Fred Wilson wrote today about his dislike for stock buybacks. He argued that it sends the wrong signal to the market and used as a case TheStreet.com, where he was an investor:
With our stock buyback we were signaling to the market that we had no good ideas about how to spend that cash. We were signaling that we didn't see much of a future in our business. And smart investors bet against those kinds of companies, managements, and boards.
I couldn't agree more. Yet, I also think that the recent trend of new financing rounds cashing out founders also sends the wrong signal. A lot of the super-angels and early stage guys are arguing that it makes sense to put some cash in founders pockets as it usually takes longer than expected to reach an exit. Actually, I'd be interested to hear what Fred's take is on this.
In general, this makes sense. Often founders are taking zero salary and may be forced to wait 5 to 7 years until an exit event can take place. Yet, I personally believe that once past the seed stage, it makes more sense to give the founder(s) a realistic salary as opposed to cashing them out, even partially. After getting initial funding, a Series A or later financing is going to bring a couple million into the company at a minimum. If the company is really rocking, it may be 20, 30 million or even more. This allows for realistic salaries and if the founders are still around, they should be compensated fairly and won't need to cash out early. Sure, there may be no room in the round so an investor offers to buy founder stock. Again, all makes sense. Yet what message does this send to the market?
Just as a stock buyback may signal to the market that the company has no idea how to spend it's cash, founders selling shares may indicate that they don't believe in a home-run exit. As VC's, we are looking for the home-runs. Yes, the singles, doubles and triples support the portfolio strategy. Yet, ultimately what we are all looking for is the home-runs. If a founder is unwilling to hold on to his full stake until the exit, he may not believe that he can ever achieve a truly spectacular exit. Smart investors, in my opinion, would also bet against this.