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
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.
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.
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.
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.
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.
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?
My 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.
If 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.
Because 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.
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?
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.
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
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
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.
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.
It 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)
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)
Aren'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.
Does 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.
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.
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.
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
Misdirected 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.
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.
yes, accreditation rules apply and typically founders qualify by virtue of stock paper value. For employees, later stage companies tend to workout because of stock values.
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?
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.
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.
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.
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.
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.
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?
That doesn't sound right... seatbelt laws forced people who otherwise would have felt confident enough to drive without it to wear one. Low confidence drivers always had the option to wear one at any time. From only study I could find on the subject [1]:
"We distinguish, following the literature, between fatalities among car occupants, who may be directly affected by
using seat belts, and fatalities among nonoccupants (pedestrians, bicyclists, and motorcyclists), who do not use seat belts and can thus be affected by seat belt use only indirectly... Our findings indicate that seat belt use significantly reduces fatalities among car occupants, but does not appear to
have any statistically significant effect on fatalities among
non-occupants. Thus, we do not find significant evidence for
compensating behavior."
Maybe the invention of seat belts could have that effect, but that coincided with so many other changes to automobile technology / urban development that any observed effects are correlated at best.
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.
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.
Founders getting only the bare minimum to survive seems like a good way to exclude certain classes of people -- those without any assets to fall back on, those with families, to name a couple -- from becoming successful founders.
"only the bare minimum to survive" as founder doesn't need to be interpreted as "only just above the poverty line" or "minimum wage".
There's a good argument to say it includes enough money for things like: comfortable bay area rent, ability to replace essential equipment (like lost/stolen/damaged dev-grade laptops) immediately, enough discretionary income to order in Ubereats dinner instead of stopping work to cook whenever in the zone.
The "bare minimum" for a founder to succeed probably rightfully means "enough money showing up every month that they can realistically not ever have to worry about any short/medium term bills/expenses/timesaving-expenditure". You shouldn't be saving for a house deposit or leasing a Lambo on a founders salary, but you also need to not be wondering where tomorrows dinner is coming from or how you're going to cover next month's rent.
"Ramen profitable" should be a choice to eat ramen because it's quick and you can get back to hacking in 4 minutes, not because you've spent the afternoon working out your food budget for the next 3 weeks comes out to $1.27 per meal if you're going to have enough money to not become homeless at the end of the month.
There are obviously two schools of thought here, but IMO a founder who is at least financially comfortable will make better long term decisions and take actions influenced less by personal stress.
I think there's two important timeframes to consider here.
You need to be "financially comfortable" for the 1/3/12 month foreseeable future to be able to fully focus on your startup.
I'm a lot less convinced that being 10+ year financially comfortable is necessarily a desirable trait for a founder. Knowledge that their future financial freedom is 100% dependant on the success of their startup is possibly a stronger driver of "better long term decisions" than someone in a position to think "it doesn't matter too much - even if this fails I have a contingency plan"...
(And I say that as someone who was once part of a team that rejected an acquisition offer that would've meant a half million payout to me, because we believed at the time we were going to be worth at least 10 times that within a year. And we were wrong. But I still stand by that decision at the time and would make it again in the same circumstances...)
I mean it's not really about "should" - if I'm a founder, I'll go with the best offer from an investor. If one wants to offer me a larger salary, that will factor into my decision.
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?
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."
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.
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.
One more risk founders and entrepreneurs need to brace for : Regime uncertainty. Political uncertainty added to market risk, macro, pandemics, on and on...
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..
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?
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?
We 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
I 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
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
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.
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.
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.
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.
> 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. :-)
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.
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.
I actually had exactly this idea with my YC knock-off, HMC INQ.
The first cohort (5 cos in 2017) I offered them to all pool some of their equity. But first I polled how much each would be willing to give. The results were 0%, 0%, 2%, 5%, and 20%.
So, I abandoned it. Ironically the one that offered 20% is doing the best so far.
Maybe, just may be a realistic assessment of the chances of success is an under appreciated entrepreneurial trait.
Maybe this trait can co-exist independently with the ability to forge ahead DESPITE knowing how low the odds are, because you want to see something happen.
Maybe it is that silicon valley groks this as "an irrational belief" when in fact, it is the compulsion to forge ahead despite knowing the odds.
> "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.
Yes, I'm aware of this little nuance - I've been through startup equity meat grinder myself. It's too complicated to quickly explain to a layperson though, and deliberately so. Many people are working for startups not knowing that they'll get bupkis if those startups succeed. I'd venture to say easily the majority. Many founders on HN try to pretend they won't negotiate their often abusive equity offer terms with their best employees (a lie - they will) because that requires "board approval". Most of them are also not huge fans of prospective employees hiring a lawyer to review the equity offer, to at least understand how the employee is being screwed.
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.
On the other hand, I've had a really fun couple of decades and I have more freedom than anyone I know who isn't just rich. Yes, if you've had your exit, you obviously can just coast through life. But where's the fun in that?
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?
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.
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.
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).
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.
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.
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.
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.
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.
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
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.
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.
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.
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?
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.
206 comments
[ 3.1 ms ] story [ 264 ms ] threadHow 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?
Also it's not either/or. Participating in a pool does not block the founder from liquidating shares on the open market.
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.
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.
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
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?
If the founder has liquidity, before joining the pool, he would be joining the pool right?
Or did I misunderstand?
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.
What sort of support are founders expected to provide to other founders in the pool?
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
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.
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".
Even in a shock scenario, there are sector winners (see biotech and funeral homes in covid pandemic)
https://www.truemadefoods.com/
Most "valuation events" for startups are seed or series X fundraisers, no? So how could founders who bootstrap participate in this, if at all?
(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/)
edit: I see, bootstrapped is their own pool so the two valuations never get compered against each other.
Employees have little individual power to impact strategy and are more likely the victims of poor management decisions.
Agree with employee pools. That is the next step version for founderpool and it is literally the most requested!
Even at massive scale, similar business diverge in profitability due to strategy decisions during all market conditions, including pandemics and other blackswan events
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.
We are exploring ways to structure the pool with a portion of it in cash/capital. more coming
Tax implications for the founders are similar to their founder stock obligations, when liquidation happens
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?
"We distinguish, following the literature, between fatalities among car occupants, who may be directly affected by using seat belts, and fatalities among nonoccupants (pedestrians, bicyclists, and motorcyclists), who do not use seat belts and can thus be affected by seat belt use only indirectly... Our findings indicate that seat belt use significantly reduces fatalities among car occupants, but does not appear to have any statistically significant effect on fatalities among non-occupants. Thus, we do not find significant evidence for compensating behavior."
Maybe the invention of seat belts could have that effect, but that coincided with so many other changes to automobile technology / urban development that any observed effects are correlated at best.
[1] https://web.stanford.edu/~leinav/pubs/RESTAT2003.pdf
https://ideas.repec.org/a/eee/trapol/v44y2015icp58-64.html
Source?
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.
There's a good argument to say it includes enough money for things like: comfortable bay area rent, ability to replace essential equipment (like lost/stolen/damaged dev-grade laptops) immediately, enough discretionary income to order in Ubereats dinner instead of stopping work to cook whenever in the zone.
The "bare minimum" for a founder to succeed probably rightfully means "enough money showing up every month that they can realistically not ever have to worry about any short/medium term bills/expenses/timesaving-expenditure". You shouldn't be saving for a house deposit or leasing a Lambo on a founders salary, but you also need to not be wondering where tomorrows dinner is coming from or how you're going to cover next month's rent.
"Ramen profitable" should be a choice to eat ramen because it's quick and you can get back to hacking in 4 minutes, not because you've spent the afternoon working out your food budget for the next 3 weeks comes out to $1.27 per meal if you're going to have enough money to not become homeless at the end of the month.
You need to be "financially comfortable" for the 1/3/12 month foreseeable future to be able to fully focus on your startup.
I'm a lot less convinced that being 10+ year financially comfortable is necessarily a desirable trait for a founder. Knowledge that their future financial freedom is 100% dependant on the success of their startup is possibly a stronger driver of "better long term decisions" than someone in a position to think "it doesn't matter too much - even if this fails I have a contingency plan"...
(And I say that as someone who was once part of a team that rejected an acquisition offer that would've meant a half million payout to me, because we believed at the time we were going to be worth at least 10 times that within a year. And we were wrong. But I still stand by that decision at the time and would make it again in the same circumstances...)
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?
"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...
We believe this scales beyond startup founders to education, athletics, and any domain where the outcome distributions follow some kind of power laws
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...
One more risk founders and entrepreneurs need to brace for : Regime uncertainty. Political uncertainty added to market risk, macro, pandemics, on and on...
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?
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?
Only three people are with Founderpool. me, manoj and geoburke
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.
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.
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.
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. :-)
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.
The first cohort (5 cos in 2017) I offered them to all pool some of their equity. But first I polled how much each would be willing to give. The results were 0%, 0%, 2%, 5%, and 20%.
So, I abandoned it. Ironically the one that offered 20% is doing the best so far.
Maybe this trait can co-exist independently with the ability to forge ahead DESPITE knowing how low the odds are, because you want to see something happen.
Maybe it is that silicon valley groks this as "an irrational belief" when in fact, it is the compulsion to forge ahead despite knowing the odds.
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.
But it is true that larger pool across sectors is more diversified
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.
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).
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.
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.
We believe that this exception to the ROFR or transfer restriction becomes a standard clause built into most term sheets in the future.