
500 Startups still owes money to its latest group of startups - moritzplassnig
https://www.axios.com/500-startups-still-owes-money-to-its-latest-group-of-startups-2511194808.html
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tjpd
"While we were completing legal documentation related to Dave McClure's
resignation from 500, funding for certain companies was delayed. Since then,
we have resumed fundraising, as well as funding our investment commitments. We
have been regularly communicating with our companies regarding the status of
their investment and expect to complete all outstanding investments in
December."

Here's my outsider's guess: Dave was almost certainly a Key Person in 500's
Limited Partnership Agreement. When a Key Person leaves, for whatever reason,
that triggers a Suspension Event and the start of the Suspension Period.
During the suspension period, the LPs are not required to contribute capital
except for certain things (e.g. management fees, follow-ons). The LP's (some
threshold or some combination of them like the LP advisory committee) then
have 60-90 days to vote whether or not to continue with the fund.

500 would already have called down some capital so that meant they could make
a few investments but otherwise, during the suspension period they likely
couldn't make any new ones. Since then they got their LPs on board with the
idea of continuing without Dave and now can fulfill all their obligations.
That would make sense to me because 500 as an institution is much more than
just one man.

~~~
austenallred
Except the implication is they “invested” in companies they didn’t have the
cash for. It’s not acceptable to say you’ll invest in a company and then go
fundraise to fulfill that commitment. Those things need to happen in reverse
order.

~~~
JumpCrisscross
> _It’s not acceptable to say you’ll invest in a company and then go fundraise
> to fulfill that commitment_

When a VC “raises” capital, they don’t get a box of cash. Instead, their LPs
sign commitments. When the VC signs a subscription agreement with a company,
they “call” that capital from their LPs. LPs are then obligated to supply it
promptly so the VC can meet its obligation to the company.

This is done to separate cash management and investment. (While the cash sits
waiting, one investor may want it in CDs; another in Treasuries. Mingling that
risk with the core activity of VCs, picking great ventures, isn’t worth it.)

OP is saying the LPs, as part of their commitment, may have had an out in
their paperwork. VC signed subscription agreement. VC called money. LPs said
“no, we’re exercising this clause to delay or not give you that money.”

TL; DR a round isn’t raised until it’s closed.

 _Disclaimer: I am not a lawyer. This is not legal advice. It outlines a
hypothetical and does not necessarily represent the facts and circumstances of
500 Startups._

~~~
austenallred
Yes, but you don’t invest money that isn’t closed.

~~~
JumpCrisscross
> _don’t invest money that isn’t closed_

Are you talking to the VC or the company?

When a VC says they have “closed” a fund, it means they have collected
commitments. (I have found no consistency in what companies mean by having
“closed” a round.)

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hatfieej
My company just finished this batch. 500 was upfront that funding would not
happen until at least 2 months after the batch starts. My impression is that
communication has been weak after Dave leaving and that has allowed room for
speculation. Personally, 500 has been good to us.

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throw17121
I participated in an accelerator run by a large corporate VC. They were
supposed to give part of the cash up front (for common stock) and part after
(in exchange for a note). During the initial negotiation, they offered to let
me take it all up front for common stock. Because we had plenty of cash on
hand, and because I wanted to use the post-program note to kick start a
funding round, I said I'd just do the regular deal.

When I asked them about the note after the program ended, they said they
thought I didn't want all the cash and so they wouldn't give it to me. Years
later, and I've only just now gotten them to give the promised funding. I was
shocked that they would behave this way considering the damage it can do to
their reputation if word got out.

~~~
rhizome
And yet...word doesn't get out.

~~~
throw17121
I decided not to publicize it without giving them several chances to fix
things. They did eventually fix it, and for reasons I won't disclose (because
disclosing would make identification much easier), publicizing what happened
to me would no longer be terribly helpful.

~~~
neotek
>publicizing what happened to me would no longer be terribly helpful.

To you maybe; what about everyone else?

~~~
throw17121
The unhelpfulness isn't related to my getting the funding. It's about changes
at the VC

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_Marak_
I've had a bad feeling about Dave McClure and 500 Startups since their Geeks
on a Plane trip to India.

I was living in India at the time with a few other American open-source
engineers. I reached out to 500 Startups and GOAP several times about the trip
and couldn't even get a response.

The whole premise of GOAP felt like a way for Dave McClure to travel to remote
places with attractive women. I'll probably get heavily down-voted for this
comment, but I think it's not very far away from the truth.

~~~
waleedka
This is a general comment not specific to the topic at hand. If you have facts
to share then do so. But if you 'feel' that someone has an ulterior motive and
you share it in a public forum then many people might take it as fact or an
anecdote. Some people might even repeat it to their own friends. By doing so
you risk harming the reputation of someone who may be innocent of that
accusation.

Let me demonstrate with an example: I 'feel' that you wanted to join GOAP
because you wanted to hang out with attractive women. And I 'feel' that 500
Startups didn't respond to you because they recognized your sleazy intentions.
And I feel that you got upset and this is your way of getting revenge. Now,
obviously, I don't really feel that way. But I just wanted to show how easy it
is to throw dirt at someone.

Let's stick to the facts, please.

disclaimer: I was in 500 Startups first batch.

~~~
elliotec
I feel that the fact that the parent had a feeling specific to the topic at
hand is completely relevant, and your comment warning against the "risk of
harming the reputation" of this person, who already has a bad reputation, is
not relevant to the discussion.

~~~
borski
The parent has nothing to do with this topic. This is about whether 500S can
pay the money it owes to the startups they fund. The parent is purely
insinuation and is not based in fact, nor is it relevant to the fund; rather,
it is simply trying to throw shade at Dave McClure, who is no longer with the
fund, regardless.

This is shown to be especially true by the fact that parent never even had a
conversation with anyone at GOAP, as they didn't respond (by parent's
admission).

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moritzplassnig
I wonder if the paperwork (eg. term sheet or whole contract) got signed before
Dave McClure left and (some) LPs are holding back their money now. Is that a
realistic scenario?

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frankdenbow
Happens for companies in StartupChile frequently

~~~
sontek
StartupChile is significantly different. With SUP you have to prove the funds
were used appropriately as part of the fund. It is an equity free government
program. The terms of the agreement are that you are reimbursed for approved
expenses.

This is much different and worse. This is a traditional investor / incubator
that took equity in these companies and promised them the money and isn't
paying them.

~~~
newaccount99
Sort of but not quite. The guy you're responding to has been through Sup
Chile, and so I have I.

They're nice people but there have been many unexplained delays of money
across the generations that have nothing to do with anything you've mentioned.

Also, only some generations follow or have followed a reimbursement model.
Mine didn't.

~~~
WillPostForFood
How active is StartupChile now? Their website says it is down, and is full of
dead links:
[http://www.startupchile.org/programs/](http://www.startupchile.org/programs/)

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jessaustin
If they're out of money, they're out of money. Was it all just coming out of
McClure's pocket? IANAL, but presumably a substantial failure to adhere to
contract terms on 500's part will release the startups from their contract
requirements?

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mtviewdave
Recently 500 Startups started offering coworking space at their Mountain View
location:

[http://go.500.co/coworking](http://go.500.co/coworking)

Seems to me to suggest they're looking for alternative ways to raise money.

~~~
borski
This has always been the case. They're just publicizing it now.

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matte_black
How has Dave McClure’s departure affected fundraising for 500 Startups?

~~~
stevenj
I'd imagine the whole scandal has negatively effected the firm and its future.

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api
I wonder how this fits in with the decline in accelerator and seed funding
activity?

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jacquesm
Did they get the stock?

~~~
kcorbitt
IANAL, but I assume a competently-written contract would have explicitly
listed the cash 500 Startups was supposed to invest as consideration for its
equity share, so if the money never shows up the contract is void.

Incidentally, this is one of the advantages of a human-run judicial system
over the wild west of "code is law"-style equity on a public blockchain. If it
comes down to it and there's a fight over how much equity is owed to 500 by
one of the startups in this group, it can be resolved by a judge with access
to all the context after hearing the best arguments available to both sides.

EDIT: The reason why this is a good example is that 500 Startups provides more
than a straight cash-for-equity trade. They also provide mentoring through
their accelerator program, introductions to later-stage investors, etc. Those
considerations (as well as HOW late the payment is eventually made, whether
that can reasonably be considered hardship for the company, etc.) can all be
weighed by an impartial judge in resolving a disagreement.

~~~
nostrademons
This isn't a particularly good example, because on a blockchain, both the
currency received and the equity percentage of ownership of the company are
numbers that go onto the blockchain and can be cryptographically enforced. A
blockchain simply wouldn't let you write a contract that says "I give $X in
exchange for Y% equity in this entity" unless it could prove that you have
ownership of $X.

The real advantages of a human judicial system come when there's a judgment
call involved in the contract. For example, "I own X% of 500 startups and have
control over future investment decisions, unless it can be shown that I have
violated the laws of the United States, some of which happen to be about
sexual harassment." What constitutes sexual harassment? Damned if a blockchain
knows. It's hard enough for humans to come to agreement on that, let alone
computers.

~~~
modeless
> A blockchain simply wouldn't let you write a contract that says "I give $X
> in exchange for Y% equity in this entity" unless it could prove that you
> have ownership of $X.

A blockchain absolutely would let you write a contract that does that, and it
could be on purpose or by accident. If you want to be sure your contract
_doesn 't_ accidentally or maliciously do that, you have to audit it ahead of
time because once it's executed, you're screwed. There's no judge who can come
in after the fact and nullify some of your contract provisions based on fraud
or mistakes or conflict with existing laws or other totally reasonable
considerations that aren't explicitly coded into the contract ahead of time.

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tty7
Once they hit 500 startups, did you _actually_ expect them to continue to pay?

~~~
matte_black
I was actually in a 500 Startups batch over 2 years ago, and they did pay.

~~~
Xorlev
I think it was just a tongue-in-cheek joke about the name.

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blargh1
1) Huge screw up by Techcrunch for not catching this. Do they even produce
quality journalism anymore?

2) Why is 500 Startups interviewing for the next accelerator period when they
can't fund the previous one?

