Founders don't always win big on 'successful' exits

You start a business. It grows. Exponentially. Bigger and bigger. More customers, more sales. Suddenly people are knocking on your door. Venture capital houses, who want to invest money in your business and help you grow. They come in and establish themselves. More good times ahead. All of a sudden you're a well-known name. You start to attract interest from buyers, perhaps a bigger rival. You sell. Payday. You win big, right? Live happily ever after.

Well, maybe not.

Venture capitalists are known for making apparently risky moves - investing in young start-ups still getting a feel for things, perhaps in the fluid tech or digital sectors. But these apparently risky moves are usually well-thought-out strategic investment decisions designed to ensure that if a company they've put money into does get snapped up, they will do very well out of it indeed. Potentially at the expense of the founder(s).

In a recent piece for the Financial Times, reporter Kadhim Shubber focuses on the different classes of shares that VCs hold in companies they invest in, showing that they tend to have 'preferred' shares that give them a priority ticket in the event of a sale.

Using music streaming website Soundcloud as an example, Shubber shows how company founders who allow VC investors to hold preferred shares could end up without a penny in the event of a sale.

Soundcloud's founders Alexander Ljung and Eric Wahlforss have raised nearly $200 million in six funding rounds since the firm's inception back in 2007. The company has been valued at $700 million.

But in each of those funding rounds, new and incoming investors have added extra layers of protection for themselves, Shubber explains, building a “preferred stack that has pushed Ljung, Wahlforss and other non-preferred shareholders further back of the queue.

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