Wednesday, July 21, 2021
Partial Exits for Founders
Directors’ dealings in public companies have long been used by investors to provide hints about company performance and outlook. An important caveat must be remembered though; there is only one reason a director might buy, but many reasons why they might sell. Selling does not automatically mean negative sentiment.
For a long time, this subtlety was not accepted by private equity and venture capital investors when investing in founder-led businesses, and partial exits were uncommon. They were suspicious of a founder that wanted to “cash in,” and worried that they would be less incentivised to deliver the performance that they had bought into. Questions would be asked: Why is the founder selling? What do they know that we do not?
More recently, this stance has softened as private equity investors consider the benefits of allowing a founder to “take some chips off the table” via a secondary sale (the sale of existing shares to new investors).
The founder placing can be a win-win. The founder is relieved of personal finance worries, and the PE/VC investors have a founder that is motivated to aim for growth and not defend what they have.
There are several scenarios and factors that might make a founder placing the thing to do:
1. Concentration risk – If the business has grown significantly then it can quickly become the founders largest financial asset, and they may begin to feel that the risk of loss is greater than the potential rewards.
2. Personal finance worries – Getting some cash out of the business could ease any personal finance concerns and provide peace of mind. A founder that is worried about paying their utility bills or mortgage payment is not going to performing at their best.
3. Tax – Here in the UK, tax on capital gains is significantly less than on income (typically 10-20% on capital gains versus 40% on income). It is therefore much more tax beneficial to get cash from the business by selling capital rather than taking dividends. (But this must be weighed up against forgoing future gains, changes in tax rates etc. where good advice is important.)
Types of placing
The larger founder placings have typically been completed in concurrence with a fundraise from PE/VC investors – the investor wants to invest £100m, the business only needs £75m, so £25m can be used on secondaries for founder and early-stage investors. But should secondaries be priced the same as new capital? What if there is no fundraise to set the price? Does the partial exit have to be one-off, or can it be available regularly?
We specialise in bringing liquidity to private markets using our auction-based solutions. We can price and arrange founder placings using AM BookBuild or set up an ongoing secondary liquidity program with AM Private Market.
If you are a founder of a company looking to arrange a secondary placing, then contact us to discuss how we can help.