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Scott Kirsner | Innovation Economy

Who benefits when startup money is ‘taken off the table’?

The sort of transaction in 2016 that benefited Nathan Eagle, who ran Boston-based Jana, is not unusual in the local startup scene.Lane Turner/Globe Staff/File 2016

Nathan Eagle had to convene an uncomfortable all-hands meeting in 2016. The startup he ran, Boston-based Jana, had raised a massive $57 million funding round that February. But employees had started to learn that several million dollars had ended up in Eagle’s bank account — a Securities and Exchange Commission filing reported that it was $12 million, but it isn’t clear that all of that money went to Eagle, the company’s cofounder and CEO. Several months later, however, Eagle did purchase a $3.75 million penthouse condo in the Ritz-Carlton residences, with views of the Boston Common and State House.

“The optics weren’t great, to be honest,” says one former Jana employee, who asked for anonymity. “Cracks had already started to show in the company,” which was building an advertising network on mobile phones used in developing countries. This employee was laid off from Jana in June 2017, and there were more severe cutbacks earlier in 2018.


The sort of transaction that benefited Eagle is not unusual in Boston’s startup scene. It’s sometimes called “taking money off the table,” a “secondary sale,” or “early liquidity.” And investors who put money into startups are often the biggest proponents of it.


“If you want to swing for the fences, and you’ve got the C-level executives of the company worried about mortgages or sending their kids to school, this can take a little bit of pressure out of the situation,” said David Frankel, an investor at Cambridge-based Founder Collective, which has put money into startups like Uber (still private) and PillPack (acquired earlier this year by Amazon for about $1 billion.)

In other words, venture capitalists like to invest in companies that will be able to go public at some point, or be bought by a bigger player for a lofty sum. If the founders and top executives have all of their net worth locked up in company stock — and little in the bank — they may be more inclined to sell the first time some would-be acquirer comes along with a halfway appealing offer. And taking some of one’s net worth out of an asset like company stock, Frankel added, “can be sound financial planning. If you can take 5 or 10 percent of your holdings off the table, the fact is, the founders are still long on the company.” Having some money in the bank can enable them to focus on growing the business and taking smart risks, as opposed to looking for opportunities to sell it.


But it can also cause problems — especially when the only people taking money off the table are the founders, and not long-time employees or senior managers who’ve also been toiling in the mines. That can spoil the feeling of “we’re all in this together,” Frankel said. (His firm wasn’t an investor in Jana.)

Former CustomMade CEO Mike Salguero said that investors suggested to him and a cofounder in 2013 that they take some money off the table, “which I encourage,” Salguero said, just because tech startups are such a high-risk endeavor. “You can have some of the fruits for the labor you’ve put in,” he said. (CustomMade initially connected consumers with craftspeople who might make custom furniture or jewelry.)

In his case, some of the company’s earliest investors also got to sell their shares, “which was good,” Salguero said, because it was a way to reward “people who wrote checks to us in 2008, when the entire market was blowing up.” The transaction was kept quiet; employees didn’t know about it at the time.


By 2015, CustomMade was shutting down, and finding some of its employees jobs at Wayfair, the Boston-based e-commerce company. (Salguero’s cofounder, Seth Rosen, later bought the site’s assets in foreclosure and relaunched it, focusing only on jewelry.) “CustomMade would’ve been a zero for me if I hadn’t taken something off the table,” Salguero said, acknowledging that the situation did leave some investors feeling like they were left “holding the bag.”

But there are other instances where letting founders take money off the table actually works — and leads to public companies that employ thousands of people. Wayfair is one example. The company’s cofounders had built the e-commerce site without taking any outside funding for nearly a decade, building it to about half a billion dollars in revenue, said Mike Kumin, a managing partner at Boston-based Great Hill Partners, a private equity firm. “The company was worth a lot, it was profitable, and it didn’t need a lot of capital,” Kumin said. Letting cofounders Niraj Shah and Steve Conine “take some chips off the table” made sense.

“We didn’t think the founders were going to go off to the beach,” he said. “It was very clear that they were looking to build a very substantial, long-term company.”

Kumin serves on the Wayfair board. In June, the company announced a deal to expand its Back Bay office to accommodate about 4,000 additional employees.


HubSpot is another example: the founders of the Cambridge digital marketing firm took money off the table before it went public, and today it employs about 2,400 people around the world. Larry Bohn, an early investor in the company and board member, said that “it’s a good practice where a founder has been humping it for years, has built a lot of value, and the investors want to keep going.”

Good companies, he said, can take a decade or more to go public or be acquired for a substantial amount. “That’s a long time to hold your breath.”

The right thing to do for both investors and founders “is not always clear-cut,” said Maria Cirino, managing partner at Boston-based .406 Ventures. But as startups stay private longer, the issue of taking money off the table is coming up more frequently.

Nathan Eagle of Jana didn’t respond to a request for comment. Earlier this year, the company moved out of its Downtown Crossing office and into a smaller shared office space. An investor, Todd Dagres of Spark Capital, said via e-mail that the company was “making progress,” but there was still “lots of work to do to monetize” its technology.

“Innovation Economy,” which formerly ran in the Sunday Business section, will now be a regular feature in Monday print editions. Scott Kirsner can be reached at kirsner@pobox.com. Follow him on Twitter @ScottKirsner.