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November 10, 2005

Paul Graham weighs in in favor of founder sales

In August 2005, I made a post saying why I thought it might be a good idea for VCs to actually insist on "limited founder sales" when they invest in a company - i.e., a *part* of the investment amount goes towards buying the shares owned by founders, rather than into the company.

I had said:
I think this will help reduce the all-too-famailiar clashes between founders and their VC backers post the initial honeymoon period. Letting the founders take "a little bit off the table" reduces their risk in doing what VCs what companies all their investee companies to do: grow faster.

Now, in a new essay titled "The Venture Capital squeeze", Paul Graham - a co-founder of ViaWeb (acquired by Yahoo for $50 million) - warns VCs that "if (they) are frightened at the idea of letting founders partially cash out, let me tell them something still more frightening: you are now competing directly with Google." Click Here to read Graham's very interesting article that is attracting a lot of attention.

Back in the Indian context, M&As have remained the main source of exits for VCs here for a long time. While Google and Yahoo! may not be acquiring too many companies in India, we are witnessing global tech majors - from Flextronics and to IBM - becoming more active acquirers here. So, would we start witnessing more founder sales in Indian VC deals as well? While I'm convinced it would be a good trend, the question is whether the demand for early-stage investments too high (compared to supply), for local VCs to "allow" this?

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.