

A VC: Getting a piece of my action - ph0rque
http://www.avc.com/a_vc/2008/11/getting-a-piece.html

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tc
FTA: _The public markets have failed to solve this problem so it's going to
get solved in some other way._

The public 'markets' haven't failed to solve this problem so much as the
government regulations that surround being public, such as Sarbanes-Oxley,
have made it impractical for smaller (< $1B) companies to go or stay public in
the US. It's impossible for a company doing $100M in revenues to justify a $5M
fixed annual cost for SOX compliance, which doesn't even begin to take into
account the compliance costs of other general and industry-specific
regulations.

~~~
olefoo
I'm trying to imagine what good solutions to this problem would look like.
Under the current paradigm, you could have a large public company that served
as a holding company taking stakes in a large number of small ventures based
on some sort of vote or 'internal market of shareholders'.

Another model that could be brought forth with the current legal framework is
for the government to provide a set of validated reporting apis, and
accounting models that anyone would be free to use, and which so long as you
didn't deviate from them would let you comply easily and cheaply.

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strlen
Few things-

First of, there is a way: if you're confident that a start-up you like will
succeed, you can invest in it by joining at a sub-market salary and taking a
high equity stake. This way you're investing ( $market_rate - $negotiated_rate
) * 4.

Yet this approach has issues: you can't join multiple start-ups at the same
time and of course you're taking a long term and substantial risk. Yet it also
provides a filter of "investors": if you can get hired in start-up run by
competent people, presumably you're able to judge the likelyhood of a start-
up's success.

If we take substantial public investments in start-ups, we'd have people with
no domain knowledge and in no financial shape making investments in start-ups
that generate the most (or the most targeted) PR. This is very much what
happened during the housing bubble (people with no knowledge of real estate
buying "investment properties" using borrowed money at prices they couldn't
afford to pay).

Bottom line is that investment in a start-up is risky. There are tons of faux-
entrepreneurs who'd abuse this method as a chance to flip a quick buck (take
an initial investment, float more and more PR about the company and sell their
stock for a profit to investors who took are hoping for a quick profit).

There is another issue everyone is talking about: public markets are
effectively closed for <$500mm companies. M&A is slowing, especially at prices
between $100mm and $1bn -- the types of companies that are too big for Flickr-
style exit and too small for an IPO.

Running a profitable mid-size company may be great for the founders (take
bonuses/receive dividends after hiring a professional to run the company while
you either step-away or step-down to a CTO/VP of Engineering), but what about
the employees? The employees in this situation are not likely to see anything
for the equity, other than through secondary private equity markets (which are
not common in cases other than Facebook and are limited).

This leave employees screwed: either wait for the "next Google", work at a
public company (where the equity may be worth something, but the quantity of
it isn't substantial and you have little ability to affect the worth of your
equity), be employee 1-5/founder of a small "built-to-flip" company (limits
you to, essentially, consumer web-start ups) or work for a salary/bonuses.

Here's an idea I'd suggest: allow limited sales of early equity by employees
to non-accredited investors who believe that the company will achieve
phenomenal growth later on making their equity worth something.

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vaksel
well SOX only deals with U.S. public companies. Whats stopping the startups
from basing their parent company in some other country and selling the "stock"
on the open market? Or if possible, just selling the "stock" on a foreign
exchange, does the sox apply then?

i.e. PG LTD, the owner of YC Inc and HN Inc would list 10% of his company for
sale on lets call it CEX(Canadian Equity Exchange). He would want to raise
$100,000 in exchange for that equity, so he'd list 100,000 shares at $1/share.
Then he would put an "invest in us" link on his main site. And U.S. consumers,
would be able to go to CEX.com, review the terms, and then buy some equity.

~~~
tptacek
Companies list on the TSX and the AIM for this reason, but you don't escape
all the US regulations; google for "Regulation S". Among other things, you
can't market stock on a foreign exchange to US buyers.

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jmtulloss
So let's say a certified investing company emerges that will take the small
investments of people like us and combine them into large rounds of
investments. They do this in rounds saying that after 6 months or so, they'll
sit down with a company that has had interest shown and work out deals that
can be voted on by the people interested in investing.

How would this be fundamentally different from a public stock exchange, except
that investments would be much slower than the instantaneous trading we can do
now?

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bprater
Often, I've thought that it would be really fun to invest a very small amount
of money into a start-up, say $25 to $50.

Even though I wouldn't have any delusions about a real ROI, it would be fun to
be part of the "insider's circle", such as a founder's forum or special deals
for micro-shareholders.

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Dilpil
Ah the US regulatory system. The problem was never too much regulation or too
little regulation, but rather, completely random regulation written hastily by
people who have minimal domain knowledge, and complete unwillingness to change
regulations after they have been made.

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jyothi
Reposting from a previous thread: <http://news.ycombinator.com/item?id=363509>

Amazing. I have always wondered why micro-financed model isn't the solution
for all the financial worries of startups and the VC play.

This is the "change" that would make a lot of things easier, ensure startups
keep up their momentum and not waste in VC fund raising process. More you have
angels who are truly angels backing founders. (I understand this can hurt lest
rational thinking is lost)

Micro financing at angel level (be it 5 friends/colleagues or more) is great.
Someone needs to institutionalize this or have some learnings on how to deal
with accountability, resolving dispute and the like.

For people in India, Israel, Ukraine and the rest of east Europe the startup
costs are quite low. $100K is like close to upper end angel funding.

I know of at least 6-7 ex-Trilogy startups in India - brilliant guys, doing it
right, when it comes to funds Indian VCs are most risk averse they wouldn't
invest in anything other than jobs, matrimony, real estate and travel. I have
always wondered why would it really bother for couple of ex-Trilogy in US to
invest. For 2 guys to put something like $50K it would be hardly anything.

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skmurphy
There are very well founded reasons for the qualified investor rules. Anytime
you read someone wanting to relax them make sure they aren't trying to pick
your pocket.

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rokhayakebe
If you have a spare money and you want to invest in a company check HN
everyday for "Review My Startup". Out of the few dozens that launch here every
year, I am sure you can find a good investment (with enough due diligence).

~~~
kqr2
Maybe there should be a kiva like website where people can specifically make
loans and/or buy shares in startup companies.

~~~
johnrob
I wish that were possible, it would be a great thing. However, what you are
describing is essentially a public offering, and the listed companies would be
subject to all of the associated regulation (SOX included).

The loans would be legal however. This kind of sucks - I can loan 5K to a
startup, but I can't become a shareholder. There has got to be a way to 'hack'
around this.

~~~
ph0rque
How about a variable loan: one that would return the profits and/or sale of
the startup as interest?

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crabapple
oh i hate these pricks and their "oh i know you would give your nuts to be in
the same room as me, here are some pointers" posts

fuck you douche, i neither want or need your money

who will want money from you is the dipshits who threw a substantial amount of
cash into your sorry funds in the first place...right now they are probably
wondering if your zero-return, high-risk investment vehicle is worth the
paperwork. something tells me you _will_ be returning their calls

