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Exchange fund for founders

Suggested by John Waller about 1 year ago

Exchange fund for founders. Founders swap equity with other founders to mitigate all or nothing outcomes.

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MM
6 months ago

Investment Associate @ Flora

Love the idea, there are a few issues that give it limitation though. Not only is there the issue of incentive alignment as Jeremy mentioned, less ownership means less incentive to be 'all in', but it would be difficult to truly diversify and not give the start ups dilution issues with their cap table on subsequent fundings.


If you give up a significant portion of your cap table early on in the exchange process, you have already been diluted. Any time you raise primary capital, you will be diluted further. This means your company would have to go very big in an exit for the smaller equity to be worthwhile. Governance/ control shouldnt be an issue, if you swap common and founders have preferred.


It might be interesting to explore the idea as a middle market fund, this is one way to solve the dilution issue (coming in later), and lemons problem Ben brought up (generalized traction KPIs and previous investors should be enough to mitigate information asymmetry). Still, if the founder swaps a significant portion of their stock it would be a negative signal, especially if they have already been significantly diluted from early stage funding.


If I had to execute the idea, I would only minimally diversify the founders cap tables (maybe 2-3 founders swapping equity for a small percentage), and ideally have them work as board advisors to each other (board advisors will often receive .5-2% in equity for operational expertise/support provided). To add another layer to this, a matching program to connect founders who are in synergistic companies could be very beneficial, initiating partnerships between their companies and sharing best practices/ networks. It could also further make a dent in the lemons problem. If they are in tangential industries they should have enough knowledge on the other's operations that the information asymmetry is mitigated. I think this model would be a positive signal to a subsequent investor instead of a negative signal. I would probably see it as a negative signal if it was a more diversified purely financial swap. It would likely be a better idea to have a vertical focus in exploring this initiative verse a generalist.


Bryan and Ben, I think Pandopooling is taking a similar approach, but with future earnings commitments, (typically salary but includes earnings from exits, etc.) instead of an actual stock swap.


KN
7 months ago

VP, Business Development and Content Partnerships @ Nasdaq Entrepreneurial Center

Clever idea - i like the idea of venture backed startups kick in X% of their shares into a common pool for more social impact causes but this is not counter to that, might just be a catalyst or module element?


RS
7 months ago

Founder @ Cambrian @ Cambrian Ventures

Always interesting to contemplate new ways of risk sharing! Here's one concept in the general space. They run "pools" for different affinity groups like (1) Minor League Baseball players, this is where they have the most pools running (2) MBAs, launched about a year ago and https://www.pandopooling.com/


edit: see now this is a duplicate comment!

SG
11 months ago

President & CTO @ ClickIPO Holdings

What an excellent idea, challenging but doable and very creative way to help each other out grow

XH
about 1 year ago

Co-CEO @ Enduring Ventures

EBX Exchange Fund was also going for a decade (six funds). I was an LP in one. The founder ended up winding it down, though he almost had some shares of Google committed in the early days. Problem is that the fund manager has to front all legal/overhead. But there were real exits in the fund and real cash distributed. Unfortunately no home runs, but I received maybe $250k over the years for a small part of my startup stock.

Jeremy Burton core team
about 1 year ago

CEO / Founder / Managing Partner @ Platform

Interesting - thanks for sharing. Who was the founder?

Jeremy Burton core team
about 1 year ago

CEO / Founder / Managing Partner @ Platform

One reason that First Round stopped doing this is they saw a negative correlation between founders willing to pool risk and outsized success. i.e. the best founders were "all in" on their own startups and didn't want to share with anyone else.

Several people have commented on the problem of distinguishing correlation and causation here.

I'd love to hear other views on this one.

BA
about 1 year ago

@ USA Payment Services

i believe this is a symptom of a broader problem called "The Market for Lemons", which George Akerlof was awarded a Nobel in economics. here is the 1970 seminal paper: http://wwwdata.unibg.it/dati/corsi/8906/37702-Akerlof%20-%20Market%20for%20lemmons.pdf


the basic idea is there are information asymmetries among market participants that result in little to no trading. if you solve the information asymmetry problem, you solve the no trading problem.

about 1 year ago

Creating.. @ McGill University

There is also https://www.pandopooling.com/. I think the critical piece to converting founders is a really good pool matching process.

about 1 year ago

Creating.. @ McGill University

Should mention in general, really like this idea. The all or nothing outcome is really painful!

AM
about 1 year ago

Head of Marketing @ Waydev

"Exchange fund for founders. Founders swap equity with other founders to mitigate all-or-nothing outcomes" - Realy good idea. Check this out - https://founderpool.co/ (I had a call with the founder of this startup a few months back)
Jeremy Burton core team
about 1 year ago

CEO / Founder / Managing Partner @ Platform

@Pedro Alves - did you take a look at FounderPool?

FK
about 1 year ago

Advisor, Product Strategy @ Various Startups

First Round experimented with a founder pool across their portfolio companies 10-ish years ago. I think they found the response from their founders to be tepid, and that was amongst a vetted cohort. Worthwhile to ping folks there about their learnings.

how_to_reg  Ron DeAngelis followed Exchange fund for founders • 4 months ago
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how_to_reg  Jane Peh followed Exchange fund for founders • 5 months ago
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favorite  Jane Peh liked Exchange fund for founders • 5 months ago
favorite  Parul Gupta liked Exchange fund for founders • 5 months ago
favorite  Alvaro Gonzalez liked Exchange fund for founders • 5 months ago
favorite  Felisha Booker liked Exchange fund for founders • 6 months ago
favorite  Matt Curtolo liked Exchange fund for founders • 6 months ago
favorite  Megan McCashland liked Exchange fund for founders • 6 months ago
favorite  Vivek Sundaram liked Exchange fund for founders • 6 months ago
favorite  Stephen Romanoff liked Exchange fund for founders • 6 months ago
favorite  Rilwan Lawal liked Exchange fund for founders • 6 months ago
favorite  Daniel Darling liked Exchange fund for founders • 6 months ago
favorite  Ryan Mykita liked Exchange fund for founders • 6 months ago
favorite  Michael Pearl liked Exchange fund for founders • 7 months ago
favorite  Alexander Fries liked Exchange fund for founders • 7 months ago
favorite  Franklin Uloneme liked Exchange fund for founders • 7 months ago
favorite  Eric Niehaus liked Exchange fund for founders • 7 months ago
favorite  Anne Dwane liked Exchange fund for founders • 7 months ago
favorite  Ronald Drabkin liked Exchange fund for founders • 7 months ago
favorite  Gene Linetsky liked Exchange fund for founders • 7 months ago
favorite  Salem Bagami liked Exchange fund for founders • 7 months ago
favorite  Adam Shatzkamer liked Exchange fund for founders • 7 months ago
favorite  Rex Salisbury liked Exchange fund for founders • 7 months ago
favorite  David Boneparth liked Exchange fund for founders • 7 months ago
favorite  Nathan Zeke liked Exchange fund for founders • 8 months ago
favorite  Mike Weppler liked Exchange fund for founders • 10 months ago
favorite  Jack Morgan liked Exchange fund for founders • 10 months ago
favorite  Michael Nwogugu liked Exchange fund for founders • 10 months ago
favorite  Chandler Phelps liked Exchange fund for founders • 10 months ago
favorite  Shelly Elliott liked Exchange fund for founders • 10 months ago
favorite  Robin Daultani liked Exchange fund for founders • 11 months ago
favorite  Mike Rodman liked Exchange fund for founders • 11 months ago
favorite  Leonardo Valenca liked Exchange fund for founders • 11 months ago
favorite  Chris Seidensticker liked Exchange fund for founders • 12 months ago
favorite  Justin Vogel liked Exchange fund for founders • 12 months ago
favorite  Celena Green liked Exchange fund for founders • about 1 year ago
favorite  Burak Eryilmaz liked Exchange fund for founders • about 1 year ago
favorite  Bill Colleran liked Exchange fund for founders • about 1 year ago
favorite  Alberto Escarlate liked Exchange fund for founders • about 1 year ago
favorite  David Oke liked Exchange fund for founders • about 1 year ago
favorite  Steven Pack liked Exchange fund for founders • about 1 year ago
favorite  Brian Bien liked Exchange fund for founders • about 1 year ago
favorite  Adam Smithline liked Exchange fund for founders • about 1 year ago
favorite  Jason Wiener liked Exchange fund for founders • about 1 year ago
favorite  Alan Guarino liked Exchange fund for founders • about 1 year ago
favorite  Amy Guarino liked Exchange fund for founders • about 1 year ago
favorite  Laura Murdock liked Exchange fund for founders • about 1 year ago
favorite  Lara Druyan liked Exchange fund for founders • about 1 year ago
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favorite  Ryan Welsh liked Exchange fund for founders • about 1 year ago
favorite  Elijah ogbonnia liked Exchange fund for founders • about 1 year ago
favorite  Christopher Ciaravino liked Exchange fund for founders • about 1 year ago
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favorite  Anurag Chandra liked Exchange fund for founders • about 1 year ago
favorite  Chukwuemeka Amadi liked Exchange fund for founders • about 1 year ago
favorite  Bryan Altman liked Exchange fund for founders • about 1 year ago
favorite  Griffin Eaton liked Exchange fund for founders • about 1 year ago
favorite  Abhishek Mishra liked Exchange fund for founders • about 1 year ago
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