
New Venture Capital Fund Gives Entrepreneurs a Cut of the Profit - ryanmickle
http://mobile.nytimes.com/blogs/dealbook/2014/07/10/new-venture-capital-fund-gives-entrepreneurs-a-cut-of-the-profit/?smid=tw-dealbook&seid=auto
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slapshot
Fun idea, but holy conflict of interest: the founders want to take an
investment from this fund in order to get a personal cut of the fund's
returns, but the other common holders (think early employees) want the fund
that provides the best value to the company as a whole. Maybe there's a way to
manage it, but otherwise this seems to put the founders on one side and early
employees on the other.

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johnrob
The obvious solution (which I'd recommend) is that the cut should go to the
funded company, not the founders. The majority of the cut would still go to
the founders, since they own a majority of the stock. But this gets everyone
(founders, employees, investors) on the same page.

Overall, this is a great idea. The point of a value added investor is to
increase the likelihood of positive outcomes. This is a great way to do that.

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webwright
I don't know. If they give a founder a sliver of a point in the fund, that's
motivating. If they give it to the company, then the employees are getting...
what? 0.1% to 2% of a tiny sliver of the fund? The more you spread this around
the less motivating it is... Might be a nice benefit, but their goal is to
change behavior (motivate potential founders to be interested in their fund
and motivate portfolio founders to help each other).

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ryanmickle
The other problem is that it's founders who invest time to support portfolio
companies, not shareholders/employees of the company, so the incentive seems
appropriate and aligned IMHO. I can personally speak to the fact that the best
support, in my experience, seems to come from founders currently operating
their own company, currently in the trenches, and they usually have the least
time to offer.

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anxman
As a founder myself, I would love to have exposure to the other startups in my
investors' portfolio and more importantly, I want other founders to have
exposure to my company!

Upside offers an attractive option to gain a small amount of exposure and to
recognize the help that founders provide other founders. I know a number of
other founders who have helped me get where I am, but unfortunately they don't
have any exposure to our stock. Typically, the logistical headaches and
liquidity needs would stop most people in their tracks but Upside simplifies
that process substantially.

Regarding the conflict of interest concerns, I don't agree at all. I
personally help the other founders in my network generously and most CEOs that
I know are very generous with their time as well. To have a formal recognition
of that would be awesome and if any of us are successful, it's nice to know
that we played a tiny piece in it.

Compared to typical VC arrangements, Upside offers something new that aligns
interests of everybody involved. It's an innovative approach to an old-style
business and delivers real value to entrepreneurs.

Most importantly though: Founders should always pick a VC based on the partner
with whom they'll be working. Kent is one of the best, smartest, hardest
working, and most importantly fair and honest. Not all VCs are alike and Kent
is a class act.

Full disclosure: Kent was on my board of directors and I endorse him so
strongly that I am LP in Upside VC.

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crapshoot101
That's really interesting, but to be fair, did you need that financial
exposure to help out? From what I saw on the VC side, the solution was usually
an advisory role or sometimes an explicit board one to recognize a
particularly valuable individual. Beyond that, I wonder if the incentives here
run into the "Israeli day care" problem - by putting a financial price on what
was previously help, more freely offered, you might have the adverse effect of
making it more transactional.

That being said, best of luck to Kent - experiments are a good thing, and the
marketing alone is a good start.

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zheshishei
This is kind of tangential to the submission, but I just read through the
"Israeli day-care" paper[1], and thought it was quite interesting. The
existence of the fine clearly shifted the equilibrium, but I wonder whether or
not the introduction of the fine partway through the start of the year
contributed anything to the increase of late parents. Redoing the experiment
with the addition of a third group of daycare centers, where the fine is
specifically laid out at the beginning of the year, might shed some insight
into that?

[1][http://rady.ucsd.edu.prx.us.teleport.to/faculty/directory/gn...](http://rady.ucsd.edu.prx.us.teleport.to/faculty/directory/gneezy/pub/docs/fine.pdf)

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7Figures2Commas
While the stated goal of this is "to build a really strong founder community",
this structure looks like a marketing ploy designed to boost dealflow.

I can't help but question, however, whether it will bring _good_ dealflow. As
an entrepreneur, the notion that I could profit from the fund's success even
if my own company fails is not at all attractive. Additionally, the fact that
this structure offers a formal incentive to focus less than 110% on my own
company would be a huge turn-off. The conflicts of interest abound.

Personally, I'd be wary of a founder who didn't recognize this and who wasn't
concerned about the effects, perceived and real, of having a personal stake in
the venture fund that had invested in his or her business. Incidentally, given
the lackluster returns of the vast majority of venture funds, I'd also
question said entrepreneur's savvy.

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kentgoldman
Dealflow comes from doing great work with and being supportive to founders.
Period. That's what I hope will drive introductions for Upside as well.

I'd also be wary of founder's who only wanted to work with us for an economic
stake in the fund. I want them to want to work with us because the partnership
as a whole, is the most supportive in all of venture.

~~~
7Figures2Commas
That's a fair response, but if I was looking to raise capital, this structure
would result in me avoiding your firm regardless of your track record and
reputation. The conflicts of interest that this structure creates, perceived
and real, would be deal-breakers.

Even if you made participation in this structure optional, having to address
it as part of a capital raise would add unnecessary complication to what
already tends to be a time-consuming and distracting process for
entrepreneurs.

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sharemywin
Without know actual number seems like its hard to rule it out right.

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crapshoot101
Its a neat idea, but I suspect its primarily value is in marketing and the
actual number is limited. That being said, the fund gets interesting if
there's a unquestioned fundmaker (a Dropbox / Pinterest / AirBnB / What's
App); do founders want to pick the firm because they hope to get a small share
of that upside?

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kentgoldman
There are much more cost effective ways to get marketing value. A material
portion of the fund's carry is being set aside. It's pretty well into the
double digit percentages. Spread across multiple founders it will have less
impact - founders will not be distracted from making their own businesses
successful.

Treating founders as partners is something in which I genuinely believe.
Investors ask founders to help guide other companies in the portfolio, they
ask for founders for introductions to new companies, they ask them to help
with diligence on prospective investments. So founders should have a stake in
the fund.

For everyone's sake, I do hope there is a Dropbox type outcome in the fund.
The idea was inspired in part by the way in which other classmates in
Dropobox's YC class dis well by investing a small amount into the company.

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arikrak
I always thought it would makes sense for Entrepreneurs to join a shared pool
to spread the risk around a bit. This way instead of 60-90% getting nothing
when their startups fail, they can all share in the top successes. This fund
is helping them do this, which seems like a good idea.

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jliptzin
I've had this idea too. I think this can be more than a VC perk though - maybe
a marketplace that fosters equity swaps between early stage startups.

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arikrak
Yes, I wondered about that too but I'm not sure about the legal issues
involved. Though once they allow regular people to invest in startups,
founders can sell some equity and use the money to invest in a pool of
startups.

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orasis
As a serial entrepreneur, I find this model very interesting. Nowadays I
prefer to go it alone without outside capital, but there are times I wish I
could pool my risk and upside with other vetted entrepreneurs.

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webmaven
Interesting. Do the returns to the founders get taxed at capital gains rates,
or as ordinary income?

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fleitz
Interesting take, it's in many way similar to the highly successful Japanese
Keiretsu strategy.

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sharemywin
Is this regionally focused?

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kentgoldman
No hard and fast geographic limitations but at the seed stage, I think it's
important for founders and investors to build a strong working relationship
and rapport. Because of that, the focus will be on California and mostly the
Bay Area.

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mvanhorn
Congrats, Kent!

