The Secret Startup Payouts: How Founders Are Getting Rich Before Their Companies Even Take Off

The Rise of Early Founder Payouts

Good morning! As a crypto editor with years of experience covering startup funding rounds, I've written countless stories about "buzzy new startups raising $50 million." But recently, I discovered something surprising: those headline numbers aren't always what they seem. In a growing number of deals, a significant portion of the money raised doesn't go to the startup itself—instead, it flows directly into the founder's pockets.

Real-World Examples of Founder Windfalls

This phenomenon played out dramatically with crypto payments firm Mesh, which announced an $82 million Series B this year that included a $20 million payout to its founder. Similarly, blockchain social network Farcaster raised an eye-popping $150 million Series A, but its CEO carved off at least $15 million of that total.

These payouts—which are completely legal and above board—occur through secondary sales where venture firms purchase some of the founder's personal stock during a funding round. In VC terminology, this practice is called "taking some off the table" and it becomes particularly common during frothy, bullish markets.

The Crypto Connection and Market Dynamics

During the crypto boom that peaked around 2021, founders of prominent firms like OpenSea and MoonPay collected eight-figure payouts through similar arrangements. What's particularly interesting is how different players in the venture ecosystem view this trend.

When I spoke with investors from smaller firms, they pointed fingers at large crypto VC firms for offering sweetheart secondary arrangements to secure lead positions on deals. Meanwhile, representatives from those large firms blamed generalist firms charging into the crypto market for the proliferation of these arrangements.

While my reporting focused specifically on crypto deals, it's almost certain that founders in other hot sectors like AI are also "taking some off the table" during early funding rounds.

The Silicon Valley Ideology Clash

Unsurprisingly, both VC firms and founders are reluctant to discuss this practice publicly. Early cashing-in conflicts with the traditional Silicon Valley ideal of the founder who would never consider selling their stock because they're utterly convinced their startup will achieve massive success.

As one VC explained, it's not unusual for founders to sell some shares at later stages "so they don't have to worry about the mortgage." However, an eight-figure Series A or B payday—occurring well before it's clear whether a startup will actually succeed—feels fundamentally different.

The Incentive Question: Does Early Wealth Hurt Motivation?

Venture investors offered several arguments defending the practice. Many pointed out that numerous crypto founders are already wealthy, so a substantial Series A payout is unlikely to undermine their incentive to build their company. They also claimed to have seen no evidence that founders who secure early jackpots work less diligently than those who haven't.

Given that most venture bets don't pan out anyway, some investors questioned whether it really matters if one portion of a losing investment went directly to a founder rather than the company.

The Social and Ethical Dimensions

Despite these rationalizations, there's an undeniable "ick factor" surrounding these early payouts. Most Americans don't resent Mark Zuckerberg or Jeff Bezos for their extreme wealth because they built transformative companies used by billions. But would they feel the same about a crypto founder who becomes fabulously wealthy without having built anything of comparable significance?

The situation becomes even more complex when considering potential gender disparities. As one female founder wrote to me, these early-stage payouts might reflect a vote of confidence in male founders that isn't always extended to their female counterparts.

Broader Context and Human Nature

Venture capital certainly isn't the only arena where people can become extremely wealthy without having accomplished much. In sports, for example, teams regularly pay massive sums to underperforming athletes—my own Toronto Blue Jays paid $27 million this year to slugger Anthony Santander only to see him deliver negative returns.

While it's tempting to judge startup founders who secure early windfalls, how many of us would behave differently in their position? If someone offered me $15 million to write columns about venture capital that nobody read, I'm not sure I'd feel particularly guilty about accepting.

The Cyclical Nature of Venture Investing

What seems certain is that when the current boom period eventually ends, VCs will regret some of the large checks they wrote to unproven founders. Yet history suggests they'll likely repeat the same pattern during the next hot market, continuing the cycle of early founder payouts during periods of excessive optimism.