Founder incentives shape behaviour. Diligence looks at remaining ownership, salary, secondary sales, other roles and personal financial pressure to judge whether founders are motivated for the long journey ahead.
10 min read · Level 3
I think the healthiest founder incentive position is one where the founder is secure enough not to be desperate and still has enough ahead of them to care deeply about the outcome. Too little of either creates problems, and both can be discussed openly rather than guessed at.
Founders are usually assumed to be highly motivated. Diligence checks whether their incentives support that.
Area What to check Ownership fully diluted stake now and after this round Unvested equity how much remains to be earned Salary whether it is sustainable, too low or unusually high Secondary sales whether founders have sold shares, how much and when Other roles board seats, advisory roles, other companies Personal pressure whether personal finances could force an early decision
Ownership after several rounds.
Founder's stake at founding 50% After seed (20% sold) 40% After Series A (20% sold) 32% After Series B (20% sold) 25.6% After option pool increases (-15%) about 21.8%
50% x 0.8 x 0.8 x 0.8 = 25.6%; 25.6% x 0.85 is about 21.8%.
With several founders sharing the original 100%, each can end up with a much smaller share, sometimes too small to motivate years of further work.
Because the next stages of a company often take many years. A founder whose remaining ownership is small, who has already taken substantial money off the table, or who is spread across several commitments may make different decisions than investors expect.
Incentives that are too weak can lead to early exits; financial pressure can lead founders to accept an offer that suits them but not the company.
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A founder's position before a Series B.
Fully diluted ownership 12% Company post-money valuation 50,000,000 Paper value of stake 6,000,000 Secondary sale last round 1,500,000 Remaining unvested shares 20% of their stake
The secondary sale may be sensible - it can reduce personal pressure and help a founder think long term. But with modest remaining ownership and most shares vested, the investor asks the board whether a founder refresh grant is needed, and asks the founder directly what outcome they are working toward.
Assuming founders are fully committed without looking at remaining ownership, vesting, secondary sales and competing commitments.
Use the fully diluted cap table now and after the round.
Note unvested equity and any shares sold.
Identify roles, boards and companies competing for time.
Ask what outcome the founder is working toward.
Before investing, particularly in later rounds where founder ownership may have fallen substantially.
Do not treat a secondary sale or a reasonable salary as a negative in itself; judge the overall balance of incentives.
Market data and investor commentary show that founder secondary sales became more common in venture rounds during strong funding markets, with investors debating whether they improve founder focus by reducing personal financial pressure or weaken alignment when they are large.
Secondary sales are a legitimate tool; their size and timing relative to remaining ownership are what matter.
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