“I want to get rich.” – very few founders in Germany admit that in public when you ask them what drives them. If you name money as a motivator, you risk your reputation. So you hear: “Money? It really doesn’t matter.” If entrepreneurs dare to say that money is important to them, an altruistic explanation follows regularly:“ I don’t want the money for myself, I would rather like to give back to the start-up scene with angel investments.”
Not so in the USA: There it is socially accepted if you want to earn a lot of money. Entrepreneurs speak openly about their successes and the public celebrates them for it. Most German entrepreneurs try to avoid naming concrete figures – this can be noticed impressively e.g. in the OMR podcast with Philipp Westermeyer, who always asks persistently, but usually only gets evasive answers.
The ongoing discussion about partial exists suggests that money may also be a central motivating factor for German founders. Opinions differ when it comes to the question of the cash-out and at which point an entrepreneur is no longer motivated to give everything for the company.
LinkedIn survey: At which cash out are founders no longer “hungry”?
When I founded my first company, Absolventa, in Berlin in 2008, it was unimaginable as a founder and CEO to take money off the table in financing rounds via a secondary. That softened somewhat in the following years: withdrawals in the lower six-digit range were ok, but beyond that, it was still not a realistic option.
I recently published a survey on LinkedIn: I sketched the fictitious case of a EUR 30 million growth financing round and asked the question: At what cash out are founders no longer considered “hungry”? 192 people from my network answered – mostly entrepreneurs and investors.
The result: around two thirds of the participants believe that founders will still stay “hungry” with a personal cash out of less than EUR 1 million. 22 percent believe that this is also the case with a sum of up to EUR 3 million. This only applies to 13 percent, even with up to EUR 6 million.
From discussions with experienced M&A advisors for financing rounds of this kind, I know that in practice between 1 and 2 million euros cash out can be seen.
Partial exits and cash-outs at FLEX Capital
At FLEX Capital we focus on majority stakes in the German-speaking internet and software market. We invest in growing companies with a turnover of 5 million euros or more and EBITDA of 1 million euros or more, with equity tickets of up to 25 million euros from the fund. Often we are also followed by co-investors and banks or debt funds. For the founders, this further increases the exit price.
Since we particularly like to work with entrepreneurs who have set up their company in so-called bootstrapping mode, i.e. with little or no external capital, the founders still hold a large number of shares at the time of the majority sale. The cash-out is correspondingly high.
Retaining the entrepreneurs’ loyalty to the company in order to make them great together is an essential aspect of our investment strategy. Accordingly, we have thought intensively about the connection between motivation and money and are discussing this very openly with the entrepreneurs in our portfolio companies.
Greed? What really motivates founders
Of course, it is not possible to lump all founders together. Nevertheless, I think I have recognized some recurring motivational aspects over the past few years.
Founders are usually driven by a strong vision. In addition, they want to make a positive contribution to society with a mission that they are fulfilled with and – of course – achieve financial success.
Money is a central motivator, but the founders usually don’t strive for it because they want to indulge in a lavish lifestyle. Very few actually buy the proverbial Ferrari after the exit, even if they once dreamed of it in their youth. If at all, the privately used property is a bit larger and they no longer stay in a 4-star hotel, but a 5-star hotel. Exceptions, of course, prove the rule – the vast majority does not change their personal lifestyle.
Why does money still play a central role? Because it is the accepted currency for success in business circles. It is success that you want to prove to your own family, friends and, last but not least, to yourself. In the end, money is also an instrument for making one’s own success comparable. “Why did the other entrepreneur redeem so much more for his work than I did? I did at least do as well, didn’t I?” Recognition is usually the real driver behind the desire for high profits and cash-outs, less the greed for more consumption.
How investors and founders come together
If investors want to count on the cooperation of the founding managing directors after their entry, they have to be aware that they need to offer them a financial incentive.
The amount that ensures the cooperation results from our experience at FLEX Capital from the ratio of the cash previously realized for the founders when the investor joins the company and the cash that can still be achieved in the future.
An example: If a founder takes 1 million euros off the table when she joins an investor and realistically another 500,000 euros are possible in the next two years, then 1 million cash out is too much. Because after the one million, the founder will no longer be hungry for another 500,000 euros.
If, on the other hand, a founder transfers 10 million euros to her private assets and another 40 million euros can realistically be redeemed over the next three or four years, then the situation is different. Despite the comparatively high cash-out, the founder will continue to kneel in the company management in order to secure the additional 40 million euros.
Conclusion: A realistic assessment is required
There is no general answer to the question at which cash out founders lose their hunger. It is clear, however, that the relative amount is more important than the absolute amount.
Anyone who wants to assess the founder’s motivation after the partial exit should look at the individual situation in addition to the financial incentive: How important is the company’s mission to him or her? Does he or she share the future business case? Does she or he have enough stamina and strength for the next possibly strenuous years? What is the family situation like? Only from the overall picture of these answers can one deduce how committed the founder will work in the company in the future. The cash-out alone is of no significance.
