Founder Failure Insurance: Pooling equity
31–39 of 39 posts
Re: Founder Failure Insurance: Pooling equity
#32Seems like there's an adverse selection problem here. (And, relatedly, a signaling problem.) This is not an attractive option for companies at the head of the distribution or anyone aspiring to be there, and to the extent that you talk about it, VCs are going to read that as "You're a loser planning on losing." From a practical perspective, one largely buys insurance to smooth out either cash shocks or future decreas…
--VCs are going to read that as "You're a loser planning on losing."-- Then I'm going to read VCs investing in lots of companies as losers planning on losing. VCs hedge their bets, almost by definition. What's wrong with founders doing the same? I'm not really in favor of this particular proposal, but the idea of one-standard-for-you-another-for-me is a major turnoff.
The goals of VCs are very different than the goals of entrepreneurs. Their job is to return at least 3x cash-on-cash in 10 years with relatively low beta. Why should their standards be the same as those of entrepreneurs?
In fact, I wrote a blog post that's very relevant to this point:
http://diegobasch.com/traditional-vcs-and-first-time-entrepr...
Re: Founder Failure Insurance: Pooling equity
#33Seems like there's an adverse selection problem here. (And, relatedly, a signaling problem.) This is not an attractive option for companies at the head of the distribution or anyone aspiring to be there, and to the extent that you talk about it, VCs are going to read that as "You're a loser planning on losing." From a practical perspective, one largely buys insurance to smooth out either cash shocks or future decreas…
One thing you should do at the start of a company is figure out how you will dissolve the company. Every time I've seen someone bring it up, it's shouted down as being negative. More than nine times out of ten, they regret this decision, as there is a bunch of fighting later. But, like you said, no one wants to admit that they might fail.
There's more to it than confronting that you could fail; now there's an incentive not to see your own venture through if a peer's venture has a better chance of being remunerative.
"Advisors" to other companies also have this incentive, but that incentive is a pittance.
Re: Founder Failure Insurance: Pooling equity
#34Sounds like something that can easily run afoul of securities laws.
Re: Founder Failure Insurance: Pooling equity
#35I don't like this way of thinking. Might be smart to "diversify risk" in an investor sense, but as a startup, you're more akin to a team than an investor. It seems akin to a pitcher betting against his own team in order to make money himself. Sure, he might come out ahead, but that's not the point of the team. If you really want to invest in other startups, put up some cash.
betting against yourself as a pitcher incentivizes you to perform poorly and fail.
"paying" 3% of your company leaves you with 97%. Trying to drive your remaining 97% in the ground is idiocy.
Re: Founder Failure Insurance: Pooling equity
#36I once got approach by someone putting together a fund for just this purpose. The rules were something like:
1. You buy into the fund with your shares.
2. The shares had to have had a valuation by a major VC in the past N months (N=4 IIRC).
3. You had to retain X% (they didn't want founders dumping on the fund.)
Finally decided it wasn't worth it. It is very difficult to have faith in other people's valuations of non-tradeable stock.
Re: Founder Failure Insurance: Pooling equity
#37I don't like this way of thinking. Might be smart to "diversify risk" in an investor sense, but as a startup, you're more akin to a team than an investor. It seems akin to a pitcher betting against his own team in order to make money himself. Sure, he might come out ahead, but that's not the point of the team. If you really want to invest in other startups, put up some cash.
betting against yourself as a pitcher incentivizes you to perform poorly and fail. "paying" 3% of your company leaves you with 97%. Trying to drive your remaining 97% in the ground is idiocy.
Not that I agree with most of GP's message, but generally pitchers come out ahead if they win a game. If they bet a nontrivial but still small amount against themselves it could be seen as a means of hedging an individual game. And strongly frowned upon.
Re: Founder Failure Insurance: Pooling equity
#38I don't like this way of thinking. Might be smart to "diversify risk" in an investor sense, but as a startup, you're more akin to a team than an investor. It seems akin to a pitcher betting against his own team in order to make money himself. Sure, he might come out ahead, but that's not the point of the team. If you really want to invest in other startups, put up some cash.
betting against yourself as a pitcher incentivizes you to perform poorly and fail. "paying" 3% of your company leaves you with 97%. Trying to drive your remaining 97% in the ground is idiocy.
Most founders don't own 100% of their company.
Re: Founder Failure Insurance: Pooling equity
#39Somewhat relevant: http://paulgraham.com/prcmc.html
This proposal is the same as as that, except no one is putting up any money.
This proposal is more like forming a large conglomeerate xompany startup, or a co-operatively owned incubator.