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FounderPool: A community for founders to share risk and diversify their equity (founderpools.com)
164 points by manojdv 4 months ago | hide | past | favorite | 202 comments



As you get older without an exit, you start to freak out a bit about your retirement. At least that was true for me.

I'm 1000x better as an entrepreneur at age 42 than I was at age 27. But I'm also 100x more worried about some basic financial things like whether I will be able to retire, maintaining a mortgage, keep up financially with my spouse's career and her changing life expectations.

And what helped stabilize me was some advisor shares that hit or I expect to hit, Beyond Meat (realized) and Calm (expected).

So I would 100% trade my own equity for equity in another startup just because of the size of returns. A 0.1% equity stake in a startup that ends up hitting is life changing.

And if you're about the entrepreneur life, then a hit on an advisor stake can set you up to never have any pressure to leave this life. One of the common patterns in my own circle of founder friends is how often they need to take a job in between companies. I've, so far, avoided that, and just moved on to swinging at the next thing.


I LOVE hearing stories like yours, and they inspire us everytime.

You hit the nail on the head. The sad fact is that as an entrepreneur grows and matures, his risk tolerance goes down.

Founderpool's mission is to maintain the entrepreneurial risk tolerance as you grow and acquire skills and connections, by reducing the opportunity cost over time. We believe it can have a positive systemic impact on the startup ecosystem.


> A 0.1% equity stake in a startup that ends up hitting is life changing.

For the vast majority of startups, "hitting" is $100-200M acquihire. 0.1% of that is only 200K. If you can get in on something like Beyond Meat, sure, but that's the kind of a company which won't be a part of something like this.

Speaking from the other end of this spectrum, BTW, my risk tolerance is higher now than it's ever been. I don't have to work at all, and my mortgage is paid off. But it's much more difficult now to convince me that some harebrained startup scheme will work. :-)


Before Series B, I don't think people really know what's going to hit. And even then it's iffy. Beyond Meat was not a foregone conclusion when I got shares. And the way I got shares was actually through a pool that produced one acquihire, two zombies and this one IPO. We all shared an interest in each other (although different structure than this company).

So, to go back in time, if instead of having half the company or whatever, I could have 47% and trade that 3% away for 0.1% stakes in 30 other companies (also knowing I had 30 people with an equity interest in my success), I would do that in a heart beat as long as those companies had been filtered at all.


Much of our research has been with founders at YC & 500 (cohorts who represent the Beyond Meats of the world). The majority we spoke to, including the breakout unicorns, stated they would have have participated in equity pooling with their batchmates during the batch. We also learned the darlings of their batch were often not the breakout successes, and later upstaged by others in the batch.


I actually had exactly this idea with my YC knock-off, HMC INQ.

The first cohort (5 cos in 2017) I offered them to all pool some of their equity. But first I polled how much each would be willing to give. The results were 0%, 0%, 2%, 5%, and 20%.

So, I abandoned it. Ironically the one that offered 20% is doing the best so far.


Maybe, just may be a realistic assessment of the chances of success is an under appreciated entrepreneurial trait.

Maybe this trait can co-exist independently with the ability to forge ahead DESPITE knowing how low the odds are, because you want to see something happen.

Maybe it is that silicon valley groks this as "an irrational belief" when in fact, it is the compulsion to forge ahead despite knowing the odds.


Amazing. I heard similar stories from other 2x founders.


> "hitting" is $100-200M acquihire. 0.1% of that is only 200K.

Note that there are liquidation preferences so it's usually not as simple as that. If 100M had been invested at 1x liquidation preference, investors hold 33% and the startup is sold for 150M, then they'd only get 50M from their shares so they'll likely execute their right to get their investment back (at the expense of their shares, let's assume the deal includes this). So the 100M gets distributed among the investors and the 50M gets distributed among the remaining shareholders who hold the other 66%. For a 0.1% shareholder from that group this would mean a 75k payout instead of 150k that your calculation would give.


Yes, I'm aware of this little nuance - I've been through startup equity meat grinder myself. It's too complicated to quickly explain to a layperson though, and deliberately so. Many people are working for startups not knowing that they'll get bupkis if those startups succeed. I'd venture to say easily the majority. Many founders on HN try to pretend they won't negotiate their often abusive equity offer terms with their best employees (a lie - they will) because that requires "board approval". Most of them are also not huge fans of prospective employees hiring a lawyer to review the equity offer, to at least understand how the employee is being screwed.


You will be surprised at the spectrum of companies that are interested in doing pooling, as were we.


LoL this is me, without the hit. Two decades in and no liquidity. But soooo much scar tissue.


Welcome to the reality of survivorship bias... At least we are talking REAL life decisions, the interesting part is that its probably the majority of people, still no liquidity after years of work. On a bright side, its going to be fine but next time we will all think twice regarding the trade-offs.


On the other hand, I've had a really fun couple of decades and I have more freedom than anyone I know who isn't just rich. Yes, if you've had your exit, you obviously can just coast through life. But where's the fun in that?


> keep up financially with my spouse's career and her changing life expectations

This has been a big issue for multiple people in my social group. It's well known at this point that a relationship where a woman earns more is less stable - https://www.nytimes.com/2013/06/02/business/breadwinner-wive...

Whether this is due to sexist expectations, increased likelihood of hypergamous relationships in women, etc., is not very relevant; this is not good for men with high-variance occupations.


This sounds like sort of an academic take on the pattern of the woman earning more in a hetero couple. My actual experience is just about feelings of equity. There's a person who I love and respect and she's done a lot to advance her own career over the 15 years we've been together. And so I want to be able to give her an equivalent amount to what she gives me.


My two cents: I think this is a fantastic idea and I've wanted to see something like this for years. That said, this is one of those things where unfortunately the reputation of the persons behind FounderPool matter a lot to me, and other founders. Yet there's no info on the site about who's running this. Founders are making a massive gamble putting their companies into this novel legal arrangement and I'd want to see someone(s) reputable and well respected by the broader community at the helm.

I'd also make it crystal clear how FounderPool plans to make money. I see the website copyrighted to Heterodox Capital LLC. What's the distinction between these two entities? Will either of these orgs be taking a management fee from the equity put into the pool? If so, how much? I see nothing on the website about compensation which makes me uneasy about pursuing this further.

All that said, the core idea, de-risking founders is a massive opportunity and someone's eventually going to get this right and make entrepreneurship a viable path for thousands of talented founders who wouldn't otherwise start a company.


All valid questions. We are adding more information about the company, the people and the business model of Founderpool.

Founderpool does take a share of the pool of equity as platform fee, it will be transparent and will be publicly available.

Thank you for the feedback.


Agreed, I'd also like to see more transparency - nevertheless, this is exciting. Good luck!


I've wanted to see something like this for underlings, but when people actually see what the EV is of working at a startup, they might not be so happy. Part of the draw of startups is the gamble, and this takes away from that.


Can the people involved with the company note their affiliation? It seems like there are several folks chiming in, and some comments make the affiliation clear (eg, by speaking in the first-person about the company). But in other comments it’s much less clear whether someone works for the company or just got info off the website.

I’m also a little confused that this isn’t a “Show HN”, but they talk about YC with authority. Are they in YC? Some other affiliation?


Founderpool are not affiliated with YC in any way. I am not sure who suggested that. I am part of the founderpool team.


Thanks for noting your affiliation. The YC question came up because of the OP's comment "This is one of the most founder requested features in YC", which makes it sound like the company is well-connected to the accelerator.

How did you decide to do this as a regular post instead of a "Show HN"? Did you already do one, or make a strategic decision? Who else among the commenters is affiliated with the company?


We decided it is of interest to the founders in the audience and not necessarily as a show HN (which is in our mind a tool specific people like to play with)

Only three people are with Founderpool. me, manoj and geoburke


The only Founderpool team members commenting are myself, csentropy, and manojdv


This sounds similar to Pando [1], which is doing income pooling for professional baseball players [2]:

"Nobody has to pay a cent until they've made it to the majors and they've made $1.6 million. Then that guy has to kick 10% of his salary back to his pool mates."

[1] https://www.pandopooling.com/baseball [2] https://www.npr.org/2019/10/25/773532516/some-baseball-playe...


It is similar. The market segment and pool construction ton mechanism as well as the legal infrastructure is different.

We believe this scales beyond startup founders to education, athletics, and any domain where the outcome distributions follow some kind of power laws


Poker players to much the same thing and trade percent stakes before tournaments. And once again, modern portfolio theory triumphs!


I'm not a poker player, but today a friend analogized SIDE POTS; opt-in diversification with 3 more opportunities per hand. De-risks every player participating in the side pot.


Good analogy.


It’s a reasonable idea, but would make a lot more sense for employees. While outside forces impact companies, founders and executives are responsible for outcomes.

Employees have little individual power to impact strategy and are more likely the victims of poor management decisions.


Founders and executives "play a role" in outcomes. The future of any company pre liquidation is uncertain.

Agree with employee pools. That is the next step version for founderpool and it is literally the most requested!


I respectfully disagree. Founders blame the macro, but that blame is very often misplaced.

Even at massive scale, similar business diverge in profitability due to strategy decisions during all market conditions, including pandemics and other blackswan events


Misdirected blame to preserve ego does not excuse the fact that the founders are the ones with the biggest impact on their own success. Access to a network incentivized to provide resources, fundraising, introductions, hiring, etc, can only bolster success probability.


Thats true. We would eventually want to grow this to support employees (think about building your own option portfolio) and student ISAs etc. We are right now emphasizing the community aspect rather than just the equity swaps because for founders, the value is in the network.


Would not that hit the securities regulations on accredited investors where most of the employees won't qualify?


yes, accreditation rules apply and typically founders qualify by virtue of stock paper value. For employees, later stage companies tend to workout because of stock values.


The very purpose of the community aspect for founders is to have direct impact on the outcomes of the participating companies.


How do you overcome the adverse selection problem? ie. only founders who know their startups are duds want to diversify their holdings?


1) We screen companies based on their quality, ex: a round raised within the last 3-6 months. 2) Founders get to interact with participating companies and rank them based on their insight. Only companies that are highly ranked get into a pool. A pool is also dynamic and founders in the pool can invite new startups based on their interactions.

Overall, this is based on the concept that founders are often good judges of other founders/startups. And pool is more than just for risk diversification, they get a community of founders ready to help your startup because they are vested in it.


> a round raised within the last 3-6 months

If a company has raised capital and done so recently, how would you compare this to the founder selling an equivalent amount of their shares in into that round (secondary)?

IOW, if a founder has liquidity and a priced round, in which situations is this better or worse?


Priced round is for indexing the value of stock being assigned to the pool.

If the founder has liquidity, before joining the pool, he would be joining the pool right?

Or did I misunderstand?


My question was a little different. FounderPool provides a lot of diversification (relative to shares in 1 company) and potentially, earlier liquidity. But if I’m able to sell shares into a funding round, don’t I get that anyway?

I’d get cash rather than shares in a fund (and later, cash), but for someone interested in doing this, getting cash seems like the goal and is still investable elsewhere.

So, why not take the shares I’d contribute to FounderPool and sell them into my B round? If I want outsized exposure to a small set of equities other than my own, I could invest that cash in 10 smaller public equities and still get high-variance outcomes - maybe I pick a future Shopify, probably I don’t - but for someone after liquidity anyway, that part doesn’t seem like a feature.


If you can sell shares on the open market, that's certainly a win, but it's likely to occur until series C and many boards may block secondary market sales as it competes with the company's own ability to raise capital.


I would add a distinction that an additional screening step should be based not only on whether a round was raised but also who it was raised from.

Given that venture returns are distributed by Power Law and not normally distributed it doesn't make sense to treat all sources of funding as equal


Great idea and thanks for suggestion.


Does a startup's equity in the pool vest over time? I'd be concerned about a startup joining the pool, and then immediately dissolving their company.


Would vesting help? Instead of dissolving you just... wait. Pretend to build.


Good way to get oneself kicked out of the pool before fully vesting.


How do you legally kick them out?


Because of the condition for participation in the pool is that your stock should continue to vest, for the membership shares in the pool to continue to vest.


Wait so your startup has to continue to grow in order for you to be able to claim profits from the pool? Doesn't that defeat the purpose?


As the first pool forms we'll collect the members' desired requirements for vesting rules, and write those into the legal docs.


Yes, big concern here, so vesting happens over time.


This is a good point -- will the funding rounds also need to be qualified by only certain VCs being trusted to make good valuations? What "bar" of trustworthiness of VC will be honored?


While we go through a vetting process for all applicants, pools are ultimately formed through a peer-selection process based on ranking. The presence of top tier VC backers is one of several major factors a founder will rank with.


Great point. We think founders/builders make the best investors. They can sniff out failure. Selection is done through peer ranking by the applicants themselves. Top make it in.


So the founders need to research every potential company that could join their pool to figure out how to rank them? Seems like that takes a lot of time to do right.


we make it really easy to get the nuggets of information you need at a glance. You can only rank your top 10.


A few months' back, someone on Twitter criticized a similar platform, calling it an outright scam.

I said that was totally unfair, and that it's one thing to call it a bad deal (which really depends on the percentage given up and the quality of the companies in the pool), it's another thing to call it a scam.

That prompted the "pro-VC crowd" to start calling me stupid and naive - "startups need cash, not equity", "if you don't back yourself, I won't back you", etc etc.

If there's one thing I learned, it's that VCs have an almost irrational hatred for this model. Unsurprising, given the pool makes founders less reliant on them. No matter what, you retain your pool share, so your insurance policy is something other than "go back to VC cap in hand".

I also wonder if it may indirectly create a unionizing effect - if a non-negligible number of founders can start banding together, they can push back on onerous terms (liquidation preferences etc).


> Unsurprising, given the pool makes founders less reliant on them

How? The startup still need VCs for funding.

If I were a VC, one gripe would be that it might hurt a founder's motivation. At 1% of a founder's equity, it's not so much that they're not working to make the next big thing, but in the back of their mind, they know they might get $1M for it. My other concern is that this almost freerides on the VC model. It's a way for a founder to get the benefits of being an LP, but without the fee structure.


Entrepreneurs free riding on the VC model is the opposite of what really happens: VCs free ride on founder risk.

We see VCs themselves encourage founders to take money off the table with a secondary sale in rounds as early as series A. They also look for founders with previous exits, and usually pay a premium for their startups or invest with a much lower threshold.

This idea that "founders that are not starving are going to be less motivated to succeed" is one of several silicon valley mythologies that don't stand up to scrutiny empirically or otherwise.

Most people don't start companies to sit back and chill as soon as they are financially secure. If they did, and you had invested in them and now have to force them to stay hungry, you should reconsider being a VC.


> How? The startup still need VCs for funding.

For precisely the reason you set out in your second paragraph.

Assuming your startup is in the VC bucket to begin with, you have two choices when you start floundering. Either ask for more money, or shut it down.

The latter practically guarantees you leave with nothing, so naturally, you prefer the former. This means VCs are almost always in a position of leverage to extract a larger share/more onerous terms/etc.

With a stake in a founder pool, "walking away" becomes a much more attractive option. You already have some baseline value that makes you far less reliant on whatever opportunistic VC you're in bed with.


Here, walking away doesn't leave the entrepreneur wealthy, but we hope, covers some opportunity cost. A safety net. This can provide a source of strength in VC negotiations as well as a foundation for the founder to make calm, rational decisions rooted in long term success.


Interesting take. Makes sense if the timeframe for startup success (profitable exit) was as truncated as startup death. Startups either die, show signs of dying, or get acqui-hired much more quickly than the startups that guarantee's (practically speaking) successful exit.


VCs also want you to join their club after the exit. I would wager that someone to joins this cabal is less likely to become a VC, and if they do, they will have a much different model.


Have you actually modeled out the potential payouts?

How did you choose the 1% number (percent of their equity that each founder contributes) as well as the pool size of < 25?

My quick back-of-the-envelope calculation:

Expected payout to each member would be:

  1% * avg_valuation_of_companies_in_pool * avg_percent_ownership_at_exit
Assuming an average valuation (in the literal sense, total exit value of all co's in the pool / number of co's) of $100M [2] and assuming that the founders own roughly 15% at exit, the expected payout would be only $150K excluding taxes, which seems quite low.

[1] Modeling should be somewhat doable leveraging public data. For example, you can use YC company data in https://ycombinator.com/topcompanies https://ycombinator.com/companies and simulate what the payouts would be if you were to choose 25 companies from a given batch at random.

[2] $100M is likely in the right ballpark. According to https://www.ycombinator.com/ :

> Since 2005, we've funded over 2,000 startups.

> Our companies have a combined valuation of over $100B.

the average valuation of YC co's would be ~$50M; if you exclude half of those that are in recent batches (haven't had time to realize their value and don't really contribute towards the $100B total) it might be closer to $100M.

Under a FounderPool model, an example of this would be a pool of 20 co's in which 2 companies end up exiting for $1B each and the rest essentially $0.


1) Pools sizes are not fixed number and more over, founders can invite other companies to existing pool on a rolling basis 2) We have done modeling, obviously selection is the top determinant of payouts (20% avg. success rate vs 40% success rate) but bigger pool sizes ensure potential for a breakout company. Happy to share if interested, contact us at contact at founderpools.com


> bigger pool sizes ensure potential for a breakout company

Yes, but the payout gets distributed among a larger number of companies. Increasing the pool size lowers the variance, but the expected value remains the same. Lower variance might be desirable for some people (more predictability -- at the limit it's as if you're investing 1% of your equity into an "ETF" of early-stage startups), whereas some people might prefer higher variance (higher potential upside if they join a pool with the next Stripe).

My concern is that if founders contribute 1% of their equity (not 1% of the entire company at exit), the expected value itself is quite small -- on the order of $150K under reasonably optimistic assumptions -- for something like FounderPool to make sense.

On the flipside, increasing the 1% by an order of magnitude might make more sense from a utility maximization point of view, but even less sense from an emotional standpoint.


Why would ownership at exit matter? If the founder only has 15% ownership then he will still have to give up 1% not 0.15% of total equity. This means the founder will be left with 14% equity.


The FounderPool website specifically mentions:

> You contribute 1% of your equity into your pool.

My understanding is that if a founder owns 30% (say) of the company when they join the pool, they would contribute towards the pool a number of shares corresponding to 1% of that 30%, i.e. 0.3% of the company. Which will presumably get further diluted by the time the company exits.

Having founders contribute X% of their equity at the time they join the pool is more reasonable from a practical execution standpoint than having founders contribute X% of the company the time of exit.


Agree. Founders contribute a percentage of the equity they would fully own, if fully vested to the pool, not a fixed percentage of the equity of the company.


Wonderful idea. These exchanges are very common in other markets. In my experience, a proclivity for equity sharing tends to have an adverse selection problem with early stage founders. The best founders are irrational, and this seems like a highly rational idea :)

But I’d imagine investors and employees would be very interested. Also worth noting tax treatment around this issue is evolving:

> In particular, a senior campaign official said a Biden administration would take aim at so-called like-kind exchanges, which allow investors to defer paying taxes on the sale of real estate if the capital gains are reinvested in another property.

https://www.bloomberg.com/news/articles/2020-07-21/biden-pro...


That is a great point. We spent a lot of time thinking about the adverse selection issue.We narrowed in on Peer selection with stable matching, which seems to mitigate this issue. We are learning..


Removing like-kind exchange wouldn't just affect this. The whole M&A space would collapse.


Thank you.

One more risk founders and entrepreneurs need to brace for : Regime uncertainty. Political uncertainty added to market risk, macro, pandemics, on and on...


Wouldn't you want to pool with companies that AREN'T in the same market area? I would imagine you would want to try and diversify membership so that returns aren't correlated.

Also if people are in the same group are in the same vertical, isn't there a risk of competition?

Still think it's a good idea though.


Yes and no. Some founders want to diversify in other verticals, but a majority of founders we work with prefer their comfort zone, because they can evaluate startups better. Right now, we are not constraining in anyway and it might evolve to support thematic or diverse pools.


https://en.wikipedia.org/wiki/Tontine

I really like this idea, but it reminded me of the tontine episode of Archer.


Cool reference. Thank you!


Thank you I wouldn't otherwise have heard of this


I have questions buzzing through my head.

How does this work?

If it's this good, why aren't VC's already doing this amongst portfolio founders?

How do you catch companies founded at the same time with close valuations to do "shared pools" equitably given all parameters?


1. Pool construction happens by peer selection. All participating founders submit rank order lists and we construct pools using Gale-Shapley algorithm (a version) 2. I wondered ht3 same. A few like FF have thought about it, but they have a financial conflict between preferred and common (LP obligations) the makes it complicated to do. With founderpoool, they can 3. YC and like. Eventually, we hope this becomes the standard model for all founders when they start


This is one of the most founder requested features in YC and also Sam Altmans new fund, Apollo is doing it.


It’s been done before: http://ebexchange.com/


This is secondary market liquidity, yes? If so, there's unfortunately no demand till series C, and the board needs to allow secondary sales, which competes with the company's own ability to raise capital. We're seeing VCs at later rounds include cash payouts to founders to dissuade secondary market activity.

Also it's not either/or. Participating in a pool does not block the founder from liquidating shares on the open market.



I will never invest in a startup where the founder(s) don't believe in their companies. Moving forward all terms I negotiate will explicitly state that this (e.g. things like FounderPool) will not be a possible scenario.


Thats a very nice sentiment. It is nice to hear from investors like you who have a portoilfio for diversifying your own risk, but deny that explicitly for founders, who also have no management fee as a fallback.

Have you heard of founders getting money for secondary shares in series A (airbnb, FB, Clubhouse etc)? Or second time founders (who are financially secure form a prior exit) getting a premium in valuations?


Thats like saying you'd never drive with someone who uses a seatbelt because wearing one means they don't "believe" in their ability to drive safely.


Interestingly, pedestrian injuries went up significantly after seatbelt laws, for the reason you note/deride.


That doesn't sound right... seatbelt laws forced people who otherwise would have felt confident enough to drive without it to wear one. Low confidence drivers always had the option to wear one at any time. From only study I could find on the subject [1]:

"We distinguish, following the literature, between fatalities among car occupants, who may be directly affected by using seat belts, and fatalities among nonoccupants (pedestrians, bicyclists, and motorcyclists), who do not use seat belts and can thus be affected by seat belt use only indirectly... Our findings indicate that seat belt use significantly reduces fatalities among car occupants, but does not appear to have any statistically significant effect on fatalities among non-occupants. Thus, we do not find significant evidence for compensating behavior."

Maybe the invention of seat belts could have that effect, but that coincided with so many other changes to automobile technology / urban development that any observed effects are correlated at best.

[1] https://web.stanford.edu/~leinav/pubs/RESTAT2003.pdf


A more recent study seems to indicate otherwise. I have no idea which study is better designed.

https://ideas.repec.org/a/eee/trapol/v44y2015icp58-64.html


> Interestingly, pedestrian injuries went up significantly after seatbelt laws, for the reason you note/deride.

Source?


Not sure what book I read it in, but here’s a cite to a study that concluded this was the case: https://ideas.repec.org/a/eee/trapol/v44y2015icp58-64.html


Thanks - have bookmarked.


Doesn't that reasoning lead to saying that founders shouldn't get a salary from investors either (or only make minimum wage), since if they really believed in their idea they would be happy with equity and not money? After all, a salary means founders would be trading future risky returns for immediate low risk cash.


Founders really shouldn’t get a salary, or if they do, only the minimum to live.

Founders getting any more than just what they need to live incentivises people to raise money for personal gain rather than raising money to build a company.

It also really blurs the line between founders and employees. How can a founder justify taking a salary at the same or even higher level than an employee while also having a huge share? We didn’t get people moaning about how employees are taking risks until SV founders stopped holding up thier end of the bargain with regard to risk taking.


Founders getting only the bare minimum to survive seems like a good way to exclude certain classes of people -- those without any assets to fall back on, those with families, to name a couple -- from becoming successful founders.


"only the bare minimum to survive" as founder doesn't need to be interpreted as "only just above the poverty line" or "minimum wage".

There's a good argument to say it includes enough money for things like: comfortable bay area rent, ability to replace essential equipment (like lost/stolen/damaged dev-grade laptops) immediately, enough discretionary income to order in Ubereats dinner instead of stopping work to cook whenever in the zone.

The "bare minimum" for a founder to succeed probably rightfully means "enough money showing up every month that they can realistically not ever have to worry about any short/medium term bills/expenses/timesaving-expenditure". You shouldn't be saving for a house deposit or leasing a Lambo on a founders salary, but you also need to not be wondering where tomorrows dinner is coming from or how you're going to cover next month's rent.

"Ramen profitable" should be a choice to eat ramen because it's quick and you can get back to hacking in 4 minutes, not because you've spent the afternoon working out your food budget for the next 3 weeks comes out to $1.27 per meal if you're going to have enough money to not become homeless at the end of the month.


Exactly correct


There are obviously two schools of thought here, but IMO a founder who is at least financially comfortable will make better long term decisions and take actions influenced less by personal stress.


I think there's two important timeframes to consider here.

You need to be "financially comfortable" for the 1/3/12 month foreseeable future to be able to fully focus on your startup.

I'm a lot less convinced that being 10+ year financially comfortable is necessarily a desirable trait for a founder. Knowledge that their future financial freedom is 100% dependant on the success of their startup is possibly a stronger driver of "better long term decisions" than someone in a position to think "it doesn't matter too much - even if this fails I have a contingency plan"...

(And I say that as someone who was once part of a team that rejected an acquisition offer that would've meant a half million payout to me, because we believed at the time we were going to be worth at least 10 times that within a year. And we were wrong. But I still stand by that decision at the time and would make it again in the same circumstances...)


I mean it's not really about "should" - if I'm a founder, I'll go with the best offer from an investor. If one wants to offer me a larger salary, that will factor into my decision.


Founders that do that don't need and shouldn't take venture capital money, so the opinions of investors scarcely matter in that case.


So you would never invest in a founder who does the rational thing? Believing in your own company doesn't preclude one from believing in other companies as well.

Say the founder estimates their startup has an 80% chance of succeeding; they pool 5% of their equity given the non-linearity of the utility of money (the additional 5% upside is negligible in a large exit). You would immediately dismiss that founder entirely because of this choice?


Funny how VCs can diversify risks, but founders can't. Perhaps you can concentrate your bets a bet more and believe in them harder?


This seems like a needlessly hard-line stance to me. It's not reasonable to think that "belief in one's company" is the only thing that will decide the success or failure of a startup, and wanting to hedge against the scenario where you pour your heart and soul into something for years, only to see it not pay off in the end, is very understandable.


Are you also against founders who diversify financial risk through angel investing?


If I truly believed in my company I wouldn't take investor money because that would imply that the investor is more important than the company.


Did you follow-on on all of your investments when they got hit by coronavirus?


> Apply to a pool in your startup category, within 3 months of the valuation event.

Most "valuation events" for startups are seed or series X fundraisers, no? So how could founders who bootstrap participate in this, if at all?


VCs and angels act as a signal as well as what sets valuation. The model works best in standard tech startup lifecycle. But as the model catches on, there could be a future where non-investment but revenue-generating businesses form a pool, as well as a lifestyle business pool, or a pre-revenue, pre-product pool.


We are using this as a screening for adverse selection, but founders who are bootstrapped can also apply if they have proven traction (we have a few stellar startups who were highly ranked but never raised money)


How about 409A valuations for those who've bootstrapped?

(You probably know what it is, but for non-founders or others who haven't been through it - https://carta.com/blog/what-is-a-409a-valuation/)


Aren't 409A valuations significantly lower than VC valuations for the same company? So wouldn't bootstrapped companies be at a disadvantage by having to use a lower 409A while VC companies get to use the higher VC valuation?

edit: I see, bootstrapped is their own pool so the two valuations never get compered against each other.


Does mean there's potentially more unforeseen upside from an acquisition exit though. I wonder if that might make the bootstrapped pool a more attractive pool to be a part of.


It is the only way to go for bootstrapped companies. There is a pool for bootstrapped companies


How is this structured legally and what are the tax implications? Have you spoken with a tax attorney about it?


It is a complex structure under the hood. There is a master LLC, holding c corp and an investment advisor.

Tax implications for the founders are similar to their founder stock obligations, when liquidation happens


Is contributing to the fund a taxable contribution? I would assume so since it's a diversifying event.


Contribution is done through a note. Not taxable until the transfer of shares upon some liquidity/exit event in the future.


So it's a forward contract...?


Yes, we see that as most frictionless way to accomplish this at scale


Is there more that can be read on this somewhere? How it's taxed, what're the implications, how is it structured?


Great questions, it will be on our FAQ page


One danger I see is that unlike an insurance company, which does a serious amount of due diligence and selection of the risks it takes on, this company/idea completely leaves it up to the founders/"investors" (however you wish to call it) to make judgement calls about their own and other people's risk, without much pooled knowledge or history. I doubt founders are very good at that.

When an insurance company sells a policy, they have something on the line in terms of risk themselves -- they have to pay out. Here, the company just acts as facilitator for founders to spread risk however they self-organize to do so. Is that likely to be right? Who cares if some people get burned when something inevitably goes bad in the pool?

It's much like the general tech company issue that thinks all the complexity and need for oversight, etc. can be externalized to others to deal with. It'll police itself. In the meantime, rake in your percentage for being the platform.

I think an idea like this will take much more work (or the verification / pooling / trust sides) than they expect -- for it to work well and people to be willing to join. Otherwise, bad money will drive out good.


Village Capital has been testing out the model of having peer-selected investment for ten years now-- https://vilcap.com/entrepreneurs/peer-selected-investment


Not only that, Erik has done a good job cheerleading the concept of risk pooling for founders: https://twitter.com/eriktorenberg/status/1123331923466522624


These are great points. Someone else addressed much of it but one thing to add is founders can actually sniff out each others' BS, sometimes better than career VCs. Seems to be common knowledge in SV that builders make the best investors: https://www.fastcompany.com/90266921/alexis-ohanian-on-why-f...


This is a great idea. I'd be willing to do this with my keto cereal companies if there was a pool of other promising food startups.


We're invested in one. TrueMade Foods. Send me a note if you want to talk with them.

https://www.truemadefoods.com/


I would suggest for this to work as a way to share risk, you would want to have a pool of companies whose returns are not correlated.


It works both ways.

1. In a verticalized approach, your startup risk approaches your sector risk, if pool is large enough.

2. In a stage based pool approach (sector agnostic), risk is more diversified but rankings will be less meaningful. For ex, a rocket company founder may not be a good judge of CPG companies.


Fair points.

Does it depend on what you are hedging against, maybe? i.e. "my startup not being successful" vs "the economy tanking/oil prices trebling/whatever".


It does. In a verticalized approach, if you pick the right sector (biotech for ex) and other founders see the value in your work, you can get rewarded even if your company fails for reasons to of your control.

Even in a shock scenario, there are sector winners (see biotech and funeral homes in covid pandemic)


This is a really interesting model that has been tried a couple times in venture. Probably most notable is Upside (https://www.upsidevc.com). Curious to get your thoughts on them + why you decided to go the founder exchange approach as opposed to raising a fund?


Does your platform accept early employees as well? The first 10 employees are essentially founders and while they typically do not receive as much of the upside as a founder, they do bear the same risk. Allowing an early employee to diversify that risk would be a huge value add to a much wider potential network.


It's something we're looking into. Would be a great market But for clarity, it's generally understood the employees do not bear the same risk as the founders, who contributed months/years of sweat equity as well as actual capital. Oh and risk of lawsuits.

An employee is paid day 1 and the risk beared does not surpass opportunity cost of a paid job at a successful startup vs a failed startup.


> who contributed months/years of sweat equity as well as actual capital

Very often not true in silicon valley. The only sweat equity most founders contributed was toiling through coffees and get-togethers on University Ave or SOMA for a few months until they got the seed money. Then they hire engineer #1 at 1/80th their own equity.

Founders at funded startups pay themselves.

During an acquihire, founders get executive roles, salaries, bonuses, and equity, while "non-founders" are just back to the grind.

The notion of "founder risk" in SV-style startups just doesn't exist like it did a generation or two ago.


oh I completely disagree, early employees are often not paid on day 1, and when they are paid, they still do bear a huge risk - often taking much lower salary than market for the opportunity of equity upside. The risk the early employee takes is often the same as the founder's, with less upside.


This is awesome, the only thing I see missing is that the primary capital of a founder is potential, not equity. That's why banks and other institutions don't typically lend to startups. It would be nice to see that reflected in some way, as something of value that's counted somehow.


Funny you say that. "Deriskinga nd monetizing future founder potential" is literally on my whiteboard.

We are exploring ways to structure the pool with a portion of it in cash/capital. more coming


Why are you splitting sectors into different pools? Surely that reduces the diservification of risk, and increases the overlap between the companies, which creates blurred incentives?


We are not splitting pools into themes. It was used as an example in the website. Founders get to choose the companies, so if all space tech companies want to band together, they can form a pool, its an option.


Founderpool is based on peer selection. The belief is people are better able to pick companies in their vertical better.

But it is true that larger pool across sectors is more diversified


Besides the obvious risk pooling, does this also help founders (esp. first-timers) with negotiating terms? It seems like the other pool members would stand to gain a lot from that.


You could consider the other members of the pool as an extension of your advisory board. They are incentivized to share their resources, wisdom, network, strategy, and 1-1 help on specific needs like this.


I think this has the potential to be successful if done correctly. What's your business model, are you charging or taking a cut of the equity yourselves


We cover all legal infrastructure and management costs. In the exchange, we reserve the right for a 10-20% (depending on pool risk) carry based on pool outcomes.


Doesn't this de-incentivize founders since they're giving up their most valuable asset, their equity?


Good question. It hasn't empirically. See founders taking money off the table in secondary in series A, Airbnb etc.

Plus, financially derisked founders are paid a premium (those with previous exits) by VC.

So we know that this is mostly an academic argument, but it is a resasanoble concern.

Moreover, if 90-95% of your holdings are your company, you are still motivated to make it a success, despite the 5-10% diversification. And most great founders are motivated by more than pure financial upside.


Only 1-5% of founder's shares are contributed. 95% or more retained. It's insurance; not a plan B.


Good timing. as a founder I could use something like this more than ever


Which aspect attracts you most?


de-"riskifying" my startup right now during covid. this would reduce my pressure very slightly and at this point anything helps


Please sign up!


Interesting. Does anyone know of anything else like this out there?


pando is seeking to expand outside of sports. id expect them to have something like this soon


None that I found so far.


It's a very nice idea, and I hope you implement in a great manner! Only thing I disaprove is "Being a founder just got riskier" on landing page lol


Fair point. That dates back to the panic period weeks ago when people were refreshing the "RIP" good times" deck from sequoia, putting their name on it and sending it off to their portfolio companies :)


Most likely will see a lot of lifestyle business founders, unlikely to find companies that will blitzscale and go on to become unicorns in this lot.


Why?


Adverse selection.


It's early, but lifestyle companies are <10% of our applicants. Mostly clustered around series A/post seed.


Is this going to be a single pool, or will founders be organized into rounds?

What sort of support are founders expected to provide to other founders in the pool?


1. Single pool, based on rounds, but new companies can join a pool with consent from all aexisting companies

2. Support is entirely up to them, but the goal is to create an engaged community with strong incentive alignment to help with investor pipeline, customer intros, partnerships, hiring, strategic advice etc


Good question, it will be multiple pools of close knit founder communities.


I wouldn't be surprised if YC implements a version of this internally


I've heard that some YC founders approached them about it, but the management of this structure may be more work that distracts YC from it's focus. We hope every accelerator and VC film does this eventually, we want to power as many of them as we can under the hood.


lol im sure you do, as does pando.

and ya, that makes sense. it should be offered by YC and other accelerators, but it should be managed by alumni and pool members, not by the investing party.

edit: a word


If they want to take it upon themselves, they should.

Having said that, there is a reason coop pools like insurance are managed by third parties.


We wondered the same. Can't speak for YC but we do understand that most funds would have trouble running this internally due to fiduciary conflicts of interest and management concerns.


Or work for a well-paying company and invest heavily in index funds...


Agreed. Avoid the need for Founderpool by avoiding becoming a founder =P


How much does the pool take? Or better, what are the costs?


Right now, there are no costs for participating founders (we cover all legal infrastructure and management costs). In the future, we reserve the right for a 10-20% (depending on pool risk) carry based on pool outcomes.


Seems super interesting! Will follow progress!


Thank you


Can you pool Asian/Latin and US startups?


Yes we support everyone and are geographic independent


Yes.


Techstars does something similar.


I believe founder institute does as well, but in their case they divide uo the pool into 4 parts, 3 of which go to FI, they local chapter, mentors and one back to founders if I remember right


Was about mentioning this as an FI alumni.. Awesome idea, kudos to the team.


Thank you.


This is the worst idea I've ever heard.

If I were a VC and I found out one of the founders in my portfolio had become involved with FounderPool I would immediately drop them and cut my losses.

Being a founder takes a huge amount of confidence: You have to believe, against all odds, that you will be successful. If you really do believe you'll be successful then it wouldn't make sense to trade your soon-to-be valuable equity for a blend of equity which is certain to contain soon-to-be-failed startups.

Being an investor takes an even larger leap of faith in many regards. Swapping your equity for what is essentially "startup insurance" sends the signal that you do not actually believe in your startup and that's a strong indicator of imminent failure.

Compounding the issue: Since founders who believe they will be successful will generally be likely to avoid the equity pool, we can surmise that FounderPool will actually contain a who's-who of failing startups.

It's a bad bet no matter how you slice it.


If I was a founder and I found out a VC would hedge their bets by investing in other startups besides mine, I would drop them in an instant. A VC should guarantee they will put their full faith in only my startup. /s


Exactly the response I wish every founder has ready, when they hear this line of objection from their VC.


So diversification is only for the investors but never permitted for the founders? Financial security for me, but financial risk for thee? I guess I shouldn't be surprised, that's the financial system as a whole; people who have property moving risk onto people who do the actual work at every turn.


I don't see this as any different than a founder who is also an angel investor, which many successful startup founders are when they go for their second company. They even cross invest.

If you look at the YC founders who have exited and gone on to found a second company, many many of them are also investors in other YC companies, sometimes even from their own cohort, if they did YC again. It's pretty common.

Diversification is a smart move. In this case a founder with less capital is investing something they do have, equity in their own startup.


I don't think people should be downvoting you. Whether or not they share the sentiment or disagree, this is a worthy opinion to raise for discussion. And refute if appropriate, but not downvote.

I think the main argument against it is that there's many, many unexpected factors that could derail any small company's ambitions. This is just like an insurance policy. It's not meant to signal you doubt your own capabilities (though some of course, do -- and that's where there need to be safeguards).


I agree. Just because someone's opinion is in the minority doesn't mean well-articulated arguments like this should be downvoted, but rather praised for stating the contrarian viewpoint.


Not advocating for the pool idea but that reasoning is generally incorrect. Decreasing personal capital/timing risk actually increases founder risk tolerance for bigger outcomes for their startup. Investors should want founders to be hungry for big capital, not small.


Yup, all that excessive risk incentives founders to do is to take a guaranteed early exit rather than go for a big future payout. And a VC who wants that probably shouldn't be a VC as they lack the risk tolerance.


Well said. This safety net is meant to help founders make better long term success decisions.


You may have missed the community aspect; the vested interest in mutual success among founders. Pooling is one of the most requested features by YC grads, including founders of unicorns. After demo day, mutual activity among the batch practically dies.


As mean as that might sound, that is exactly what I assumed the VC reaction would be. I also thought equity agreements heavily restricted how employee-shareholders can sell their stock, and you can't just promise away shares to others without consent of the investors as if that somehow bypasses the restriction?


Hard transfer ban clauses are rare, usually they are ROFRs. Some boards may push back, but they do see the benefit of the founder having an aligned support network and we believe many will let this happen.

We believe that this exception to the ROFR or transfer restriction becomes a standard clause built into most term sheets in the future.


+100

And on top of all this, what happens to the voting of this pool, share holder agreements, etc? I can only fathom the shenanigans that can occur. An acquiring firm can press hard on this 1% if they're playing ball.


This comes out of the founder's vested shares -- not the company stock -- transferrable only if there's ever an exit event. It's arguably more desirable for investors, the board, and acquirers than if the founder sold shares on the secondary market.




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