about 1 year ago
Exchange fund for founders. Founders swap equity with other founders to mitigate all or nothing outcomes.
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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.
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?
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!
President & CTO @ ClickIPO Holdings
What an excellent idea, challenging but doable and very creative way to help each other out grow
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.
CEO / Founder / Managing Partner @ Platform
Interesting - thanks for sharing. Who was the founder?
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.
@ 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.
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.
Should mention in general, really like this idea. The all or nothing outcome is really painful!
Head of Marketing @ Waydev
@Pedro Alves - did you take a look at FounderPool?
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.
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