Founder Failure Insurance: Pooling equity
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Founder Failure Insurance: Pooling equity
1–10 of 39 posts
Re: Founder Failure Insurance: Pooling equity
#2Interesting but I think the problem is that most founders are not building companies to minimize their losses, but to maximize their upside potential. Especially for a developer founder, the worst case scenario is you fail and go back to having a high paying day job.
Re: Founder Failure Insurance: Pooling equity
#3First Round Capital did something similar a few years ago with their portfolio companies: http://redeye.firstround.com/2010/01/sharing-and-exchanging....
Speaking personally, I want to own as much equity as possible in a company I start. 3% is a ridiculous amount of common stock to go towards something like this.
Re: Founder Failure Insurance: Pooling equity
#4Interesting but I think the problem is that most founders are not building companies to minimize their losses, but to maximize their upside potential. Especially for a developer founder, the worst case scenario is you fail and go back to having a high paying day job.
i don't think pooling is about loss _minimization_ so much as accepting that startups are often risky.
the idea would be to give up a VERY small sliver of your upside in hopes of participating on other wins.
I understand founders' desire to "maximize their upside potential", but if you cash out for 100mm, the incremental 5mm you give up has relatively small utility after the 95mm you cashed out.
However, in the more probably 0 dollar scenario, the shavings of the successful startups will be a nice hedge. Probably won't pay your bills, but better than zero.
Hopefully you pool with a group of founders that increases your expected utility (not dollars).
Re: Founder Failure Insurance: Pooling equity
#5First Round Capital did something similar a few years ago with their portfolio companies: http://redeye.firstround.com/2010/01/sharing-and-exchanging.... Speaking personally, I want to own as much equity as possible in a company I start. 3% is a ridiculous amount of common stock to go towards something like this.
3% of all my companies to date is worth exactly zero.
The idea isn't to say "everyone should throw X%" into a pool. It's for you to pick a number that makes sense for you and find a group of founders that wants something similar.
Founders who are absolutely certain of their future success only do worse by pooling equity. The more likely you are to succeed and succeed big, the less likely you should be to contribute to a pool.
Luckily, founders run the gamut in both skill and risk tolerance, so there are probably people close to you no matter where you fall on the spectrum.
Re: Founder Failure Insurance: Pooling equity
#6Interesting but I think the problem is that most founders are not building companies to minimize their losses, but to maximize their upside potential. Especially for a developer founder, the worst case scenario is you fail and go back to having a high paying day job.
i don't think pooling is about loss _minimization_ so much as accepting that startups are often risky. the idea would be to give up a VERY small sliver of your upside in hopes of participating on other wins. I understand founders' desire to "maximize their upside potential", but if you cash out for 100mm, the incremental 5mm you give up has relatively small utility after the 95mm you cashed out. However, in the more…
Risk spreading reminds me of this Dogbert cartoon I came across back when I worked in finance:
http://dilbert.com/strips/comic/2008-12-13/
Basically, risk spreading suffers from unintended consequences. There are however other alternatives to the portfolio approach that do make more sense. My favorite is the concept of a keiretsu ( http://en.wikipedia.org/wiki/Keiretsu ). This approach makes sense, especially when you have potential co-dependencies between startups in a portfolio. The YC portfolio is generally large enough and the group activities create enough comraderie between startups that it functions like a keiretsu because I often hear about one startup using the services of another startup.
I think it could make sense at the level of investor portfolios. If I were accepted into YC, I would be open to the idea of giving up a small percentage into a YC "insurance" fund. The same would apply to a few investors (Sequoia, Kleiner, Benchmark, A16Z, Greylock, etc.), but for anyone other than the top funds, I think such a fund would be a losing proposition.
Re: Founder Failure Insurance: Pooling equity
#7Interesting but I think the problem is that most founders are not building companies to minimize their losses, but to maximize their upside potential. Especially for a developer founder, the worst case scenario is you fail and go back to having a high paying day job.
How much of this could be because there is no real way for people to found companies without taking on this risk? Perhaps this might reduce the risk profile of founding a startup enough that family providers or risk-averse developers can feel more comfortable building their ideas.
Re: Founder Failure Insurance: Pooling equity
#8Vesting is hard enough with groups of people working together on a common project. How would you solve that problem with a group of different companies, each with different incentive systems?
Re: Founder Failure Insurance: Pooling equity
#9This has existed for years... and been structured.
http://ebexchangefunds.com/ is one popular one... :-)
Re: Founder Failure Insurance: Pooling equity
#10Apologies for the snark, but if my goal was to maximize expected return, I think I'd probably not do a startup at all and get a nice salaried job with a government contractor. Startups are risky! And it's hard enough for me to judge the risk/reward of my own startup, let alone someone else's.
If I wanted to take out some risk, I'd rather cash out some equity using more traditional means and putting it some place safe (or at least different), not other startups.