It might seem Jason Katz has gotten it all backward.

While so many startups are groveling for funding, the founder and CEO of Paltalk, an online social video conferencing startup based in New York, decided to use its cash to buy back a major chunk of the company from a venture capital backer. Specifically, Paltalk last month purchased a 20% stake from Softbank Capital Partners LP, which acquired the shares through a $6 million investment five years ago.

"We were accumulating a lot of money in the bank, but we're not a bank," Katz says. "We still have multimillions in cash, and now everyone owns a lot more of the company."

Paltalk's move seems particularly counterintuitive at a time when many startups are desperately seeking cash or struggling to conserve as much of their existing coffers as possible. VC industry experts are hard-pressed to cite a situation similar to Paltalk's.

"In every board meeting I sit in, cash is still king," says Brian Beard, a partner with Wilson Sonsini Goodrich & Rosati PC. "Most companies would probably love to do something like this but don't have the luxury."

But industry observers do view it as a part of an unprecedented shuffle in venture portfolios, sparked by a desperate hunt for liquidity and a sort of "investor fatigue" that leads to many recapitalizations. Secondary funds such as Industry Ventures LLC, which recently closed a $265 million fund aimed at buying VC portfolios and limited partner committments, are gathering up bundles of long-held startup stakes.

"We are seeing shifting of capitalization structures, existing funds selling portfolios, exiting people transferring to other people," says Morgan, Lewis & Bockius LLP partner John Park. "It's musical chairs."

Katz founded and bootstrapped Paltalk in 1998 and launched a primitive voice-over-Internet-protocol social chat site. Eventually, as technology advanced, the company added video to its chatrooms and built the capacity for hundreds of users to connect with one another. For groups of more than 10, Paltalk charges a subscription rate of $14.95 per month or $60 per year.

Before the Softbank investment, Paltalk received $3.9 million in two rounds from friends and family and a "smallish investment fund" that Katz declined to identify. But in 2004, he started looking for a backer that could bring not only money (the investment boosted Paltalk's coffers to $8 million from $2 million) but expertise, connections and reputation.

"I wanted money from a brand name VC," he says. "When a VC the quality of Softbank has looked at you, you are a real company."

With the help of Softbank partner Mike Perlis, Paltalk built a marketing operation and hired some Internet talent from AOL LLC. Very soon after the investment, the tiny company, now with 37 employees, became profitable and started piling up cash, Katz says.

The Softbank money became essentially superfluous, and, following a 2008 that Katz described as the startup's strongest year yet, the entrepreneur and the Paltalk board decided to try something out of the ordinary.

"I couldn't declare dividends or distribute any money because Softbank was there with a preference," he says. "So we approached them with a different idea."

Softbank's Perlis was amenable to the notion of selling its stake back to the company, Katz says, especially with the 5% annual dividend that was agreed upon as part of the investment. A request to interview Perlis received no reply.

"I was going to have to pay them one way or another," Katz says. "Liquidity is hard to come by, and Softbank got a good return."

An obvious conclusion one might draw from Paltalk's move would be that the startup is cleaning up its capital structure in preparation for a sale. Katz insists this isn't so, though he does argue that Paltalk would make an attractive takeover target.

"We convert users to a pay situation, so we are a monetization engine," Katz says, referring to the "freemium" business model where users are charged a subscription fee to upgrade from Paltalk's basic service. "If you layer this kind of thing on top of other services, it could make tons of money for lots of big companies."

Paltalk has struck a few acquisitions of its own, having acquired the assets of rivals HearMe.com and Firetalk in 2001. But for now, Katz says he aims to keep running his successful business and, in maintaining Paltalk's uniqueness among venture capital-backed startups, perhaps even returning cash to its remaining shareholders.