
Why Don't Startups Get Their Users To Invest In Them? - edent
http://shkspr.mobi/blog/2013/05/why-dont-startups-get-their-users-to/
======
martinkallstrom
The concept of a business is hundreds of years old and history has seen most
types of business financing, both benevolent and scammy. As a result, there's
a massive amount of regulations around it. No matter if intentions of the
business owners are benign or not, when the public invests in companies there
is a need for rules governing transparency and control.

What the post is referring does exist, it's called the stock market. It is a
set of rules you need to follow before you can allow thousands or millions of
shareholders to invest. Committing to the rules and getting the permission to
do so is called an IPO.

~~~
huherto
Understood. Is it possible to create a mutual fund that invests in start ups?
May be something like a VC backed by many small investors? Small investors can
be an important resource. Loyal customers, promoters, extra help, etc.

~~~
30thElement
There are some hedge funds that invest in startups, along with the investment
arm of other companies (Microsoft bought 1.6% of Facebook pre-IPO), but I
don't know if it'll work for mutual funds. Hedge funds and companies can sit
on a startup for years before getting any return, but mutual funds have to be
much more liquid. It could work as a closed-end fund, but those are much less
common than open-ended funds and you lose the ability to reinvest in the
startups.

------
minimax
_The thing is, it's pretty hard for an ordinary person to buy a share of a
company. You usually need to be able to buy a large quantity of shares, pay
for a trading account, try not to get ripped off with various fees, and deal
with taxes._

This is FUD. You can easily buy one share if you want to. You don't pay to
open a trading account. The fees are about as transparent as they could
possibly be. And the taxes are not much more complicated than normal income
taxes -- if you hold for less than a year your profits are taxed at the
marginal rate and if you hold for longer than that you are taxed at the long
term capital gains rate.

I'm not saying it's a good idea to buy one share of a $25 stock. It's not. But
modern retail trading is accessible to pretty much anyone these days.

~~~
edent
Got any links? In the UK I was using iii.co.uk - but they recently started
imposing fees which were prohibitive for small scale transactions.

~~~
minimax
Sorry I should have put a disclaimer that I was talking about trading in the
US. I'm not as familiar with retail trading in the UK. In the US you will
typically pay between $7 - $10 per trade for stocks (regardless of order
size). These are the sorts of retail rates you see here:

[https://www.scottrade.com/online-brokerage/trading-fees-
comm...](https://www.scottrade.com/online-brokerage/trading-fees-
commissions.html)

<https://us.etrade.com/investing-trading/pricing-rates>

<https://www.tdameritrade.com/pricing.page>

So at these rates, a $25 trade still doesn't make any sense, but a $500 -
$1000 (still well short of a round lot) trade might.

~~~
edent
But, that's exactly what I'm talking about. Those fees kill "nano" investors.

Why can't I walk up to the stock market and buy a single share of Facebook?

~~~
minimax
_Why can't I walk up to the stock market and buy a single share of Facebook?_

If you have a membership on an exchange, the marginal cost of buying one share
of FB would be the liquidity removal fee of $0.0030 (three tenths of a
penny)†. But you don't have membership on any exchanges, so you have to buy
your share through a third party, a stock broker.

Your broker is providing a service that has costs. Exchange connectivity is
not free. Brokerage staff do not work for free. The website and backend
technology are not free. Clearing is not free. Those costs have to be passed
on.

There is a lot of healthy competition in the retail brokerage space. It's
relatively easy to move your holdings from one brokerage to another, which
suggests that competition has driven transaction fees to a level that allows
brokers to cover their costs and provide a small profit.

† See:

<http://www.nasdaqtrader.com/trader.aspx?id=pricelisttrading2>

[http://cdn.batstrading.com/resources/regulation/rule_book/BA...](http://cdn.batstrading.com/resources/regulation/rule_book/BATS-
Exchanges_Fee_Schedules.pdf)

------
orangethirty
They do, its called selling a product. Tumblr didn't sell much of anything,
because they did not have much of anything to sell. They provided free blogs
to people. That's it. You can't complain about not making money _if you did
not make sure to have a clear way to make some._ Reason for which one should
first make sure to validate the business.

~~~
lancewiggs
Tumblr seemed to do a very poor job of asking customers for money, and it's a
lesson that everyone can take away. At the very least provide users with some
money to spend with an easy incentive to spend it, and make the transaction
very easy and quick.

~~~
orangethirty
Exactly. Blogs are a super easy sale. All you needs to do is upsell
customization. Plugins, themes, more storage, etc.

------
robertlaing
This article is not 100% clear on whether it means "true" investment or just
paying for a service, which is not the same thing at all.

But regarding "true" investment, It's something we looked at 18 months ago
when raising our Series A. At the time it was impossible due to SEC regs
around accredited investors and max number of investors (deeper analysis here:
[http://www.startupcompanylawyer.com/2012/05/26/is-
crowdfundi...](http://www.startupcompanylawyer.com/2012/05/26/is-crowdfunding-
legal/)) so we gave up. But it would be great to have simple ways of getting
it done.

<https://wefunder.com/> and others (round-up here:
[http://www.thecrowdcafe.com/investment-crowdfunding-
platform...](http://www.thecrowdcafe.com/investment-crowdfunding-platforms-
whos-funded/)) are trying to make it happen. Good luck to them :)

------
tobinfricke
A business owned by its "stakeholders" (customers and/or employees) is called
a co-op.

~~~
alexchamberlain
Now all you need to do is make it really easy to set up a co-op and "sell
shares" online...

I'm guessing this could be done in the UK - we have a few major co-ops here;
is the US the same?

~~~
antoko
Federal Credit Unions work in a similar way to the UK's Building Societies.
There are other co-ops here but I don't think they have the same penetration
as in the UK.

One national brand I CAN think of that is a co-op is REI, I'm sure there are
others though, lots of local-focused food businesses use a co-op model.

Costco and Sam's club (wholesalers / cash n carry) offer membership benefits
but I think that's more related to getting air miles on your credit card.

~~~
cglace
Costco and Sam's club (wholesalers / cash n carry) offer membership benefits
but I think that's more related to getting air miles on your credit card.

I'm confused. What on earth does being a member of Costco have to do with
credit card air miles?

~~~
antoko
Apologies, bad choice of word on my part. I should have said "akin" rather
than "related".

The point I was trying to make is that whilst those companies offer a
membership incentive structure its not a true co-op and you don't have an
ownership stake in the company. You just receive some member benefits like
cash back and discount coupons - similar to your credit card company giving
you air miles.

------
brudgers
_"I want to be an investor - a very small one - in the services I use. I don't
want my attention to be sold to the highest bidder on the stock market."_

The second sentence explains why allowing investors described in the first one
is a bad idea for a startup. Investors have rights, and investor relations is
time consuming. It is better if the interests of investors align with those of
the business owners, e.g. making a large amount of money. Otherwise, there is
real risk of being dragged down by lawsuits.

------
lucaspiller
Brew Dog, a craft brewery - but a startup none the less - did exactly this.
They needed to raise a few million pounds to expand their business:

<http://www.brewdog.com/equityforpunks>

[http://www.thetimes.co.uk/tto/business/industries/retailing/...](http://www.thetimes.co.uk/tto/business/industries/retailing/article3092355.ece)

They also do pretty good beer :-)

------
ig1
Wordpress.com has 66 million blogs and it's parent company made ~$45m - and
I'm guessing a significant chunk of that came from a tiny percentage of power
users.

Most users just aren't willing to pay for a consumer web product let alone
invest, for something like tumblr you'ld be lucky if you could get a tiny
fraction of a percent of users to even think about investing.

------
heldtogether
It's not a bad idea, but there are so many things that need considering. For
example, you can't have more than 500 investors before you're required to
declare your accounts. For a company that's in a growth period rather than a
'making shed loads of money that looks good to your average joe on the street'
period, declaring your accounts isn't necessarily a good idea.

Secondly when you have shareholders you have to be seen to be doing things to
increase value for your shareholders, and not necessarily for the long term.
Raising money doesn't always coincide with making profit, so the companies
would be exposing themselves to potentially hindering lawsuits (which would
probably be dismissed but are definitely distracting).

------
jwr
One good reason is because it's illegal. You can't just go around selling
shares in your company to anyone. There is a reason why an IPO is called a
"Public" offering and why there is tons of regulations and paperwork. This is
to prevent scams, pyramid schemes, and the like.

And forming a non-public company with more than 20 or so shareholders is a
good recipe for a completely unmanageable entity.

So while the basic idea seems good, it would be difficult to pull off. I guess
a ransom-type deal would work better: "Dear Users, we have a $1.1 billion
buyout offer. But you could just pay us $13 each and then assuming we get $1.1
billion in _revenue_ , we promise to maintain the service for 2 years."

~~~
roc
> _" I guess a ransom-type deal would work better: "_

Or you could just, i dunno, _charge for the service_.

------
famousactress
There's an easy solution and it's called _charge them fucking money for your
product_.

Every bootstrapped, for-pay startup has users who invest in them. Do those get
shuttered? Sure, that happens.. but with less frequency I'm sure, especially
when the business is actually turning a profit. As a user, it makes sense to
pay attention to the complete cost of 'free' when choosing a service.

------
quackerhacker
I think the reason most startups are hesitant to ask their user base for
funding is because even selling OTC stock in a company still requires alot of
regulation with the SEC. If I remember right (others feel free to weight in
here), the startup has to designated a transfer agent, then the company also
has to value all of it's assets, past revenue, and I don't think they can
account potential revenue. Selling OTC stock in a company, I don't believe is
just stick a price on it and sell it for that amount.

In other words, a startup would be better off formulating a clear and concise
business plan.....or be like Mark Cuban, and sell high and go on Shark
Tank...funny, what happened to Broadcast.com and the buyer? [yes, I know the
buyer is Yahoo, and the basis of this article is Tumblr]

------
morgante
It's called an IPO, and the structures are in place for a reason.

Can you actually imagine the difficulty of keeping 170 million "investors"
updated on the status of the company? You'd have to share so many reports,
make sure everything is done fairly, release regular earnings. Oh, wait,
that's _exactly_ what the SEC requires for doing IPOs...

Seriously though, it'd be a scary world where everyone is an investor. Most
people just aren't qualified to understand risk and make smart decisions for
the future of the company. Startups would end up with no revenue and people's
investments would be worthless.

------
ronilan
There once, during the internet bubble of 2000, was a startup that said
anybody who signs up for their newsletter will get a share in the company.

All the serious finance people said it was a scam, but a lot of people fell
for it and did enter their email. Internet was hot back then.

How did it end?

After many years, the company paid about $4 for each shareholder and then
IPOed.

It is still an awosome newsletter business today. It's called TravelZoo (TZOO)

------
smalldaddy
Depends on the startup business model. I work in the "enterprise space" and at
my last company, and the one I am just starting this is our plan. We are
actually in discussion with two major enterprises who will help fund our
initial development through NRE and invest.

This is possible since we are talking 5 figure sums, where the legal hurdles
and time negotiating are worth it. IF the sums of money are small, this would
not work.

~~~
mindcrime
_with two major enterprises who will help fund our initial development through
NRE and invest._

What is "NRE" in this context?

~~~
mintplant
Non-recurring engineering: <https://en.wikipedia.org/wiki/Non-
recurring_engineering>

Basically, the one-time cost, time, and effort to develop something. Putting
in funds so a product/service can exist in the first place.

------
kp27
There's a fundamental difference between investors and customers.

Users are customers, they pay if they feel the value of the product is worth
XYZ.

Investors are banking on the idea/product to be worth more in the future than
what it is now. They also have an appetite for risk, mainly because they
understand investing and diversify.

------
capex
You are mistaking Facebook's 900 million users vs 900 million users willing to
chip in $18 for 1/900 millionth of Facebook.

------
fudged71
It seems like a viable idea to let users of big sites vote for feature
upgrades with their wallets, kickstarter style. Pay to get into a beta
rollout.

Early adopters will do a lot to get a new feature, and they love to decide on
features. So let them do that.

I don't know why Facebook doesn't do this, honestly.

------
beat
Look up "qualified investor". Opening ownership shares up to literally
thousands (if not millions) of not-qualified investors makes it impossible to
get proper funding from VCs later. Imagine having to get signatures from
100,000 ten dollar investors, just to get a million dollars. Crazy.

------
gnoway
I didn't read all of this, but isn't the current standard business plan to get
as many 'free' users as possible, monetize them by adding advertising, then
selling their eyeballs to Yahoo, etc. for actual money?

Asking your users to actually pay themselves would mess up step 1, right?

~~~
mindcrime
_but isn't the current standard business plan to get as many 'free' users as
possible, monetize them by adding advertising, then selling their eyeballs to
Yahoo, etc. for actual money?_

No. There may be a lot of people pursuing that sort of thing, but there are
plenty of startups selling "stuff" (whether it's software or something else)
to people with money to spend (probably businesses) for real money.

Don't fall for the silicon valley groupthink / herd mentality BS. Building a
company that makes money the old fashioned way is still very feasible, and -
IMO - always will be.

------
brackin
In the UK crowdfunding startups is becoming common using Seedrs or Crowdcube
and a few startups I know have raised a few hundred thousand from their users
(and wealthy individuals using these sites).

------
lifeisstillgood
They can - it's called an Enterprise license

Many a startup has bootstrapped off one or two customer "investments" - Marc
Andressen famously walked a cheque for 11 million USD round the early Netscape
offices.

I believe he regretted taking the money be ause it made them beholden to
features that customer wanted - but try telling the difference between that
and a equity investment

~~~
lifeisstillgood
Honestly, I don't get the down vote. Maybe a facetious tone, but 11million
bucks helped one of the web's formative companies take off - and that was a
customer "investment".

The person(s) who signed that cheque probably had done dozens like it before
and dozens like it afterwards - whoever they were, and like hundreds of other
senior corporate radicals across the globe, they take the one thing scelortic
huge companies have plenty of (money) and push it back to nimble innovative
companies. Its an investment in all but name. And it pays everyone dividends
when it works.

seriously - if you want investment from your customers, find the big names in
your email list.

------
fitzpasd
I can't imagine what Facebook would be like today if every user had a share,
given the community uproar (at least initially) to any new changes to the UI,
feature set etc.

------
ehm_may
"I don't understand money. Well, specifically, I don't understand how
companies are funded, classify shares, or any of that finance stuff." lol -
stopped reading

------
mousefad
Because the users are the product.

~~~
zwieback
Yes, I think that's basically it. Right now the valuation of companies with
little or no revenue is based on future cash flow from users. That makes the
calculation of how much one user is worth much harder since 90% of users will
just drop off and use the next free service.

Also, it's really hard to predict how much users are willing to pay for
distraction and entertainment. There are some sites I get value from (e.g.
buying/selling or booking things) but the vast majority is just entertainment.

------
c3vin
I can't imagine a majority of facebook users making decisions. ..that sounds
dangerous.

------
nolite
we all those "customers" in the real world

------
icedchai
why don't they get paying customers instead?

------
oscargrouch
Folks, we are in the beginning of the digital currency era..

the idea is that the founders of a company say "Starter", create the Starter
currency.. make a evaluation of how much the whole company worth.. translate
this value to Starter units.. and decide the amount to share, and sell..

Then people would buy it, indexed with bitcoins and/or dollars.. The idea is
to create a digital crypto-currency the same way bitcoin is.. but indexed by
each company evaluation by trading, sell/buy operations..

how about that?

------
EGreg
The problem in the USA is telling everyone you are looking for invstment. That
breaks the rules of general solicitation, which the SEC was supposed to have
updated last year but has been dragging its feet. So startups can only really
talk to accredited investors, and can't talk to their users and tell them
they're going to pay dividends or something.

However, they CAN charge their users for SERVICES :)

~~~
dragonwriter
> The problem in the USA is telling everyone you are looking for invstment.
> That breaks the rules of general solicitation, which the SEC was supposed to
> have updated last year but has been dragging its feet. So startups can only
> really talk to accredited investors, and can't talk to their users and tell
> them they're going to pay dividends or something.

Startups can talk _directly_ to potential investors, both non-accredited and
accredited investors (how _many_ non-accredited investors can invest in them
depends on which of the exemptions from registration requirements they are
taking advantage of), all current registration exemptions however, prohibit
general solicitation and advertising and solicitation except that certain
state-law conditions can allow general solicitation and advertising for Rule
504 "seed capital" fundraising.

The update the SEC must make under the JOBS Act for general solicitation would
remove the general solicitation restriction for offerings that are _restricted
to_ accredited investors where the offering firm takes certain steps to verify
that any investors qualify as accredited investors. There's also a
crowdfunding option that requires an SEC-registered intermediary (and has
overall limits similar to the existing seed-capital option in Rule 504.)

Its not clear to me that either is necessary (or even helpful) to a company
that wishes to conduct _direct_ solicitation directed to _purchasers_ of the
company's existing offerings who are not necessarily qualified as accredited
investors.

~~~
EGreg
Okay, I am a bit confused. Right now, most startups are probably advised to
make a good-faith effort to ascertain that their investors are indeed
accredited. If they engage in general solicitations, then the bar is higher
for ascertaining this. Correct?

If I wanted to message all my users and tell them to point their investor
friends towards our AngelList profile, wouldn't that be public solicitation?

~~~
dragonwriter
> Okay, I am a bit confused. Right now, most startups are probably advised to
> make a good-faith effort to ascertain that their investors are indeed
> accredited.

There's no requirement that I see for "seed capital" (Rule 504) investors to
be accredited. Offerings that make use of the Rule 505 or Rule 506 exemptions
instead, however, are limited to 35 non-accredited investors (the language of
the exemption requirement, in both cases, "There are no more than _or the
issuer reasonably believes that there are no more than_ 35 purchasers of
securities from the issuer in any offering under this section"; in both cases,
accredited investors, and certain other special classes, are excluded from the
count of purchasers.)

> If they engage in general solicitations, then the bar is higher for
> ascertaining this.

Well, we don't know precisely because the rule required under the JOBS Act
_permitting_ general solicitation under the Rule 506 exemption haven't been
written, but it would seem likely to be so once that is permitted. But the Act
itself provides that the elimination of the general solicitation prohibition
requires that "all purchasers of the securities are accredited investors", and
that the "rules shall require the issuer to take reasonable steps to verify
that purchasers of the securities are accredited investors, using such methods
as determined by the Commission." This would appear to require a higher bar
than the simple "reasonable belief" test in the current exemptions.

> If I wanted to message all my users and tell them to point their investor
> friends towards our AngelList profile, wouldn't that be public solicitation?

I suspect so (but I'm not an expert in the application of these regulations):
you aren't soliciting investment directly from just the identified users, you
are asking them to solicit on your behalf from a vaguely defined group
("investor friends".)

I would suspect that an offering made _only_ to your existing users would not
be general solicitation.

------
wilfra
They can't take money from non-accredited investors (those who make below
$200k per year or have less than $1 million in assets). This is the reason you
can't get shares or profit sharing on Kickstarter.

The JOBS act loosened the regulations to open it up to anybody - but those
changes have yet to be implemented and you presently still need to be an
accredited investor to invest in startups.

As for whether they'd even want to do it, that's another question. WeFunder (a
YC company) wasn't able to convince many of their batchmates to offer shares
to the public when they launched and the company I tried to fund through them
(Strikingly) appears to have ignored everybody who attempted to back them
through WeFunder and went with traditional investors instead (or at least
that's what they've done in my case).

~~~
dragontamer
I came here just to post this. Then I noticed that you already mentioned it.
The JOBS act is new, and companies aren't taking advantage of it yet. It was
only passed a month ago after all...

That said, how do Co-ops work? As well as companies like REI or Vanguard?
Purchasing an REI membership makes you a holder of the company, and same thing
with Vanguard funds... or many credit unions. Is there a reason why the JOBS
act was needed when customer-owned businesses already existed?

~~~
nknighthb
Whether you realize it or not, I believe you've just asked for a dissertation
on the myriad rules covering ownership of incorporated entities.

I'm not qualified to give it to you, but I can say it's not nearly as simple
as "IPO or accredited investors only!". You need only consider one scenario to
realize this: You don't need to be an accredited investor to incorporate a
company.

This is not comprehensive, but it's a good starting place:
<http://www.sec.gov/info/smallbus/qasbsec.htm>

~~~
dragontamer
Thanks for the link, I'll give it a look over :-)

