Good morning, it’s Crypto Editor Jeff Roberts pinch-hitting for Allie. Over the course of my career, I’ve written many stories along the lines of “Buzzy new startup raises $50 million.” Imagine my surprise then when I learned that, in recent years, those splashy headline numbers are not always what they seem. In a growing number of deals, it turns out, a chunk of the money raised doesn’t go to the startup, but instead into the pockets of the founder.
That was the case with crypto payments firm Mesh, which announced an $82 million Series B this year that included a $20 million payout to its founder. Ditto with the blockchain social network firm Farcaster, which raised an eye-popping $150 million Series A, but saw its CEO carve off at least $15 million of that. You can read about other examples here.
These payouts—which are totally above board—take place by means of secondary sales that involve venture firms purchasing some of the founder’s personal stock during a round. In VC-speak, the practice is called “taking some off the table” and it’s common during frothy markets. During the crypto boom that tailed off in 2021, for instance, the founders of firms like OpenSea and MoonPay collected eight-figure payouts.
VC firms and founders, unsurprisingly, are not eager to talk about the practice. After all, cashing in early clashes with the Silicon Valley ideal of the founder who would never dream of selling their stock because they are so sure their startup is going all the way. It’s not unusual for founders to sell some shares at a later stage “so they don’t have to worry about the mortgage,” in the words of one VC, but an eight-figure Series A or B payday—well before it’s clear a startup will succeed—feels different.
When I spoke with investors from small firms, they blamed large crypto VC firms for dangling sweetheart secondary arrangements in order to be the lead on a deal. A person at one of those large firms, in turn, blamed generalist firms charging into the crypto market for the proliferation of these arrangements.
My reporting focused on crypto deals, but it’s a safe bet that founders in other hot sectors like AI are also “taking some off the table” in early rounds. The question is whether this matters.
Venture investors told me that many crypto founders are rich already, so a big Series A payout is unlikely to undermine the incentive they have to build their company. They also claimed they’ve seen no evidence that a founder who hits an early jackpot will grind less hard than one who hasn’t. And, after all, the nature of venture is that most bets don’t work out so does it matter if one portion of a losing bet on a portfolio company went to a founder?
Still, there is an ick factor. Most Americans don’t begrudge Mark Zuckerberg or Jeff Bezos for being obscenely wealthy since, well, they built awesome companies used by everyone. But do they feel the same about a crypto founder who gets filthy rich without building anything of note? The situation is also awkward since, as one female founder wrote me, these early stage payouts may reflect a vote of confidence in men that is not always extended to women.
Venture capital, of course, is hardly the only realm where people can get very rich without accomplishing much. In the sports world, my poor Toronto Blue Jays—reeling from a brutal Game 7 loss to the Dodgers—paid $27 million this year to slugger Anthony Santander only to see him post negative returns (WAR in baseball terms). That’s just how it goes.
And while it’s tempting to raise eyebrows against overpaid startup founders, how many of us would act any differently? If someone offered me $15 million to write columns about venture capital and nobody read them, I don’t know if I’d feel bad. What I do know is that, when the current boom time ends, VCs will rue some of the big checks they wrote to unproven founders. And then they will do it all over again during the next hot market.
Jeff John Roberts
X: @jeffjohnroberts
Email: jeff.roberts@fortune.com
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