FounderPool: A community for founders to share risk and diversify their equity

http://www.founderpools.com

by manojdv • 6 years ago

164 202 6 years ago

founderpools.com

kumarski• 6 years ago

I 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?

csentropy40• 6 years ago

1. 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

manojdv16• 6 years ago

This is one of the most founder requested features in YC and also Sam Altmans new fund, Apollo is doing it.

ojbyrne2• 6 years ago

It’s been done before: http://ebexchange.com/

geoburke33• 6 years ago

This 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.

sshamoon• 6 years ago

Doesn't this de-incentivize founders since they're giving up their most valuable asset, their equity?

geoburke33• 6 years ago

Only 1-5% of founder's shares are contributed. 95% or more retained. It's insurance; not a plan B.

csentropy40• 6 years ago

Good 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.

aaisola2• 6 years ago

How do you overcome the adverse selection problem? ie. only founders who know their startups are duds want to diversify their holdings?

geoburke33• 6 years ago

Great 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• 6 years ago

So 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.

manojdv16• 6 years ago

1) 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.

aaisola2• 6 years ago

I 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

troydavis2• 6 years 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?

mkolodny• 6 years ago

Does 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.

supernova87a3• 6 years ago

This 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?

geoburke33• 6 years ago

While 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.

BlockchainMike• 6 years ago

Is 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?

manojdv16• 6 years ago

Good question, it will be multiple pools of close knit founder communities.

csentropy40• 6 years ago

1. 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• 6 years ago

I 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

manojdv16• 6 years ago

We 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• 6 years ago

Seems super interesting! Will follow progress!

csentropy40• 6 years ago

Thank you

asparagus1232• 6 years ago

Good timing. as a founder I could use something like this more than ever

geoburke33• 6 years ago

Which aspect attracts you most?

asparagus1232• 6 years ago

de-"riskifying" my startup right now during covid. this would reduce my pressure very slightly and at this point anything helps

csentropy40• 6 years ago

Please sign up!

jaronlukas• 6 years ago

This 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.

gadders3• 6 years ago

I 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.

csentropy40• 6 years ago

It 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.

AndrewKemendo• 6 years ago

We're invested in one. TrueMade Foods. Send me a note if you want to talk with them.

https://www.truemadefoods.com/

whatl3y• 6 years 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?

manojdv16• 6 years ago

We 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)

eganist2• 6 years ago

How 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/)

geoburke33• 6 years ago

VCs and angels act as a signal as well as what sets valuation. The model works best in standard tech startup lifecycle. But as the model catches on, there could be a future where non-investment but revenue-generating businesses form a pool, as well as a lifestyle business pool, or a pre-revenue, pre-product pool.

wtvanhest2• 6 years ago

It’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.

csentropy40• 6 years ago

Founders 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!

wtvanhest2• 6 years ago

I 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

manojdv16• 6 years ago

Thats 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• 6 years ago

Would not that hit the securities regulations on accredited investors where most of the employees won't qualify?

geoburke33• 6 years ago

The very purpose of the community aspect for founders is to have direct impact on the outcomes of the participating companies.

killnine• 6 years ago

Interesting. Does anyone know of anything else like this out there?

csentropy40• 6 years ago

None that I found so far.

forgotmysn3• 6 years ago

pando is seeking to expand outside of sports. id expect them to have something like this soon

gadders3• 6 years ago

Wouldn'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.

manojdv16• 6 years ago

Yes 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• 6 years ago

This 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.

csentropy40• 6 years ago

Funny 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• 6 years ago

How much does the pool take? Or better, what are the costs?

manojdv16• 6 years ago

Right 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• 6 years ago

Can you pool Asian/Latin and US startups?

csentropy40• 6 years ago

Yes.

manojdv16• 6 years ago

Yes we support everyone and are geographic independent

jrpt• 6 years ago

How is this structured legally and what are the tax implications? Have you spoken with a tax attorney about it?

csentropy40• 6 years ago

It 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

lachyg2• 6 years ago

Is contributing to the fund a taxable contribution? I would assume so since it's a diversifying event.

rasengan• 6 years ago

I 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• 6 years ago

This 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.

geoburke33• 6 years ago

Are you also against founders who diversify financial risk through angel investing?

csentropy40• 6 years ago

Thats 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?

tqi3• 6 years ago

Thats 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.

gnicholas5• 6 years ago

Interestingly, pedestrian injuries went up significantly after seatbelt laws, for the reason you note/deride.

manojdv16• 6 years ago

Did you follow-on on all of your investments when they got hit by coronavirus?

landryraccoon2• 6 years ago

Doesn't that reasoning lead to saying that founders shouldn't get a salary from investors either (or only make minimum wage), since if they really believed in their idea they would be happy with equity and not money? After all, a salary means founders would be trading future risky returns for immediate low risk cash.

Negitivefrags• 6 years ago

Founders really shouldn’t get a salary, or if they do, only the minimum to live.

Founders getting any more than just what they need to live incentivises people to raise money for personal gain rather than raising money to build a company.

It also really blurs the line between founders and employees. How can a founder justify taking a salary at the same or even higher level than an employee while also having a huge share? We didn’t get people moaning about how employees are taking risks until SV founders stopped holding up thier end of the bargain with regard to risk taking.

yrral• 6 years ago

So you would never invest in a founder who does the rational thing? Believing in your own company doesn't preclude one from believing in other companies as well.

Say the founder estimates their startup has an 80% chance of succeeding; they pool 5% of their equity given the non-linearity of the utility of money (the additional 5% upside is negligible in a large exit). You would immediately dismiss that founder entirely because of this choice?

bigpumpkin• 6 years ago

Funny how VCs can diversify risks, but founders can't. Perhaps you can concentrate your bets a bet more and believe in them harder?

imtringued2• 6 years ago

If I truly believed in my company I wouldn't take investor money because that would imply that the investor is more important than the company.

tqi3• 6 years ago

This 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 [2] https://www.npr.org/2019/10/25/773532516/some-baseball-playe...

csentropy40• 6 years ago

It 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• 6 years ago

Poker players to much the same thing and trade percent stakes before tournaments. And once again, modern portfolio theory triumphs!

csentropy40• 6 years ago

Good analogy.

geoburke33• 6 years ago

I'm not a poker player, but today a friend analogized SIDE POTS; opt-in diversification with 3 more opportunities per hand. De-risks every player participating in the side pot.

danicgross• 6 years ago

Wonderful 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-pro...

csentropy40• 6 years ago

Thank you.

One more risk founders and entrepreneurs need to brace for : Regime uncertainty. Political uncertainty added to market risk, macro, pandemics, on and on...

geoburke33• 6 years ago

Removing like-kind exchange wouldn't just affect this. The whole M&A space would collapse.

csentropy40• 6 years ago

That 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..

gnicholas5• 6 years ago

Can 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?

csentropy40• 6 years ago

Founderpool are not affiliated with YC in any way. I am not sure who suggested that. I am part of the founderpool team.

gnicholas5• 6 years ago

Thanks 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?

geoburke33• 6 years ago

The only Founderpool team members commenting are myself, csentropy, and manojdv

SMAAART• 6 years ago

Techstars does something similar.

csentropy40• 6 years ago

I 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

oluomike1• 6 years ago

Was about mentioning this as an FI alumni.. Awesome idea, kudos to the team.

tonystubblebine3• 6 years ago

As 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.

csentropy40• 6 years ago

I 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• 6 years 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-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.

tonystubblebine3• 6 years ago

This sounds like sort of an academic take on the pattern of the woman earning more in a hetero couple. My actual experience is just about feelings of equity. There's a person who I love and respect and she's done a lot to advance her own career over the 15 years we've been together. And so I want to be able to give her an equivalent amount to what she gives me.

m0zg2• 6 years ago

A 0.1% equity stake in a startup that ends up hitting is life changing.

For the vast majority of startups, "hitting" is $100-200M acquihire. 0.1% of that is only 200K. If you can get in on something like Beyond Meat, sure, but that's the kind of a company which won't be a part of something like this.

Speaking from the other end of this spectrum, BTW, my risk tolerance is higher now than it's ever been. I don't have to work at all, and my mortgage is paid off. But it's much more difficult now to convince me that some harebrained startup scheme will work. :-)

tonystubblebine3• 6 years ago

Before Series B, I don't think people really know what's going to hit. And even then it's iffy. Beyond Meat was not a foregone conclusion when I got shares. And the way I got shares was actually through a pool that produced one acquihire, two zombies and this one IPO. We all shared an interest in each other (although different structure than this company).

So, to go back in time, if instead of having half the company or whatever, I could have 47% and trade that 3% away for 0.1% stakes in 30 other companies (also knowing I had 30 people with an equity interest in my success), I would do that in a heart beat as long as those companies had been filtered at all.

geoburke33• 6 years ago

Much of our research has been with founders at YC & 500 (cohorts who represent the Beyond Meats of the world). The majority we spoke to, including the breakout unicorns, stated they would have have participated in equity pooling with their batchmates during the batch. We also learned the darlings of their batch were often not the breakout successes, and later upstaged by others in the batch.

est31• 6 years ago

"hitting" is $100-200M acquihire. 0.1% of that is only 200K.

Note that there are liquidation preferences so it's usually not as simple as that. If 100M had been invested at 1x liquidation preference, investors hold 33% and the startup is sold for 150M, then they'd only get 50M from their shares so they'll likely execute their right to get their investment back (at the expense of their shares, let's assume the deal includes this). So the 100M gets distributed among the investors and the 50M gets distributed among the remaining shareholders who hold the other 66%. For a 0.1% shareholder from that group this would mean a 75k payout instead of 150k that your calculation would give.

csentropy40• 6 years ago

You will be surprised at the spectrum of companies that are interested in doing pooling, as were we.

ttul2• 6 years ago

LoL this is me, without the hit. Two decades in and no liquidity. But soooo much scar tissue.

kirso• 6 years ago

Welcome to the reality of survivorship bias... At least we are talking REAL life decisions, the interesting part is that its probably the majority of people, still no liquidity after years of work. On a bright side, its going to be fine but next time we will all think twice regarding the trade-offs.

richardwhiuk• 6 years ago

Why 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?

csentropy40• 6 years ago

Founderpool 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

manojdv16• 6 years ago

We 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• 6 years ago

This 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.

supernova87a3• 6 years ago

I 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).

geoburke33• 6 years ago

I 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.

geoburke33• 6 years ago

You 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.

charliemil4• 6 years ago

+100

And on top of all this, what happens to the voting of this pool, share holder agreements, etc? I can only fathom the shenanigans that can occur. An acquiring firm can press hard on this 1% if they're playing ball.

geoburke33• 6 years ago

This comes out of the founder's vested shares -- not the company stock -- transferrable only if there's ever an exit event. It's arguably more desirable for investors, the board, and acquirers than if the founder sold shares on the secondary market.

kazagistar• 6 years ago

So diversification is only for the investors but never permitted for the founders? Financial security for me, but financial risk for thee? I guess I shouldn't be surprised, that's the financial system as a whole; people who have property moving risk onto people who do the actual work at every turn.

bynormous• 6 years ago

If I was a founder and I found out a VC would hedge their bets by investing in other startups besides mine, I would drop them in an instant. A VC should guarantee they will put their full faith in only my startup. /s

csentropy40• 6 years ago

Exactly the response I wish every founder has ready, when they hear this line of objection from their VC.

jedberg• 6 years ago

I don't see this as any different than a founder who is also an angel investor, which many successful startup founders are when they go for their second company. They even cross invest.

If you look at the YC founders who have exited and gone on to found a second company, many many of them are also investors in other YC companies, sometimes even from their own cohort, if they did YC again. It's pretty common.

Diversification is a smart move. In this case a founder with less capital is investing something they do have, equity in their own startup.

vladislav• 6 years ago

Not advocating for the pool idea but that reasoning is generally incorrect. Decreasing personal capital/timing risk actually increases founder risk tolerance for bigger outcomes for their startup. Investors should want founders to be hungry for big capital, not small.

marcinzm2• 6 years ago

Yup, all that excessive risk incentives founders to do is to take a guaranteed early exit rather than go for a big future payout. And a VC who wants that probably shouldn't be a VC as they lack the risk tolerance.

SilasX• 6 years ago

As mean as that might sound, that is exactly what I assumed the VC reaction would be. I also thought equity agreements heavily restricted how employee-shareholders can sell their stock, and you can't just promise away shares to others without consent of the investors as if that somehow bypasses the restriction?

csentropy40• 6 years ago

Hard transfer ban clauses are rare, usually they are ROFRs. Some boards may push back, but they do see the benefit of the founder having an aligned support network and we believe many will let this happen.

We believe that this exception to the ROFR or transfer restriction becomes a standard clause built into most term sheets in the future.

joncp• 6 years ago

Besides 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.

geoburke33• 6 years ago

You 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.

DevX101• 6 years ago

My 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.

csentropy40• 6 years ago

All 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• 6 years ago

Agreed, I'd also like to see more transparency - nevertheless, this is exciting. Good luck!

dehrmann2• 6 years ago

I'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.

forgotmysn3• 6 years ago

I wouldn't be surprised if YC implements a version of this internally

geoburke33• 6 years ago

We 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.

csentropy40• 6 years ago

I'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.

forgotmysn3• 6 years ago

lol 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

mauriziocalo3• 6 years ago

Have 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/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/ :

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.

manojdv16• 6 years ago

1) 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

mauriziocalo3• 6 years 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.

imtringued2• 6 years ago

Why would ownership at exit matter? If the founder only has 15% ownership then he will still have to give up 1% not 0.15% of total equity. This means the founder will be left with 14% equity.

mauriziocalo3• 6 years ago

The FounderPool website specifically mentions:

You contribute 1% of your equity into your pool.

My understanding is that if a founder owns 30% (say) of the company when they join the pool, they would contribute towards the pool a number of shares corresponding to 1% of that 30%, i.e. 0.3% of the company. Which will presumably get further diluted by the time the company exits.

Having founders contribute X% of their equity at the time they join the pool is more reasonable from a practical execution standpoint than having founders contribute X% of the company the time of exit.

imlina• 6 years ago

Most 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.

geoburke33• 6 years ago

Why?

danieltillett• 6 years ago

Adverse selection.

motohagiography• 6 years ago

https://en.wikipedia.org/wiki/Tontine

I really like this idea, but it reminded me of the tontine episode of Archer.

csentropy40• 6 years ago

Cool reference. Thank you!

zatel• 6 years ago

Thank you I wouldn't otherwise have heard of this

supernova87a3• 6 years ago

One 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• 6 years ago

Village Capital has been testing out the model of having peer-selected investment for ten years now-- https://vilcap.com/entrepreneurs/peer-selected-investment

geoburke33• 6 years ago

Not only that, Erik has done a good job cheerleading the concept of risk pooling for founders: https://twitter.com/eriktorenberg/status/1123331923466522624

geoburke33• 6 years ago

These 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-f...

nmfisher4• 6 years ago

A 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).

dehrmann2• 6 years 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.

nmfisher4• 6 years 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.

csentropy40• 6 years ago

Entrepreneurs free riding on the VC model is the opposite of what really happens: VCs free ride on founder risk.

We see VCs themselves encourage founders to take money off the table with a secondary sale in rounds as early as series A. They also look for founders with previous exits, and usually pay a premium for their startups or invest with a much lower threshold.

This idea that "founders that are not starving are going to be less motivated to succeed" is one of several silicon valley mythologies that don't stand up to scrutiny empirically or otherwise.

Most people don't start companies to sit back and chill as soon as they are financially secure. If they did, and you had invested in them and now have to force them to stay hungry, you should reconsider being a VC.

sitkack• 6 years ago

VCs also want you to join their club after the exit. I would wager that someone to joins this cabal is less likely to become a VC, and if they do, they will have a much different model.

bonobo8862• 6 years ago

Does 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.

geoburke33• 6 years ago

It'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• 6 years 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.

bonobo8862• 6 years ago

oh 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.

bilifuduo• 6 years ago

This is a really interesting model that has been tried a couple times in venture. Probably most notable is Upside (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?

aaronbrethorst• 6 years ago

Or work for a well-paying company and invest heavily in index funds...

geoburke33• 6 years ago

Agreed. Avoid the need for Founderpool by avoiding becoming a founder =P

gverrilla• 6 years ago

It'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

csentropy40• 6 years ago

Fair 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 :)

FounderPool: A community for founders to share risk and diversify their equity

Related Stories