Doug Leone: The Secondary Door Is Shut for Sequoia Companies

By Sarah Lacy , written on April 5, 2012

From The News Desk

Last night, Wealthfront pulled together a surprising number of big names in the Valley for a small event designed to encourage startups to think big and think IPO, not quick-and-dirty company flip.

There's a business motivation here, as Wealthfront wants to help serve tech employees' investment portfolios, but this is also something Wealthfront CEO Andy Rachleff is intensely passionate about. A former VC and entrepreneurship professor at Stanford, he hates the culture of the easy flip and believes it's detrimental to the Valley longterm. (I tend to agree.)

There were a lot of interesting data points and tips for entrepreneurs. Robert Scoble was there filming, and we'll embed his video for any entrepreneurs mulling that stage of startup life. Particularly, interesting was a data-driven presentation by Frank Quattrone about why this market is one of the most fertile times for IPOs he's seen in a multi-decade career -- and how it's incumbent on the Valley not to let it go to excess this time.

But there was one particularly interesting bomb dropped during the VC panel. Someone in the audience asked about the secondary markets and how viable they are, now that the companies that dominated trading have gone public or, in the case of Facebook, are about to.

Said Sequoia kingpin Doug Leone, "Within Sequoia Capital companies, the door is getting shut on the secondary markets." Increasingly nervous about who are buying these shares and the potential for random lawsuits, companies are enforcing stricter trading rules on employees and "rights of first refusal all over the place," he said. The trend is effectively over -- and a lot of that is being driven by the entrepreneurs, he said.

On the other hand, partial liquidations for founders are here to stay. Even Leone said it was a healthy trend for entrepreneurs to be able to take some money off the table, so they weren't tempted to sell prematurely.

Benchmark's Bill Gurley had a caveat to that, saying his firm "gets offended," when investors offer a several million dollar cash-out at a series A, before much value at all has been built, calling these rounds "bribes."

Indeed, pre-IPO cash outs that are too greedy can come back to haunt entrepreneurs. Just ask Groupon.