarily suited for mature companies. Such companies are usually profitable. Ownership is thereby transferred to new investors.

A founder should consider liquidity when a company is somewhat stable. Such a company need not be a start-up anymore. It should be in a position where it has and can be able to generate sufficient capital. This capital is critical for growth.

He or she should seek advice when it comes to liquidity. Advisors will be able to help one strategize on how to go about liquidation. A founder’s needs can be met through following trusted advisors. However, this strategy should be concrete. It shouldn’t create problems for a founder later on. It should be in a founder’s best interests.

A founder of a business may seek liquidity for various reasons. Responsibilities and priorities of a founder may change over time. These may lead to him or her seeking to liquidate the shares owned within a business.

Financial concerns may also be of concern to a founder. Personal matters such as health and family may also prompt a founder to liquidate. One may liquidate his or her stakes in a company in order to take care of his or her family.

A founder can also take liquidity in order to clear personal debts. When one is faced with personal liability, he or she may give away the stake that is owned within a company. The funds received can be used to offset the debt.

One may also seek liquidity in order to separate from a company. This occurs when one is not interested in being actively involved in the affairs of a company. This strengthens one’s personal balance sheet since capital is transferred to his or her account.

A founder needs to make informed decisions before liquidation. He or she needs to seek advice before giving up stakes in a company. There are many reasons as to why one may consider liquidation. Proper procedures need to be followed during the process of founder liquidity to ensure that damages and losses are not incurred.