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How do you overcome the adverse selection problem? ie. only founders who know their startups are duds want to diversify their holdings?
by aaisola 6y ago
How 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?
- csentropy 6y agoPriced round is for indexing the value of stock being assigned to the pool. If the founder has liquidity, before joining the pool, he would be joining the pool right? Or did I misunderstand?
- troydavis 6y agoMy question was a little different. FounderPool provides a lot of diversification (relative to shares in 1 company) and potentially, earlier liquidity. But if I’m able to sell shares into a funding round, don’t I get that anyway? I’d get cash rather than shares in a fund (and later, cash), but for someone interested in doing this, getting cash seems like the goal and is still investable elsewhere. So, why not take the shares I’d contribute to FounderPool and sell them into my B round? If I want outsized exposure to a small set of equities other than my own, I could invest that cash in 10 smaller public equities and still get high-variance outcomes - maybe I pick a future Shopify, probably I don’t - but for someone after liquidity anyway, that part doesn’t seem like a feature.
- geoburke 6y agoIf you can sell shares on the open market, that's certainly a win, but it's likely to occur until series C and many boards may block secondary market sales as it competes with the company's own ability to raise capital.
- aaisola 6y agoI would add a distinction that an additional screening step should be based not only on whether a round was raised but also who it was raised from. Given that venture returns are distributed by Power Law and not normally distributed it doesn't make sense to treat all sources of funding as equal
- manojdv 6y agoGreat idea and thanks for suggestion.
- mkolodny 6y agoDoes a startup's equity in the pool vest over time? I'd be concerned about a startup joining the pool, and then immediately dissolving their company.
- geoburke 6y agoYes, big concern here, so vesting happens over time.
- bananaface 6y agoWould vesting help? Instead of dissolving you just... wait. Pretend to build.
- geoburke 6y agoGood way to get oneself kicked out of the pool before fully vesting.
- bananaface 6y agoHow do you legally kick them out?
- geoburke 6y agoAs the first pool forms we'll collect the members' desired requirements for vesting rules, and write those into the legal docs.
- csentropy 6y agoBecause of the condition for participation in the pool is that your stock should continue to vest, for the membership shares in the pool to continue to vest.
- bananaface 6y agoWait so your startup has to continue to grow in order for you to be able to claim profits from the pool? Doesn't that defeat the purpose?
- supernova87a 6y agoThis is a good point -- will the funding rounds also need to be qualified by only certain VCs being trusted to make good valuations? What "bar" of trustworthiness of VC will be honored?
- geoburke 6y agoWhile we go through a vetting process for all applicants, pools are ultimately formed through a peer-selection process based on ranking. The presence of top tier VC backers is one of several major factors a founder will rank with.