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.
> 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. :-)
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.
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.
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.
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?
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."
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.
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.
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).
> 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.
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.
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/topcompanieshttps://ycombinator.com/companies and simulate what the payouts would be if you were to choose 25 companies from a given batch at random.
> 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.
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
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.
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.
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.
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?
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.
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 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.
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.
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)
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.
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...
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?
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.
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.
[+] [-] tonystubblebine|5 years ago|reply
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.
[+] [-] csentropy|5 years ago|reply
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.
[+] [-] m0zg|5 years ago|reply
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. :-)
[+] [-] ttul|5 years ago|reply
[+] [-] centimeter|5 years ago|reply
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.
[+] [-] DevX101|5 years ago|reply
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.
[+] [-] csentropy|5 years ago|reply
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.
[+] [-] dehrmann|5 years ago|reply
[+] [-] gnicholas|5 years ago|reply
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?
[+] [-] csentropy|5 years ago|reply
[+] [-] geoburke|5 years ago|reply
[+] [-] tqi|5 years ago|reply
"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...
[+] [-] csentropy|5 years ago|reply
We believe this scales beyond startup founders to education, athletics, and any domain where the outcome distributions follow some kind of power laws
[+] [-] smabie|5 years ago|reply
[+] [-] wtvanhest|5 years ago|reply
Employees have little individual power to impact strategy and are more likely the victims of poor management decisions.
[+] [-] csentropy|5 years ago|reply
Agree with employee pools. That is the next step version for founderpool and it is literally the most requested!
[+] [-] manojdv|5 years ago|reply
[+] [-] geoburke|5 years ago|reply
[+] [-] aaisola|5 years ago|reply
[+] [-] nmfisher|5 years ago|reply
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).
[+] [-] dehrmann|5 years ago|reply
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.
[+] [-] sitkack|5 years ago|reply
[+] [-] mauriziocalo|5 years ago|reply
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:
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.
[+] [-] manojdv|5 years ago|reply
[+] [-] danicgross|5 years ago|reply
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...
[+] [-] gadders|5 years ago|reply
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.
[+] [-] manojdv|5 years ago|reply
[+] [-] motohagiography|5 years ago|reply
I really like this idea, but it reminded me of the tontine episode of Archer.
[+] [-] rasengan|5 years ago|reply
[+] [-] csentropy|5 years ago|reply
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?
[+] [-] tqi|5 years ago|reply
[+] [-] landryraccoon|5 years ago|reply
[+] [-] yrral|5 years ago|reply
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?
[+] [-] pickledish|5 years ago|reply
[+] [-] bigpumpkin|5 years ago|reply
[+] [-] geoburke|5 years ago|reply
[+] [-] imtringued|5 years ago|reply
[+] [-] manojdv|5 years ago|reply
[+] [-] kumarski|5 years ago|reply
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?
[+] [-] whatl3y|5 years ago|reply
Most "valuation events" for startups are seed or series X fundraisers, no? So how could founders who bootstrap participate in this, if at all?
[+] [-] geoburke|5 years ago|reply
[+] [-] manojdv|5 years ago|reply
[+] [-] jrpt|5 years ago|reply
[+] [-] supernova87a|5 years ago|reply
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|5 years ago|reply
[+] [-] geoburke|5 years ago|reply
[+] [-] jaronlukas|5 years ago|reply
[+] [-] bilifuduo|5 years ago|reply
[+] [-] bonobo886|5 years ago|reply
[+] [-] zackmorris|5 years ago|reply