
First Round Capital launches Entrepreneur Exchange Fund - jkopelman
http://redeye.firstround.com/2010/01/sharing-and-exchanging.html
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jessep
I'm happy to see this happening. I pitched this same idea to a few friends
last year and have wondered for a while why entrepreneurs don't commonly
exchange equity simply to reduce the risk of entrepreneurship, and why there
aren't funds like this.

What would be a good way to catalyze more of this type of activity? Does
anyone have insight into the legal requirements of trading equity for equity?

If entrepreneur equity exchanges became common, I believe it would have hugely
positive impact on entrepreneurs and might even end up offering a better way
to finance ventures.

Let's say you had a ton of autonomous entrepreneur-to-entrepreneur equity
exchange funds (or a market, who knows). Basically, funds where entrepreneurs
recruit other entrepreneurs to participate in trading equity. Probably some
would develop reputations as being where all the best entrepreneurs go and
they'd become exclusive, like the best VCs currently, and those would be hard
to get into. But there'd be no real limit on how many companies could join
even the best, only how many promising ventures there are. (At least that's my
guess, because there probably wouldn't be the same kind of overhead for
accepting a new member as VCs face when making a new investment).

Once you have a group of quality entrepeneurs who each own a bit of the pooled
equity, individual entrepreneurs could simply sell some of their shares in the
fund to raise money for their own ventures. Rather than selling shares in my
company, I'd be selling shares in a bunch of companies just like my company.
An entrepreneur could probably find a much better deal (just like VCs
currently do) because the risk would be so much lower. The fund could also
sell shares directly to investors and disburse it to members, but that might
get a bit tricky.

It seems to me like the best kind of organization to run this kind of fund
would be a non-profit trade organization or some such. Or it could even just
be a co-op where all the entrepreneurs are members.

Obviously these funds would be cheaper for LPs to invest in than going through
VCs, and entrepreneurs would get better terms if they were able to access a
new class of investor.

It also seems like a good idea for VCs and angels to set these up, though,
because it aligns the interests of the participating entrepreneurs with that
of the VC. As a VC, I want you to go for the big wins. As a member of the
pool, I want everyone else to go for the big win, and by reducing my risk, it
makes me more comfortable going big.

I kind of thought this was just another of my somewhat ridiculous ideas until
seeing this article. I'm happy to see it validated, at least in some small
way.

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shafqat
I think the challenge might be in setting the valuation of these funds. With
so many startup's, there is bound to be information asymetry. I wouldn't
really wAnt to trade my equity based on a 'feel' or PR of the member startups.
But I agrees with your general thesis- it's a great idea.

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mmastrac
This is a neat idea. Your expected value of your project is probably the same
either way, but it changes the distribution such that you are more likely to
get something (but with a slightly smaller "big payout").

It certainly makes gives First Round a leg up on the other VCs. Kudos to them
for doing this.

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sachinag
I always thought you'd be crazy to not pick First Round over any other VC
fund, but this actually seals it economically (if you believe there's value in
the FRC's portfolio).

Those guys are just so damn smart.

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bravura
Y combinator should offer a similar option.

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ryanwaggoner
Don't artists often do things like this?

