Cashing Out

At a board meeting after a recent financing, one of the VCs picked up a stock certificate (delivered to investors during that meeting) and said that he hoped that this piece of paper will be worth something someday.

I responded by saying that the stock is worth something now. Our firm would be happy to buy all of the shares represented by that piece of paper. In fact, we had already bought some shares from existing investors.

When we made our decision to invest, we believed in the management and the direction of the company. Our desire was to take a significant ownership in the company. We got to our minimum % ownership...but we would have wanted to buy more if people were willing to sell.

The UPS Story

One of the stories I like to tell is that of UPS, which is celebrating its 100th anniversary this year. Founded in 1907, they did not go public until 1999 (it was the biggest U.S. IPO ever - $5.47 Billion worth at $50/share). For 92 years, as a private company, there was always plenty of liquidity for shareholders because the company was growing and profitable.

UPS is a remarkable company. Even while helping to spread Unions, providing healthcare benefits for part-time workers, paying for lifelong continuing education programs, and promoting employee stock ownership and sharing the wealth, they grew revenues and profits almost every year and never had layoffs - even during the Great Depression. With millions...and eventually billions in revenues and profits, they had no trouble finding buyers and sellers of their stock, even as a private company.

Over the decades, UPS has probably created more millionaires than Microsoft and Google combined (many UPS truck drivers became your typical "millionaire next door"). Unlike private companies such as Cargill or Bechtel, UPS ownership did not remain in the hands of a very small number of family shareholders. The shares belonged to tens of thousands of employees (now hundreds of thousands, as the third largest employer in the U.S.).

In the case of UPS, the founder, Jim Casey's various foundations are now worth billions of dollars supporting causes such as underprivileged children's education (Jim Casey had to work to support his family rather than attend high school).

What we like to tell entrepreneurs is this - if you build a company that generates cash, your stock certificates be worth something. If the company is growing, then it will most likely be worth more the next year, and the year after that...

There are always buyers of stock in companies that are growing and making money. The higher the growth, profits, and competitive advantages, the greater the intrinsic value. It's as simple as that. It doesn't matter if the company is public or private.

When UPS was still private, the board determined the price of stock every quarter. They followed a rational process and valued their stock according to the same principles that we follow. These days, due to 409a regulations, we even bring in third parties to validate our logic in setting a fair stock price.

Rather than obsessing over cashing out and the "liquidity event" entrepreneurs would be better off if they focused on building value. The liquidity is secondary. There will always be buyers of stock in companies that are doing well. Sophisticated investors don't care if your company is public or private.

For example, Warren Buffet doesn't care if an investment is in a public company like Coca Cola or a private company such as See's Candies. He'll buy if he believes that 1) the business is great, 2) the price is fair, and 3) management is trustworthy, competent and passionate. He's not necessarily looking for bargain basement prices. (Buffet likes to say that it is far better to buy a wonderful company at a fair price than a fair company at a wonderful price).

As VCs, we look to be co-owners of wonderful businesses with tremendous long term growth potential. Such businesses are rare - really rare. An opportunity to buy a significant stake in such a business is rare enough that there will always be plenty of buyers if some (or all) shareholders desire to cash out along the way.

Another example I like to tell people about is Vesta, one of our private companies that has grown to over a thousand employees in a decade (much of it during the post bubble crash). We've had more than 24 consecutive quarters of earnings growth and paid out tens of millions of dollars in dividends with excess cash, even after making significant investments to fuel continued growth (including several acquisitions - all for cash). The company has also bought back stock - just as public companies initiate stock buy back programs to reduce share count and increase per share earnings.

At another private portfolio company, one of our executives recently sold shares to buy a bigger house (his growing family needed it). The company is doing well (the common stock price has tripled in the past year) and there were plenty of buyers. In fact, some potential investors were almost begging to get in (at the price those shares traded, none of the other executives wanted to sell).

I can recite many more examples. We've bought and sold plenty of private as well as public company shares (common as well as preferred shares). Such transactions happen all the time.

The bottom line is this - build a great company and your shares will be worth something - a lot more than it is today. Don't worry about liquidity. The key is building sustainable, long term value.