Asking for a friend…
An angel investor in a successful startup wants to cash out a bit in a secondary but the founders are telling him he can only cash out fully or stay in full. No partial sale allowed. But his shareholder docs show he has tag along rights to the tune of 20%. Would it rub off a founder the wrong way if the angel were to invoke that right? Presumably because the founder may then have to offer a partial sale to all exiting shareholders, some of whom may not have been aware of their tag along rights.
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If you have the tag rights you can execute them per the agreement, full stop. If they are taking money off table you should too.
Who cares what the founder thinks. If it’s their right, it’s their right.
Exactly. This actually reflects very badly on the founder, who based on this sounds like a complete idiot.
This doesn’t make a lot of sense. Tag-along rights allow LPs to join a sale if the GP is selling. What do “partial sales” have to do with it?
Good question. The new investor (ie buyer) has a minimum ticket size they want to put in considering they are institutional. The founders also have a cap of 10% of their shares that they can sell. If most angels choose to sell partial rather than full, the total amount of shares available for sale may not end up meeting the new buyer’s minimum ticket size, and that may scuttle the deal for everybody if the buyers decides to walk away. But if most angels sell ALL their stake, then that threshold is met. Make sense?
Yes, but the contract language allowing partial sales doesn’t. Half of the point of tag-along language is to enable a buyer to clear the cap table of LPs.
The founder shouldn’t have gotten invested if he thought he could just ignore the agreed rights later.
If the startup dies the startup dies, you can always build a new one.
I’m assuming there’s a need for the funds and hence why they don’t want to create that chain of events
It’s just business. The contract prevails.
It’s interesting the founder drew such a firm line there. Presumably the founder should know what they agreed to, and that the tag along request is legitimate.
It’s important to have respect on both sides of a business relationship. Sure, the angel investor could back down to keep the founder happy, but is that a good long-term dynamic? At best, the investor might remind the founder about their agreement and ask why the founder is hoping to avoid any investor sales. Maybe some middle ground can be reached, eg stealth tag along if that’s a thing.
The founder doesn’t want an investor to exercise their contractual rights because others might find out they have the same contractual rights?
I’m feeling a bit skeptical about this founder.
Assuming all terms of investor agreements are “standard” (ie NVCA model docs), the co-sale rights granted to the investor would usually ONLY let them sell up to their pro-rata share of the company. In other words, you’d expect the terms of the docs to prohibit any founder or investor from selling their entire stake without allowing others to participate in the sale. This isn’t an unreasonable protection for a minority investor… imagine you invest $5M as the lead investor in a series A round. At this stage you’re often betting as much on the founding team as anything else - there’s just not a track record of financial performance, so at this stage you’re partially counting on the founders to do great things (this is why founders with multiple exits under their belts can raise easier - even in the absence of financial performance for THIS company, there is a history of success you can at least reference). Now assume the founding team decides they want to sell 80% of their stake in the company - you bet on the team as much as the product, and now they’re selling off a huge portion of their holdings. Your investment just got materially riskier - your founders are no longer nearly as (financially) incentivized to make the company a success, and you made a bet on THEM. If you’re getting off the bus, I wanna be able to get off the bus as well. If you’re gonna just put one foot out the door, I’m gonna put one foot out the door as well. Totally reasonable for the investor to want this protection.
If I’m speculating on what could be going on here, not all investors are as helpful as they promise they will be before they write a check. Maybe this investor is a bully. Maybe they promised to make connections that never came through. Maybe they just ask dumb questions at board meetings and you have better things to do than explain the thing that they would have understood if they’d only read the pre-reading you sent out ahead of the board meeting! It’s also perfectly reasonable in that sort of scenario for the founder to want to create a scenario where the investor is going to be out of their hair. It’s also possibly more benign, and just that the cap table is messy and they want to consolidate down to fewer major investors, and partial sales don’t help that cause. In either case it’s worth trying to say that the investor has to sell all or nothing if you think they want/need the cash - It doesn’t mean it’s gonna work if that’s not what the legal docs say is required, but it’s worth shooting your shot. If neither of those scenarios though, and they like the investor, best thing to do is to let them take their pro-rata portion of the secondary and move on - it’s definitely the fairest way to run a secondary process, even if it does inevitably reduce the amount available to the founder to sell.