Is It Typical for Founders to Cash Out Some Money for Themselves at a Series A Round?

Yes, it is relatively typical for founders to cash out a portion of their equity during a Series A funding round. However, the specifics can vary widely based on the company's circumstances, the terms negotiated, and the investors' preferences.

Reasons for Cashing Out

Several factors can influence whether and how much founders choose to cash out at the Series A stage:

Risk Mitigation: Founders may want to secure some personal financial stability after investing significant time and resources in building the startup. Validation: Cashing out can serve as a signal to the market that the company is moving forward and gaining traction. Reinvestment: Founders might want to reinvest the cash into the company or other ventures.

Typical Amounts

When it comes to the specific amounts, the percentages and figures can vary widely. Here are some general guidelines based on industry standards:

Percentage of the Round

Founders might cash out anywhere from 10% to 30% of the total amount raised, depending on the size of the round and the company's valuation.

Specific Figures

For a Series A round that raises USD 2 million to 10 million, it is not uncommon for founders to take out between USD 200,000 to 1 million. However, this can vary significantly based on the total valuation and the specific deal structure.

Considerations

Several factors can influence the decision to cash out, including:

Investor Sentiment: Some investors may prefer that founders reinvest their equity to demonstrate confidence in the company's future. Company Stage: Early-stage companies might see less founder cashing out compared to more established startups. Negotiation: Ultimately, the decision will depend on negotiations between the founders and the investors.

Conclusion

While it is common for founders to cash out some equity at the Series A stage, the exact amount can vary depending on the factors mentioned above. Founders should carefully consider their long-term goals, the needs of the company, and the expectations of their investors when deciding how much to cash out.

Alternatively, instead of cashing out, founders can consider other alternatives, such as:

Performance Bonuses: Encourage performance-based bonuses to align with long-term goals rather than immediate payouts. Increased Salary: Negotiate for a higher salary to provide a more stable financial cushion. Rent and Travel Expenses: Allow for specific corporate expenses, such as rent and travel, as part of a performance-based plan.

These methods can provide the necessary funds without the "out" component, effectively buying more CEO time and mind, and keeping the team together and focused on moving forward.

Stay Informed with Key Data: According to Pitchbook, the average time between Series A and Series B rounds is approximately 1.7 years. Thus, it is optimal for founders to consider cashing out during Series B when the company is more established and the traction is more evident.

Final Note: Cash out should be the last resort, often as a sign that one party is considering a split. By considering the alternatives mentioned, founders can maintain motivation and focus on long-term success.