How Can You Buy Back Your Equity?
“I have an early investor that wants to liquidate their investment,” “Steve” said to me.
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“That’s interesting,” I said. “Tell me more.”
“They were an incubator we hooked up with. They just contacted me a couple of days ago. I don’t think they really care about the valuation. They just want to sell their share.”
“What do you want to do?” I asked Steve.
“It’s such a small amount that I’m okay with buying back their shares,” Steve said.
“Just checking, but it will not hurt your runway?”
“No, we’re fine,” Steve said.
You can only buy back your investor’s equity when they want to sell their equity.
Later that day, I was speaking with “Tim.” Tim had a major investor that was no longer supportive.
“I brought up with (the investor) that we received an offer from a company to buy a 51% position in our company. They would buy out (the investor).
“Our investor was supportive. Why do you think that is?”
“Well, I think it’s obvious. They want out, and this (the potential of selling their equity) is their savior,” I said.
“Two investors in one day,” I thought to myself.
Do you see the pattern? Investors are willing to sell their equity when they don’t believe in your company.
I felt bad for Tim.
It’s no fun when a well known, tier one, Silicon Valley investor decides they’re not going to support your company going forward. That’s where Tim was at.
So, of course, the investor would be happy to sell. Any money they got from the deal is money they weren’t counting on. In all likelihood, the investment was already written down to zero on the investor’s books.
Don’t expect to be able to buy back your equity if your company is doing really well.
Remember, investors are not the bank. A bank is happy when they get their principle plus interest back.
Sorry to burst your bubble, but that’s not what venture capitalists and angel investors are about.
VCs are investing to get the huge win. If your company is on the way to being the next unicorn, there is no way an investor is going to sell their investment.
And why would they? Investors have a responsibility to their limited partners to maximize their investment.
You’re the company that’s going to make up for their failed bets in other companies. So putting your interests ahead of their interests just can’t be justified.
You want your investors to make lots of money betting on your company.
My dad liked to tell me, “Don’t get greedy.” My dad was right. If you’re doing well, then your investors are doing well too.
So, keep executing, and keep your investors support. The more money they make, the more money you make.