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FounderPool: A community for founders to share risk and diversify their equity
- kumarski 6y agoI have questions buzzing through my head. How does this work? If it's this good, why aren't VC's already doing this amongst portfolio founders? How do you catch companies founded at the same time with close valuations to do "shared pools" equitably given all parameters?
- deleted 6y ago[deleted]
- csentropy 6y ago1. Pool construction happens by peer selection. All participating founders submit rank order lists and we construct pools using Gale-Shapley algorithm (a version) 2. I wondered ht3 same. A few like FF have thought about it, but they have a financial conflict between preferred and common (LP obligations) the makes it complicated to do. With founderpoool, they can 3. YC and like. Eventually, we hope this becomes the standard model for all founders when they start
- manojdv 6y agoThis is one of the most founder requested features in YC and also Sam Altmans new fund, Apollo is doing it.
- ojbyrne 6y agoIt’s been done before: http://ebexchange.com/ http://ebexchange.com/
- geoburke 6y agoThis is secondary market liquidity, yes? If so, there's unfortunately no demand till series C, and the board needs to allow secondary sales, which competes with the company's own ability to raise capital. We're seeing VCs at later rounds include cash payouts to founders to dissuade secondary market activity. Also it's not either/or. Participating in a pool does not block the founder from liquidating shares on the open market.
- ojbyrne 6y agoYeah I guess it’s changed. https://techcrunch.com/2008/04/16/eb-exchange-funds-provides-safety-net-for-entrepreneurs/ https://techcrunch.com/2008/04/16/eb-exchange-funds-provides...
- sshamoon 6y agoDoesn't this de-incentivize founders since they're giving up their most valuable asset, their equity?
- geoburke 6y agoOnly 1-5% of founder's shares are contributed. 95% or more retained. It's insurance; not a plan B.
- csentropy 6y agoGood question. It hasn't empirically. See founders taking money off the table in secondary in series A, Airbnb etc. Plus, financially derisked founders are paid a premium (those with previous exits) by VC. So we know that this is mostly an academic argument, but it is a resasanoble concern. Moreover, if 90-95% of your holdings are your company, you are still motivated to make it a success, despite the 5-10% diversification. And most great founders are motivated by more than pure financial upside.
- aaisola 6y agoHow do you overcome the adverse selection problem? ie. only founders who know their startups are duds want to diversify their holdings?
- geoburke 6y agoGreat point. We think founders/builders make the best investors. They can sniff out failure. Selection is done through peer ranking by the applicants themselves. Top make it in.
- jawns 6y agoSo the founders need to research every potential company that could join their pool to figure out how to rank them? Seems like that takes a lot of time to do right.
- csentropy 6y agowe make it really easy to get the nuggets of information you need at a glance. You can only rank your top 10.
- manojdv 6y ago1) We screen companies based on their quality, ex: a round raised within the last 3-6 months. 2) Founders get to interact with participating companies and rank them based on their insight. Only companies that are highly ranked get into a pool. A pool is also dynamic and founders in the pool can invite new startups based on their interactions. Overall, this is based on the concept that founders are often good judges of other founders/startups. And pool is more than just for risk diversification, they get a community of founders ready to help your startup because they are vested in it.
- troydavis 6y ago> a round raised within the last 3-6 months If a company has raised capital and done so recently, how would you compare this to the founder selling an equivalent amount of their shares in into that round (secondary)? IOW, if a founder has liquidity and a priced round, in which situations is this better or worse?
- BlockchainMike 6y agoIs this going to be a single pool, or will founders be organized into rounds? What sort of support are founders expected to provide to other founders in the pool?
- manojdv 6y agoGood question, it will be multiple pools of close knit founder communities.
- csentropy 6y ago1. Single pool, based on rounds, but new companies can join a pool with consent from all aexisting companies 2. Support is entirely up to them, but the goal is to create an engaged community with strong incentive alignment to help with investor pipeline, customer intros, partnerships, hiring, strategic advice etc
- calmessense 6y agoI think this has the potential to be successful if done correctly. What's your business model, are you charging or taking a cut of the equity yourselves
- manojdv 6y agoWe cover all legal infrastructure and management costs. In the exchange, we reserve the right for a 10-20% (depending on pool risk) carry based on pool outcomes.
- missSatoshi1 6y agoSeems super interesting! Will follow progress!
- csentropy 6y agoThank you
- asparagus123 6y agoGood timing. as a founder I could use something like this more than ever
- geoburke 6y agoWhich aspect attracts you most?
- asparagus123 6y agode-"riskifying" my startup right now during covid. this would reduce my pressure very slightly and at this point anything helps
- csentropy 6y agoPlease sign up!
- jaronlukas 6y agoThis is a great idea. I'd be willing to do this with my keto cereal companies if there was a pool of other promising food startups.
- gadders 6y agoI would suggest for this to work as a way to share risk, you would want to have a pool of companies whose returns are not correlated.
- csentropy 6y agoIt works both ways. 1. In a verticalized approach, your startup risk approaches your sector risk, if pool is large enough. 2. In a stage based pool approach (sector agnostic), risk is more diversified but rankings will be less meaningful. For ex, a rocket company founder may not be a good judge of CPG companies.
- gadders 6y agoFair points. Does it depend on what you are hedging against, maybe? i.e. "my startup not being successful" vs "the economy tanking/oil prices trebling/whatever".
- csentropy 6y agoIt does. In a verticalized approach, if you pick the right sector (biotech for ex) and other founders see the value in your work, you can get rewarded even if your company fails for reasons to of your control. Even in a shock scenario, there are sector winners (see biotech and funeral homes in covid pandemic)
- AndrewKemendo 6y agoWe're invested in one. TrueMade Foods. Send me a note if you want to talk with them. https://www.truemadefoods.com/ https://www.truemadefoods.com/
- whatl3y 6y ago> Apply to a pool in your startup category, within 3 months of the valuation event. Most "valuation events" for startups are seed or series X fundraisers, no? So how could founders who bootstrap participate in this, if at all?
- manojdv 6y agoWe are using this as a screening for adverse selection, but founders who are bootstrapped can also apply if they have proven traction (we have a few stellar startups who were highly ranked but never raised money)
- eganist 6y agoHow about 409A valuations for those who've bootstrapped? (You probably know what it is, but for non-founders or others who haven't been through it - https://carta.com/blog/what-is-a-409a-valuation/ https://carta.com/blog/what-is-a-409a-valuation/)
- csentropy 6y agoIt is the only way to go for bootstrapped companies. There is a pool for bootstrapped companies
- marcinzm 6y agoAren't 409A valuations significantly lower than VC valuations for the same company? So wouldn't bootstrapped companies be at a disadvantage by having to use a lower 409A while VC companies get to use the higher VC valuation? edit: I see, bootstrapped is their own pool so the two valuations never get compered against each other.
- eganist 6y agoDoes mean there's potentially more unforeseen upside from an acquisition exit though. I wonder if that might make the bootstrapped pool a more attractive pool to be a part of.
- wtvanhest 6y agoIt’s a reasonable idea, but would make a lot more sense for employees. While outside forces impact companies, founders and executives are responsible for outcomes. Employees have little individual power to impact strategy and are more likely the victims of poor management decisions.
- csentropy 6y agoFounders and executives "play a role" in outcomes. The future of any company pre liquidation is uncertain. Agree with employee pools. That is the next step version for founderpool and it is literally the most requested!
- wtvanhest 6y agoI respectfully disagree. Founders blame the macro, but that blame is very often misplaced. Even at massive scale, similar business diverge in profitability due to strategy decisions during all market conditions, including pandemics and other blackswan events
- geoburke 6y agoMisdirected blame to preserve ego does not excuse the fact that the founders are the ones with the biggest impact on their own success. Access to a network incentivized to provide resources, fundraising, introductions, hiring, etc, can only bolster success probability.
- manojdv 6y agoThats true. We would eventually want to grow this to support employees (think about building your own option portfolio) and student ISAs etc. We are right now emphasizing the community aspect rather than just the equity swaps because for founders, the value is in the network.
- notyourday 6y agoWould not that hit the securities regulations on accredited investors where most of the employees won't qualify?
- killnine 6y agoInteresting. Does anyone know of anything else like this out there?
- csentropy 6y agoNone that I found so far.
- forgotmysn 6y agopando is seeking to expand outside of sports. id expect them to have something like this soon
- gadders 6y agoWouldn't you want to pool with companies that AREN'T in the same market area? I would imagine you would want to try and diversify membership so that returns aren't correlated. Also if people are in the same group are in the same vertical, isn't there a risk of competition? Still think it's a good idea though.
- manojdv 6y agoYes and no. Some founders want to diversify in other verticals, but a majority of founders we work with prefer their comfort zone, because they can evaluate startups better. Right now, we are not constraining in anyway and it might evolve to support thematic or diverse pools.
- zackmorris 6y agoThis is awesome, the only thing I see missing is that the primary capital of a founder is potential, not equity. That's why banks and other institutions don't typically lend to startups. It would be nice to see that reflected in some way, as something of value that's counted somehow.
- csentropy 6y agoFunny you say that. "Deriskinga nd monetizing future founder potential" is literally on my whiteboard. We are exploring ways to structure the pool with a portion of it in cash/capital. more coming
- La1n 6y agoHow much does the pool take? Or better, what are the costs?
- manojdv 6y agoRight now, there are no costs for participating founders (we cover all legal infrastructure and management costs). In the future, we reserve the right for a 10-20% (depending on pool risk) carry based on pool outcomes.
- tomaspaulo 6y agoCan you pool Asian/Latin and US startups?
- jrpt 6y agoHow is this structured legally and what are the tax implications? Have you spoken with a tax attorney about it?
- csentropy 6y agoIt is a complex structure under the hood. There is a master LLC, holding c corp and an investment advisor. Tax implications for the founders are similar to their founder stock obligations, when liquidation happens
- rasengan 6y agoI will never invest in a startup where the founder(s) don't believe in their companies. Moving forward all terms I negotiate will explicitly state that this (e.g. things like FounderPool) will not be a possible scenario.
- pickledish 6y agoThis seems like a needlessly hard-line stance to me. It's not reasonable to think that "belief in one's company" is the only thing that will decide the success or failure of a startup, and wanting to hedge against the scenario where you pour your heart and soul into something for years, only to see it not pay off in the end, is very understandable.
- geoburke 6y agoAre you also against founders who diversify financial risk through angel investing?
- csentropy 6y agoThats a very nice sentiment. It is nice to hear from investors like you who have a portoilfio for diversifying your own risk, but deny that explicitly for founders, who also have no management fee as a fallback. Have you heard of founders getting money for secondary shares in series A (airbnb, FB, Clubhouse etc)? Or second time founders (who are financially secure form a prior exit) getting a premium in valuations?
- tqi 6y agoThats like saying you'd never drive with someone who uses a seatbelt because wearing one means they don't "believe" in their ability to drive safely.
- gnicholas 6y agoInterestingly, pedestrian injuries went up significantly after seatbelt laws, for the reason you note/deride.
- 6y ago
- tqi 6y agoThis sounds similar to Pando [1], which is doing income pooling for professional baseball players [2]: "Nobody has to pay a cent until they've made it to the majors and they've made $1.6 million. Then that guy has to kick 10% of his salary back to his pool mates." [1] https://www.pandopooling.com/baseball https://www.pandopooling.com/baseball [2] https://www.npr.org/2019/10/25/773532516/some-baseball-players-are-entering-income-pooling-agreements-to-fix-imbalance https://www.npr.org/2019/10/25/773532516/some-baseball-playe...
- csentropy 6y agoIt is similar. The market segment and pool construction ton mechanism as well as the legal infrastructure is different. We believe this scales beyond startup founders to education, athletics, and any domain where the outcome distributions follow some kind of power laws
- smabie 6y agoPoker players to much the same thing and trade percent stakes before tournaments. And once again, modern portfolio theory triumphs!
- danicgross 6y agoWonderful idea. These exchanges are very common in other markets. In my experience, a proclivity for equity sharing tends to have an adverse selection problem with early stage founders. The best founders are irrational, and this seems like a highly rational idea :) But I’d imagine investors and employees would be very interested. Also worth noting tax treatment around this issue is evolving: > In particular, a senior campaign official said a Biden administration would take aim at so-called like-kind exchanges, which allow investors to defer paying taxes on the sale of real estate if the capital gains are reinvested in another property. https://www.bloomberg.com/news/articles/2020-07-21/biden-proposes-775-billion-plan-funded-by-real-estate-taxes https://www.bloomberg.com/news/articles/2020-07-21/biden-pro...
- csentropy 6y agoThank you. One more risk founders and entrepreneurs need to brace for : Regime uncertainty. Political uncertainty added to market risk, macro, pandemics, on and on...
- geoburke 6y agoRemoving like-kind exchange wouldn't just affect this. The whole M&A space would collapse.
- csentropy 6y agoThat is a great point. We spent a lot of time thinking about the adverse selection issue.We narrowed in on Peer selection with stable matching, which seems to mitigate this issue. We are learning..
- gnicholas 6y agoCan the people involved with the company note their affiliation? It seems like there are several folks chiming in, and some comments make the affiliation clear (eg, by speaking in the first-person about the company). But in other comments it’s much less clear whether someone works for the company or just got info off the website. I’m also a little confused that this isn’t a “Show HN”, but they talk about YC with authority. Are they in YC? Some other affiliation?
- csentropy 6y agoFounderpool are not affiliated with YC in any way. I am not sure who suggested that. I am part of the founderpool team.
- gnicholas 6y agoThanks for noting your affiliation. The YC question came up because of the OP's comment "This is one of the most founder requested features in YC", which makes it sound like the company is well-connected to the accelerator. How did you decide to do this as a regular post instead of a "Show HN"? Did you already do one, or make a strategic decision? Who else among the commenters is affiliated with the company?
- csentropy 6y agoWe decided it is of interest to the founders in the audience and not necessarily as a show HN (which is in our mind a tool specific people like to play with) Only three people are with Founderpool. me, manoj and geoburke
- geoburke 6y agoThe only Founderpool team members commenting are myself, csentropy, and manojdv
- claydavisss 6y agoI mean...if you're already at the point where you are willing to barter your equity with a bunch of dark matter...isn't the gig up? At what point does this level of "inside baseball" even put money in your pocket? Seems to only benefit the weaker by design, or drive mediocre pool members to sink lower as they believe that once in the pool, they at least get some scraps. Seems like the last gasp of the startup era - UBI for startups
- SMAAART 6y agoTechstars does something similar.
- csentropy 6y agoI believe founder institute does as well, but in their case they divide uo the pool into 4 parts, 3 of which go to FI, they local chapter, mentors and one back to founders if I remember right
- tonystubblebine 6y agoAs you get older without an exit, you start to freak out a bit about your retirement. At least that was true for me. I'm 1000x better as an entrepreneur at age 42 than I was at age 27. But I'm also 100x more worried about some basic financial things like whether I will be able to retire, maintaining a mortgage, keep up financially with my spouse's career and her changing life expectations. And what helped stabilize me was some advisor shares that hit or I expect to hit, Beyond Meat (realized) and Calm (expected). So I would 100% trade my own equity for equity in another startup just because of the size of returns. A 0.1% equity stake in a startup that ends up hitting is life changing. And if you're about the entrepreneur life, then a hit on an advisor stake can set you up to never have any pressure to leave this life. One of the common patterns in my own circle of founder friends is how often they need to take a job in between companies. I've, so far, avoided that, and just moved on to swinging at the next thing.
- csentropy 6y agoI LOVE hearing stories like yours, and they inspire us everytime. You hit the nail on the head. The sad fact is that as an entrepreneur grows and matures, his risk tolerance goes down. Founderpool's mission is to maintain the entrepreneurial risk tolerance as you grow and acquire skills and connections, by reducing the opportunity cost over time. We believe it can have a positive systemic impact on the startup ecosystem.
- centimeter 6y ago> keep up financially with my spouse's career and her changing life expectations This has been a big issue for multiple people in my social group. It's well known at this point that a relationship where a woman earns more is less stable - https://www.nytimes.com/2013/06/02/business/breadwinner-wives-and-nervous-husbands.html https://www.nytimes.com/2013/06/02/business/breadwinner-wive... Whether this is due to sexist expectations, increased likelihood of hypergamous relationships in women, etc., is not very relevant; this is not good for men with high-variance occupations.
- tonystubblebine 6y ago
- richardwhiuk 6y agoWhy are you splitting sectors into different pools? Surely that reduces the diservification of risk, and increases the overlap between the companies, which creates blurred incentives?
- csentropy 6y agoFounderpool is based on peer selection. The belief is people are better able to pick companies in their vertical better. But it is true that larger pool across sectors is more diversified
- manojdv 6y agoWe are not splitting pools into themes. It was used as an example in the website. Founders get to choose the companies, so if all space tech companies want to band together, they can form a pool, its an option.
- maxk42 6y agoThis is the worst idea I've ever heard. If I were a VC and I found out one of the founders in my portfolio had become involved with FounderPool I would immediately drop them and cut my losses. Being a founder takes a huge amount of confidence: You have to believe, against all odds, that you will be successful. If you really do believe you'll be successful then it wouldn't make sense to trade your soon-to-be valuable equity for a blend of equity which is certain to contain soon-to-be-failed startups. Being an investor takes an even larger leap of faith in many regards. Swapping your equity for what is essentially "startup insurance" sends the signal that you do not actually believe in your startup and that's a strong indicator of imminent failure. Compounding the issue: Since founders who believe they will be successful will generally be likely to avoid the equity pool, we can surmise that FounderPool will actually contain a who's-who of failing startups. It's a bad bet no matter how you slice it.
- supernova87a 6y agoI don't think people should be downvoting you. Whether or not they share the sentiment or disagree, this is a worthy opinion to raise for discussion. And refute if appropriate, but not downvote. I think the main argument against it is that there's many, many unexpected factors that could derail any small company's ambitions. This is just like an insurance policy. It's not meant to signal you doubt your own capabilities (though some of course, do -- and that's where there need to be safeguards).
- geoburke 6y agoI agree. Just because someone's opinion is in the minority doesn't mean well-articulated arguments like this should be downvoted, but rather praised for stating the contrarian viewpoint.
- geoburke 6y agoYou may have missed the community aspect; the vested interest in mutual success among founders. Pooling is one of the most requested features by YC grads, including founders of unicorns. After demo day, mutual activity among the batch practically dies.
- DevX101 6y agoMy two cents: I think this is a fantastic idea and I've wanted to see something like this for years. That said, this is one of those things where unfortunately the reputation of the persons behind FounderPool matter a lot to me, and other founders. Yet there's no info on the site about who's running this. Founders are making a massive gamble putting their companies into this novel legal arrangement and I'd want to see someone(s) reputable and well respected by the broader community at the helm. I'd also make it crystal clear how FounderPool plans to make money. I see the website copyrighted to Heterodox Capital LLC. What's the distinction between these two entities? Will either of these orgs be taking a management fee from the equity put into the pool? If so, how much? I see nothing on the website about compensation which makes me uneasy about pursuing this further. All that said, the core idea, de-risking founders is a massive opportunity and someone's eventually going to get this right and make entrepreneurship a viable path for thousands of talented founders who wouldn't otherwise start a company.
- csentropy 6y agoAll valid questions. We are adding more information about the company, the people and the business model of Founderpool. Founderpool does take a share of the pool of equity as platform fee, it will be transparent and will be publicly available. Thank you for the feedback.
- jbgud 6y agoAgreed, I'd also like to see more transparency - nevertheless, this is exciting. Good luck!
- dehrmann 6y agoI've wanted to see something like this for underlings, but when people actually see what the EV is of working at a startup, they might not be so happy. Part of the draw of startups is the gamble, and this takes away from that.
- joncp 6y agoBesides the obvious risk pooling, does this also help founders (esp. first-timers) with negotiating terms? It seems like the other pool members would stand to gain a lot from that.
- geoburke 6y agoYou could consider the other members of the pool as an extension of your advisory board. They are incentivized to share their resources, wisdom, network, strategy, and 1-1 help on specific needs like this.
- forgotmysn 6y agoI wouldn't be surprised if YC implements a version of this internally
- geoburke 6y agoWe wondered the same. Can't speak for YC but we do understand that most funds would have trouble running this internally due to fiduciary conflicts of interest and management concerns.
- csentropy 6y agoI've heard that some YC founders approached them about it, but the management of this structure may be more work that distracts YC from it's focus. We hope every accelerator and VC film does this eventually, we want to power as many of them as we can under the hood.
- forgotmysn 6y agolol im sure you do, as does pando. and ya, that makes sense. it should be offered by YC and other accelerators, but it should be managed by alumni and pool members, not by the investing party. edit: a word
- csentropy 6y agoIf they want to take it upon themselves, they should. Having said that, there is a reason coop pools like insurance are managed by third parties.
- aaronbrethorst 6y agoOr work for a well-paying company and invest heavily in index funds...
- geoburke 6y agoAgreed. Avoid the need for Founderpool by avoiding becoming a founder =P
- mauriziocalo 6y agoHave you actually modeled out the potential payouts? How did you choose the 1% number (percent of their equity that each founder contributes) as well as the pool size of < 25? My quick back-of-the-envelope calculation: Expected payout to each member would be: 1% * avg_valuation_of_companies_in_pool * avg_percent_ownership_at_exit Assuming an average valuation (in the literal sense, total exit value of all co's in the pool / number of co's) of $100M [2] and assuming that the founders own roughly 15% at exit, the expected payout would be only $150K excluding taxes, which seems quite low. [1] Modeling should be somewhat doable leveraging public data. For example, you can use YC company data in https://ycombinator.com/topcompanies https://ycombinator.com/topcompanies https://ycombinator.com/companies https://ycombinator.com/companies and simulate what the payouts would be if you were to choose 25 companies from a given batch at random. [2] $100M is likely in the right ballpark. According to https://www.ycombinator.com/ https://www.ycombinator.com/ : > Since 2005, we've funded over 2,000 startups. > Our companies have a combined valuation of over $100B. the average valuation of YC co's would be ~$50M; if you exclude half of those that are in recent batches (haven't had time to realize their value and don't really contribute towards the $100B total) it might be closer to $100M. Under a FounderPool model, an example of this would be a pool of 20 co's in which 2 companies end up exiting for $1B each and the rest essentially $0.
- manojdv 6y ago1) Pools sizes are not fixed number and more over, founders can invite other companies to existing pool on a rolling basis 2) We have done modeling, obviously selection is the top determinant of payouts (20% avg. success rate vs 40% success rate) but bigger pool sizes ensure potential for a breakout company. Happy to share if interested, contact us at contact at founderpools.com
- mauriziocalo 6y ago> bigger pool sizes ensure potential for a breakout company Yes, but the payout gets distributed among a larger number of companies. Increasing the pool size lowers the variance, but the expected value remains the same. Lower variance might be desirable for some people (more predictability -- at the limit it's as if you're investing 1% of your equity into an "ETF" of early-stage startups), whereas some people might prefer higher variance (higher potential upside if they join a pool with the next Stripe). My concern is that if founders contribute 1% of their equity (not 1% of the entire company at exit), the expected value itself is quite small -- on the order of $150K under reasonably optimistic assumptions -- for something like FounderPool to make sense. On the flipside, increasing the 1% by an order of magnitude might make more sense from a utility maximization point of view, but even less sense from an emotional standpoint.
- imlina 6y agoMost likely will see a lot of lifestyle business founders, unlikely to find companies that will blitzscale and go on to become unicorns in this lot.
- geoburke 6y agoWhy?
- danieltillett 6y agoAdverse selection.
- csentropy 6y agoIt's early, but lifestyle companies are <10% of our applicants. Mostly clustered around series A/post seed.
- motohagiography 6y agohttps://en.wikipedia.org/wiki/Tontine https://en.wikipedia.org/wiki/Tontine I really like this idea, but it reminded me of the tontine episode of Archer.
- supernova87a 6y agoOne danger I see is that unlike an insurance company, which does a serious amount of due diligence and selection of the risks it takes on, this company/idea completely leaves it up to the founders/"investors" (however you wish to call it) to make judgement calls about their own and other people's risk, without much pooled knowledge or history. I doubt founders are very good at that. When an insurance company sells a policy, they have something on the line in terms of risk themselves -- they have to pay out. Here, the company just acts as facilitator for founders to spread risk however they self-organize to do so. Is that likely to be right? Who cares if some people get burned when something inevitably goes bad in the pool? It's much like the general tech company issue that thinks all the complexity and need for oversight, etc. can be externalized to others to deal with. It'll police itself. In the meantime, rake in your percentage for being the platform. I think an idea like this will take much more work (or the verification / pooling / trust sides) than they expect -- for it to work well and people to be willing to join. Otherwise, bad money will drive out good.
- azorychta 6y agoVillage Capital has been testing out the model of having peer-selected investment for ten years now-- https://vilcap.com/entrepreneurs/peer-selected-investment https://vilcap.com/entrepreneurs/peer-selected-investment
- geoburke 6y agoNot only that, Erik has done a good job cheerleading the concept of risk pooling for founders: https://twitter.com/eriktorenberg/status/1123331923466522624 https://twitter.com/eriktorenberg/status/1123331923466522624
- geoburke 6y agoThese are great points. Someone else addressed much of it but one thing to add is founders can actually sniff out each others' BS, sometimes better than career VCs. Seems to be common knowledge in SV that builders make the best investors: https://www.fastcompany.com/90266921/alexis-ohanian-on-why-former-founders-make-the-best-vcs https://www.fastcompany.com/90266921/alexis-ohanian-on-why-f...
- nmfisher 6y agoA few months' back, someone on Twitter criticized a similar platform, calling it an outright scam. I said that was totally unfair, and that it's one thing to call it a bad deal (which really depends on the percentage given up and the quality of the companies in the pool), it's another thing to call it a scam. That prompted the "pro-VC crowd" to start calling me stupid and naive - "startups need cash, not equity", "if you don't back yourself, I won't back you", etc etc. If there's one thing I learned, it's that VCs have an almost irrational hatred for this model. Unsurprising, given the pool makes founders less reliant on them. No matter what, you retain your pool share, so your insurance policy is something other than "go back to VC cap in hand". I also wonder if it may indirectly create a unionizing effect - if a non-negligible number of founders can start banding together, they can push back on onerous terms (liquidation preferences etc).
- dehrmann 6y ago> Unsurprising, given the pool makes founders less reliant on them How? The startup still need VCs for funding. If I were a VC, one gripe would be that it might hurt a founder's motivation. At 1% of a founder's equity, it's not so much that they're not working to make the next big thing, but in the back of their mind, they know they might get $1M for it. My other concern is that this almost freerides on the VC model. It's a way for a founder to get the benefits of being an LP, but without the fee structure.
- nmfisher 6y ago> How? The startup still need VCs for funding. For precisely the reason you set out in your second paragraph. Assuming your startup is in the VC bucket to begin with, you have two choices when you start floundering. Either ask for more money, or shut it down. The latter practically guarantees you leave with nothing, so naturally, you prefer the former. This means VCs are almost always in a position of leverage to extract a larger share/more onerous terms/etc. With a stake in a founder pool, "walking away" becomes a much more attractive option. You already have some baseline value that makes you far less reliant on whatever opportunistic VC you're in bed with.
- bonobo886 6y agoDoes your platform accept early employees as well? The first 10 employees are essentially founders and while they typically do not receive as much of the upside as a founder, they do bear the same risk. Allowing an early employee to diversify that risk would be a huge value add to a much wider potential network.
- geoburke 6y agoIt's something we're looking into. Would be a great market But for clarity, it's generally understood the employees do not bear the same risk as the founders, who contributed months/years of sweat equity as well as actual capital. Oh and risk of lawsuits. An employee is paid day 1 and the risk beared does not surpass opportunity cost of a paid job at a successful startup vs a failed startup.
- khazhoux 6y ago> who contributed months/years of sweat equity as well as actual capital Very often not true in silicon valley. The only sweat equity most founders contributed was toiling through coffees and get-togethers on University Ave or SOMA for a few months until they got the seed money. Then they hire engineer #1 at 1/80th their own equity. Founders at funded startups pay themselves. During an acquihire, founders get executive roles, salaries, bonuses, and equity, while "non-founders" are just back to the grind. The notion of "founder risk" in SV-style startups just doesn't exist like it did a generation or two ago.
- bonobo886 6y agooh I completely disagree, early employees are often not paid on day 1, and when they are paid, they still do bear a huge risk - often taking much lower salary than market for the opportunity of equity upside. The risk the early employee takes is often the same as the founder's, with less upside.
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- bilifuduo 6y agoThis is a really interesting model that has been tried a couple times in venture. Probably most notable is Upside (https://www.upsidevc.com https://www.upsidevc.com). Curious to get your thoughts on them + why you decided to go the founder exchange approach as opposed to raising a fund?
- gverrilla 6y agoIt's a very nice idea, and I hope you implement in a great manner! Only thing I disaprove is "Being a founder just got riskier" on landing page lol
- csentropy 6y agoFair point. That dates back to the panic period weeks ago when people were refreshing the "RIP" good times" deck from sequoia, putting their name on it and sending it off to their portfolio companies :)