When To Sell

There are times to buy and times to sell.  When I was trading, one of the hardest things to do was manage your winners.  You’d think that it would be a simple. In fact, it was harder than figuring out what to do with losers.

The classic story is Facebook.  Yahoo made a $1B offer for the company and only Marc Andreessen rejected it.  He had enough foresight, credibility and forcefulness at the board level of the company to persuade the other board members not to sell.  He was right, and bingo they made billions more.  It was a great outcome for all involved.

Of course, there is also the story of companies that didn’t sell and they either lost everything, lost a lot, or would have been better off selling.

It’s a tricky decision and even if you have a checklist knowing when to sell and when to hold is an art not a science.

A lot of it is mental.  There is the push/pull between fear and greed.  You try to be as logical about it as you can but the truth is there is a lot of unknown in the future.  The psychological constructs of  behavioral economics fear of loss and anchoring really come into play.

Sometimes buying or selling is simple math.  The risk vs reward that you calculate just isn’t there and so you either get in, don’t get in, get out or get out.  One question I have always asked myself about selling is “Will the dollars I am receiving make a meaningful difference in my life?”

Sometimes they do, and sometimes they don’t.  If it’s a big one, it helps to write down some things so that you are able to go back and remember them.  Time and distance away from the sale can cause you to have regret and second thoughts.  Rehashing the decision over and over again, woulda shoulda coulda isn’t good.

An example of this is Groupon.  Everyone says they could have sold to Google for $8B.  They IPO’ed at more than that.  Today the valuation is $1.75B.  20/20 hindsight clouds the original decision.  If they would have received Google stock back then, they might have been better off but who knows?

Sometimes, it’s best to know your role.  If I am an angel investor that gets in during a seed round or pre-seed round, does it make sense to stay with the investment for the lifetime of the investment?  Dilution on the cap table might not give you the same amount of upside as selling and reinvesting somewhere else.  Staying in your lane and doing what you are good at pays dividends.

When you are a lone wolf on a cap table, often it is best to get out if given the chance.  The other investors on the cap table and any new investor aren’t going to watch out for your interest.  You are going to have to rely on the relationship you have built with the entrepreneur, and often that can change over time.  They have different fish to fry at later stages of the company than they did when you invested at the outset.

This is why as an angel, it’s best to be a part of a syndicate that consumes one line on the cap table.  It’s also a good idea for entrepreneurs to roll up single angels into one LLC to make cap tables look tidy, but also to have one point of contact for information flow.

In liquid markets, finding a buyer at a fair price isn’t an issue unless there is a market panic.  In startups, it is totally is an issue.  The haircut on valuation that you will take if you have to get out will likely see you making little to no money.  Whenever you are given a chance at liquidity, you have to at least take a cursory look at it.

When I first got involved in startups, I thought the hold time was going to be 3-5 years.  Possibly 7 years.  Boy, how wrong I was!  It’s more like 10-15 years and in some cases might be longer!  When you are 40 that looks a lot different than when you are 50 or 60.  You cannot spend paper gains.  They also don’t pay you interest.

It doesn’t mean older people shouldn’t invest in startups.  It does mean that they need to figure out how much liquidity they need to operate their lives and then allocate to startups if they are so inclined.  I mean, done right the returns are off the charts.

There are stories of early investors in some companies making lots of money and having no trouble getting out but those are few and far between.  They are usually companies that have blow-out valuations like Uber.  As much ink and press as they get you’d think those types of companies were numerous, but the opposite is true.

There is a startup I was a seed investor in.  At some point during the development, an investor offered to buy out the cap table.  Others on the cap table were able to opt-in to the buyout or opt-out.  It was early enough in the life of the company that there was still a lot of upside.  Some people I know took their short term profit and high IRR and got out.  I reinvested and doubled down.  Since that time, I have never had a chance at liquidity again and likely won’t until they either exit or fail.  It’s pretty obvious I was willing to take the risk but sometimes I wonder as I see the company develop if there will ever be an exit or if it will just exist in my portfolio until they bury me six feet under.