The world of startups celebrates founder stories who struggle for years and ultimately become multimillionaires when the business they built goes public or is acquired. Such rags-to-riches stories are common in the cryptocurrency space too — although the path to a large payout is often much shorter.
One example: Bam Azizi founded cryptocurrency payments company Mesh in 2020, and this year raised $82 million in a Series B funding round. In the normal course of things, capital raised in a Series A or Series B round goes almost entirely toward funding the startup’s growth. But in this case, the round included at least $20 million for Azizi himself.
Payment came through secondary sales, which involve investors purchasing shares held by the founder or others involved in the startup’s early existence. These sales mean that when a startup announces a round of funding, the company itself often receives less money than advertised in the headline. It also means that instead of waiting years to convert their shares into cash, the founder suddenly becomes very rich.
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This isn’t necessarily a bad thing. In response to a request for comment on Azizi’s earnings, a Mesh spokesperson pointed to recent achievements, including a partnership with PayPal and the launch of an AI wallet, to suggest the company is doing very well. Still, founders who engage in secondary sales early — a common feature of the current bull market — allow some to accumulate fortunes before their company truly proves itself, which, of course, may never happen. This raises questions about whether these payments distort incentives and the broader receive-rich-quick culture in the cryptocurrency world.
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A $7.3 million complex in Los Angeles
Mesh’s Azizi is not the only founder to receive an early payout in this crypto bull market, which launched last year and saw the price of Bitcoin rise from $45,000 to $125,000.
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In mid-2024, a cryptocurrency-based social media platform called Farcaster raised an impressive $150 million in a Series A round led by venture capital firm Paradigm. That amount included the purchase of at least $15 million in secondary shares from Farcaster founder Dan Romero. An early Coinbase employee who received shares before the crypto giant went public, Romero has not been discreet about his wealth. In an interview with Architectural Digest, he talked about extensive renovations to his family’s $7.3 million, four-building Venice Beach complex, which the magazine likened to “a compact Italian villa.”
While the renovations were a success, the same cannot be stated for Farcaster. Despite early momentum, the startup had fewer than 5,000 daily applyrs last year and is currently far behind rivals like Zora. Romero did not respond to repeated requests for comment on Farcaster’s performance or its sale of secondary shares.
Farcaster’s difficulties are notable given the $135 million ($150 million minus $15 million) the company has raised, but they are not unusual. In the crypto world, and in venture capital more broadly, investors understand that it is much more common for startups to fail than to grow and become large companies..
Omer Goldberg is another crypto founder who has benefited from the current wave of secondary sales. Earlier this year, he received $15 million as part of a $55 million Series A round for his security company Chaos Labs, according to a venture capitalist involved in the deal. Goldberg did not respond to requests for comment, as did Chaos Labs, which is backed by PayPal Ventures and has become an influential voice on blockchain security issues.
Azizi, Romero and Goldberg are just a few examples of those who have benefited from the recent wave of secondary sales, cited by venture capitalists and a crypto founder who spoke to Fortune. These sources questioned not to be identified to preserve industest relationships.
According to investors, secondary sales — which are also occurring in other hot startup sectors like AI — are rising due to the hot crypto market, which has seen venture capital firms like Paradigm, Andreessen Horowitz and Haun Ventures jostling to receive in on deals.
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In this context, venture capital firms can become the lead investor in a round, or secure a seat at the table, by agreeing to turn a portion of a founder’s illiquid shares into cash. The deals typically involve one or more VC firms agreeing to purchase shares during a financing round and hold them in hopes of selling them at a higher valuation in the future. In some cases, early startup employees may also have the opportunity to sell shares — or in other cases, they are left in the dark about the founders’ sales.
For investors, secondary transactions carry risks becaapply the shares they receive are common shares, which have fewer rights than the preferred shares they typically receive in a financing round. At the same time, in a crypto industest with a history of overpromising and underdelivering, secondary sales are sparking debate about how much to reward an early-stage founder — or whether it even affects the startup’s future success.
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Crypto founders are different
For longtime observers of the crypto world, the spectacle of founders receiving exorbitant sums in a bull market can caapply a feeling of déjà vu. In 2016, a wave of so-called Initial Coin Offerings (ICOs) saw countless projects raise tens or even hundreds of millions of dollars by selling digital tokens to venture capital firms and the general public.
These firms typically promised to popularize revolutionary new applys for blockchain or surpass Ethereum as a global computer, which would increase the value of their tokens as their projects attracted more applyrs. Today, most of these projects are little more than digital dust. Some founders still build the rounds on the never-concludeing crypto conference circuit, but others have disappeared completely.
A venture capitalist recalls how investors from that era tested to impose accountability on founders through so-called governance tokens. In theory, these tokens gave their owners the right to vote on the direction of a project, but it rarely worked that way in practice.
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“They may be called governance tokens, but they don’t govern anything,” the venture capitalist noted ruefully.
Around the time of the next crypto boom in 2021, startup deals launched to more closely resemble traditional Silicon Valley funding rounds, with venture capitalists receiving shares (although token sales in the form of warrants are still common in venture capital deals). In some cases, they also came with upfront payments to founders via secondary sales, like those occurring now.
That’s what happened at payments company MoonPay, where executives pocketed $150 million during a $555 million round. This arrangement gained notoriety two years later when a media investigation revealed that the company’s CEO purchased a mansion in Miami for nearly $40 million just before the crypto market crashed in early 2022.
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Then there is the OpenSea NFT platform. The once-hyped startup has raised more than $425 million in multiple investment rounds, which included a large portion in secondary sales to its founding executives. By 2023, however, NFTs have become virtually irrelevant, leading the company to announce this month that it is altering its strategy.
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‘You’re building a cult’
Given the industest’s volatile history, it’s worth questioning why venture capital firms don’t insist that crypto founders accept a more traditional incentive structure — one where, in the words of one VC, they receive paid enough in the Series B or C rounds to no longer worry about the hoapply mortgage, but still have to wait until the company has a successful exit for the large payout.
Derek Colla, a partner at Cooley LLP who has supported structure numerous deals, states the rules are different in the crypto world. He notes that crypto companies are “asset light” (few physical assets) compared to other startup sectors, meaning capital that would go to things like chips can instead go to founders.
Colla adds that, as it is a market heavily driven by influencer marketing, there is an excess of people willing to invest money in founders. “You’re building a cult,” he notes.
At Rainbuildr Securities, a firm specializing in secondary sales, CEO Glen Anderson states a large reason founders receive large upfront payments is simply becaapply they can. “We are in a hype market in many stock categories, like AI and crypto,” states Anderson, “and when you are in that kind of market and notify a good story, you can sell.”
Anderson also states that founders selling shares is rarely a sign that they have lost faith in the startup’s grand ambitions. Still, the question remains whether founders have a moral right to a ten-figure payout for testing to build a company that may never succeed.
Colla, the lawyer, states he doesn’t believe these payments erase a founder’s motivation to build their company. He notes that MoonPay’s founder was criticized by the media for his mansion, but that the startup’s business is thriving today. Meanwhile, in his view, Farcaster may have failed, but that wasn’t for a lack of effort from founder Romero, who he states “works harder than anyone.”
Still, Colla recognizes that the best entrepreneurs seek to keep all their shares becaapply they believe they will be worth much more in the future, when their company goes public. “Great founders don’t want to sell on the secondary market,” he stated.
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