The whispers have started: How much money did Kevin Rose make personally by selling shares in Digg's latest round of VC funding? The talk that Rose has sold shares is driven by equal parts envy and admiration. To understand the reaction, it helps to realize that the notion of an entrepreneur selling his own shares directly to investors before a public offering — getting out of the company just as other investors were getting in — used to be taboo in Silicon Valley. But that was before Wall Street's IPO machine broke down, and before merger activity dried up. Rose is at the vanguard of a seismic shift in how the Valley pays off its entrepreneurs.Rose, whose stake in Digg was famously estimated by BusinessWeek as worth $60 million, may be a unique case. More driven entrepreneurs must be frustrated by Rose, the fun-loving rock climber, on-screen beer drinker, and legendary lothario. His company's rise has seemed effortlessly successful, driven more by the former TV host's fan following than Digg's innovations. But Rose has gotten good business advice, chiefly from Digg CEO Jay Adelson, a longtime friend. Adelson feels he gave up too much control to investors at his previous company, Equinix; he strove to protect Rose from the same fate, an effort which Sarah Lacy chronicles in her recent book, Once You're Lucky, Twice You're Good. As a result, Rose still holds a substantial stake in Digg. Rose is already believed to have taken $1 million in a previous financing. It's not clear how much he's taken in this round, if any — but it stretches credulity to think he hasn't cashed out to some extent. Here's why: Normally, a company raising $28.7 million in a third round of financing, as Digg just did, would be giving up a substantial chunk to outside investors. But when the founder controls as much as Rose does, the math doesn't work. Former Digg engineer Owen Byrne, who complains that he hasn't had access to Digg's financials in some time, speculates that the round involved massive dilution — the reduction in value suffered by existing shareholders when new shares are issued. But Byrne has this exactly wrong: Allowing the VCs to put in enough money to make the investment worth their time, at a high valuation, would require substantial dilution, which would disadvantage employees and early investors. Much simpler to transfer shares directly from one large shareholder — Rose — to another. What's the effect? Already, employees at Facebook have been agitating to sell their shares, and the company is creating an internal market to let them do so. Rose, as another high-profile example, will put further pressure on startups' management to let their workers cash out. This seems dangerous: Digg, with its high traffic and Microsoft ad deal, has achieved some success — but it's hard to envision it lasting long as an independent concern. What will the boards of even less developed startups tell their founders, when they want to sell, too — that they're just not as cool as Kevin Rose?
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