Republic – Now everyone can invest in startups | Hacker News Reader

Republic – Now everyone can invest in startups

republic.co

123 pointsjrbedard81 comments

Interesting. These appear to be JOBS act short-form mini-IPOs.[1] That's something new, which just became possible this year and hasn't been used much.

Here's Farm from a Box's SEC filing.[2] Typical crappy terms - no voting rights, no anti-dilution, no transferability for one year, insiders have control.

Nobody associated with the project has a farming background. They have two employees. One is a liberal arts majors from UC Berkeley and one has an unspecified degree from UCLA. They do not have a working prototype farm according to the SEC filing.

The filing for Youngry [2] is more interesting. They want to start a glossy web site for young entrepreneurs. They claim lots of good contacts. (Miss Las Vegas?) They're only asking for $50K, which isn't enough. Two-person business.

Republic takes a 5% cut; that's how they make their money.

This is a reasonable concept, but the current set of deals isn't very impressive. These are people looking for Series A funding and would probably be rejected by YC. The idea behind the JOBS act short-form IPO was supposed to be that when your startup got too big for angel/friends and family/Kickstarter funding, there was a next level and an exit strategy for the original funders. It wasn't intended for startups this early.

You can look up these companies on the SEC's EDGAR system. If you scroll down all the way to the end of Republic's pages, there's a link.

[1] https://media2.mofo.com/documents/120416-pli-quick-guide-job... [2] https://www.sec.gov/Archives/edgar/data/1679373/000167937316... [3] https://www.sec.gov/Archives/edgar/data/1679372/000167937216...

Regardless of the terms, all of these companies appear to be just terrible investments.

Never stopped terrible products on Kickstarter from goosing thousands of dollars from naive backers.

"Youngry" - A newsmedia property built a supplement entrepreneur and professional "entrepreneurial-advice" entrepreneur that aims to make money by creating sponsored content and e-commerce products (webinars, digital books) for early-stage, young entrepreneurs.

That's my impression too. Some, like Cringle on Companisto, looks OK-ish, but most of it is crap. At worst it's "delightful" candy subscriptions and at best it's a slightly better implementation of something that already exists.

EDIT: Having just looked at Companisto's page I now get lots of advertisements all over the web from them. So that's why no good start-ups bother with crowd-investing - because the portals take a big fat cut and so the start-up effectively gets a lower valuation.

So interesting. Seems like we now have two ways for the public to buy shares in companies. On the stock exchanges, we've made it so difficult and expensive (Sarbox and other requirements) - that many companies have chosen to delay or avoid going public. So the government passed more laws to make it easier for companies to go "public" (in a different way), and we now have another system that seems to be a real wild west.

Oh government... solving unintended consequences with more unintended consequences.

No, what's happened is that low interest rates have made borrowing, or investment with borrowed capital (which is what much "private equity" really is) more attractive than going public. That's why we have overvalued "unicorns". If Uber went public, they'd have a far lower market cap than their current valuation.

This also has a lot to do with the tax advantages of debt.

It sounds like you might be thinking of Title IV of the JOBS Act (Reg A fundraises, more details here: https://www.sec.gov/oiea/investor-alerts-bulletins/ib_regula...), which are akin to "mini IPOs" and are intended for later-stage companies.

Republic operates exclusively under Title III of the JOBS Act, which was enacted in May of this year and is intended for early-stage companies.

On deal terms, generally speaking it would be impractical for a startup to fundraise via equity crowdfunding if the hundreds or thousands of investors, each putting in as little as $10, were to have voting and information rights. The non-transferability component is actually a legal restriction put in place by the SEC, not a term that any companies raising on Republic have put in place.

Each deal page has a discussion section, if you have questions for the founding team of each company, please do ask :)

Yeah, right. I get an annual report, a 10-K, and voting rights on every public stock for which I own at least one share.

Companies raising under Title III file annual reports with the SEC. That said, public companies in which you own stock and private, early-stage startups have vastly different capacities to deal with these issues. The basis for investment in each is also quite different. Apples and oranges.

Actually, both Apple and Orange are public companies :D

pmen is right. We considered crowd investments for our own startup, and concluded it's too much work, hassle and inflexibility. Republic's model seems to mitigate this somewhat, but (probably?) only works in the US and even they state on their site:

"The tradeoff for the benefits of investment crowdfunding is the complex regulatory requirements that companies must follow. The general spirit of the law is simple: companies should provide complete and accurate information so that the public can make informed investment decisions. Incorrect or misleading information comes with severe legal consequences. In addition to the following, you should also consult your attorneys and accountants to ensure full compliance with all legal and accounting requirements. Republic as a funding portal is not authorized to and does not provide legal, accounting or investment advice."

Sounds like it could very well still be too much for us.

I imagine there are very few good startups that would offer the general public voting rights in early stages without first being able to vet those investors.

You don't get shares if you invest -- you get something called a "crowd safe": https://republic.co/learn/investors/crowdsafe

More info here: http://www.crowdfundinsider.com/2016/06/87034-republic-adds-...

I'm a bit leery of these. According to the article, "unless specifically negotiated, SAFE holders do not have any voting or information rights." I also suspect that the shareholders get taken care of before crowd safe holders in legal or bankruptcy proceedings. The rights of crowd safe holders haven't been tested in court.

I think the lack of rights and additional risk inherent in crowd safes would need to be compensated for by some kind of discount relative to what investors pay for shares. Otherwise, the risk-adjusted return is lower.

I would also be skeptical of the potential of a startup that can't convince normal VCs to fund them. If people who do this for a living don't think a startup is worth investing in, why should I?

> I would also be skeptical of the potential of a startup that can't convince normal VCs to fund them. If people who do this for a living don't think a startup is worth investing in, why should I?

There are plenty of SaaS companies that are naturally limited in revenue potential.

In my experience, VCs are not interested in a company with a conservative forecast of 10MM ARR in 5 years. These are still viable businesses that need capital to actualize the plan.

Alternative lending sources are crucial to these companies. While the terms of this particular idea are not ideal, I think we will see a lot of new ideas in this realm over the coming years and some will be great!

How is an investor in such a company supposed to actually get a return? Unless the company is paying dividends or something similar, the only payout comes from selling your shares or if the company is acquired at a premium. But who is going to buy these companies with a conservative "slow and steady" growth rate and market share?

I think you have to get in early and hope for an IPO. But anyone who buys after the IPO is probably a sucker.

10 million dollar companies don't IPO

The idea of the JOBS act mini-IPO was to let 10 million dollar companies IPO. There are dollar and number of investor limits, but they're generous. ($1BN and 2000 investors, I think.) Above that, the regular IPO rules apply.

TrueCar, Zoës Kitchen, GlycoMimetics, ChannelAdvisor, and Malibu Boats all went public via this route, but on a larger scale, around $100M each. They did a proper IPO, where investors got publicly tradeable shares, not this weird "SAFE" thing.

There are lots of ways to get a return. I helped start Lighter Capital (originally "RevenueLoan"), which invests a lump sum that gets repaid as a percentage of revenue (like a royalty). That model, Revenue-Based Financing, is harder to game than dividends (management can and often does make profit "disappear" but rarely has any incentive to make revenue disappear).

You can also have redemption rights or dividends. Depending on tax treatments these can be reasonably lucrative.

Of course, if you tautologically declare that the only payout is from an "exit" then no exit, no returns. But historically speaking "exits" are the exception, not the rule -- yet businesses have been aggregating capital and rewarding investors for centuries.

Agreed 100%. Financial instruments are interesting- if you can dream up the structure, there's likely a (legal) way to make it work. After all, it's just a record in a database at this point :).

I totally agree, but in cases like Republic with a Crowd Safe, none of those options seem to apply unless I'm missing something. My question was for crowd funded smaller companies that have low potential of an exit - in those cases how is a crowd funding "investor" going to realize a return?

Very fair critique. The SAFE for all its merits is an exit-centric security.

For small-cap companies, debt instruments can be a perfect way to raise capital. Investors hold a promissory note promising to re-pay the capital loaned, with interest, over a specified period of time.

If a company can get debt financing, it's a great choice for them. But there's not a lot of investors interested in loaning money to a company with no assets and little to no revenue. At least not at reasonable interest rates. And unreasonable interest rates can be problematic due to usury laws. The rigid repayment timing can also be problematic for the borrower. Equity is really a better fit for companies that have greater than, say, a 10% chance of not being able to repay their investors.

I used to think so as well. Anecdotally, my company has experienced the exact opposite.

Likely rare (and requires luck) but it can be done.

You raise some good points.

The Crowd Safe is essentially a YC Safe (which in turn is a standardized convertible note) that gives companies control over when to convert, rather than conversion necessarily happening in the following financing round. Given the ubiquity of convertible notes in early stage financings, legal treatment shouldn't be a unique concern.

To your point on startups not being able to convince VCs to fund them: much of the value of crowdfunding, from our perspective, is the ability to democratize the fundraising process by putting the decision of which companies get financed into the hands of the average person. While VC investment is surely a signal to take into account, the VC industry as a whole has shown itself to be biased in who it chooses to fund (more here: https://medium.com/equitycrowdfunding/new-impact-new-inclusi...).

For many companies, there are also significant brand loyalty and marketing benefits to doing a crowdfunding campaign and letting their users play a role in their growth as a company.

The Crowd Safe is not similar to YC Safe or any convertibles issued in pre seed financing that I have seen or received. Crowd Safe seems to cap upside for investor during conversion and defers everything to company's discretion. Even the example in OP's link shows in the event of exit, the investor upside is capped at company's discretion. The whole thing is structured pretty badly. I have stayed away from equity crowdfunding because no corporate governance, no voting and information rights, and lack of influence. There is no way to diversify away the risks that come with early stage investing. And platforms can't be trusted to do due diligence or put investor interest above their own.

The Crowd Safe is designed to give investors the same economic outcome as shareholders, and doesn't cap upside upon conversion. If you're referring to the valuation cap (the only reference to a cap upon exit at OP's link), that's a standard term in convertible notes that sets the maximum price an investor will pay upon conversion. Let me know if I misunderstood.

You are absolutely right about the discount.

Being skeptical is also good, but on the flip side there is a lot of money floating around in peoples private bank accounts that is seeking an investment target. I mean, how would one invest $10 in a startup through the traditional VC model? There's no way. This model can be seen as an alternative. There's no inherent reason to think of it as a backup for startups that failed to get VC funding. It's just money from people who are not VCs.

If your life savings is 10k or even 100k you don't need to invest in startups. Try an index fund.

I agree, but that is beside the point.

Shareholders rarely get anything in a bankruptcy, and at best it tends to be pennies on the dollar, so that seems like a minor concern.

Voting rights are more interesting, but my impression is that tiny shareholders in startups are usually bound by tight shareholders' agreements so that they must vote along with the majority investors anyway. (That at least seems to be the practice in Europe.)

The information rights are pretty important, though.

Because Kickstarter! The uneducated financier model works well for everyone involved there, right? Right guys??

Works great for good talkers regardless of product quality.

The safe word, great for lawsuits when all the investors lose everything

The general counterargument to the "we're in a bubble" observation has been that it's all private equity, that people aren't risking their houses or 401(k)s on startups this time around. This would appear to be a move in that direction.

It's the modern day equivalent of public investment in penny stocks.

There are a number of similar sites (wefunder was YC, and Angellist dominates the space).

We shouldn't treat the "public at large" like kids, and they have the right to do what they want with their money.

HOWEVER, I do hope that people don't get hopped up on TechCrunch stories about gazillion dollar exits and then cash out their 401k to invest in some company or another.

They should know that the vast majority of startups fail, and that the chances are any particular one will fail. They should also understand that it isn't worth the due diligence for $100 or something, so you're really taking a flier unless you piggyback off someone else's diligence (which you should).

Startups as investments are very risky with long payoff horizons. With their limited funds, this is a poor investment for the average investor. I can't help but feel like this will hurt more people then it will help.

I think it is healthy strategy to dedicate 5-10% of investment portfolio to high risks investments like this, even for average investor.

"SAFE holders do not have any voting or information rights".

With this kind of agreement, it's basically gambling since most info on start-ups is basically PR fluff. At least public companies have to publish annual reports and real investors get information rights.

Most of the startups have negative cashflow anyway. Early investors invest into potential, idea, team, tech, know how, market share.

> With their limited funds, [startups are] a poor investment for the average investor

They're not great for institutional investors either: http://www.bloomberg.com/news/articles/2016-08-10/venture-ca...

It appears that the Startup/issuer sets a static offering price [0]. When I envision how crowdsourced investing would reinvent this space, a huge component of the value added would be a degree of price-elasticity and feedback. It doesn't have to be a full-on auction, but getting the pricing right (for the issuer) seems like THE killer feature here... (thinking back to the concept of how Google priced their IPO )[1]. Offering a product that facilitated more innovative pricing structures at offering would be extremely compelling - and would greatly increase Republic.co's target market as well.

[0] https://republic.co/learn/issuers/how_it_works [1] http://www.wsj.com/articles/SB108328345314098183 (potential paywall)

Don't current Title III rules make it legally risky for companies to crowdfund like this? The last thing I read about this suggested that crowdfunding like this could put a startup in a position of having to effectively go public very early in their life --- which would suggest that none of the best startups would crowdfund, which would create a major adverse selection problem for Republic.

You're right -- a company with $25M in assets and 500 unaccredited shareholders is essentially forced to go public. That's why traditional security instruments are poorly suited for investment crowdfunding. We created and open-sourced a derivative of the YC Safe called the Crowd Safe to solve for this (more at https://republic.co/crowdsafe).

Republic - Invest in the startups real investors won't invest in

That strikes me as a very cynical view, and I consider myself to be a pretty cynical guy. You could also make the same argument about other market platforms:

"Ebay - Buy things real shoppers won't"

"Uber - Get a ride somewhere real taxis won't go"

"Monster.com - Hire people real employers won't"

Is it really that different?

I'd call the appraisal justified. At least from where I sit, I'd say that the equivalent to eBay or Uber would be listing stock from startups that also have VC funding, and selling actual shares in the company.

eBay and Uber cater to the same folks that use competing services. No one on Sand Hill Road is going to use Republic.

As for Monster...that's a little too accurate.

This is actually a great way to test your idea. If lots of people find it promising, it will at least remove one concern when building a startup.

Wow, I'm blown away by the negativity in this thread. I know Silicon Valley is conservative but this is killing it.

In Europe (of all places), this sort of stuff has been going on for a number of years now. The first startup I worked for had gathered its €150k preseed funding from over 20 people. Not even with a convertible note, they really all went to the lawyer's office together. It was pretty nuts, but it got the product out (and then tanked miserably but hey, people knew what they were getting into).

Sites like Leapfunder (https://www.leapfunder.com/) have been doing what Republic does for years, but then in Europe. As far as I can see, the only reason the US is behind on this one is the "accredited investor" rule that European countries don't appear to have. I wonder how Republic works around that but I guess it's a good development. I have a hard time understanding how any "you're only allowed to X if you're rich" law can be fair (and I'd assume that especially libertarian HN would be with me on that one).

But still, HN's conclusion is that it's stupid to do this? What? Why is it stupid to invest $5k in a startup but not to invest $500k in a startup? If you ask me, that's irrational to the bone. If you really can't imagine some good reasons why a company wouldn't want to raise from a VC but would prefer to crowdfund, you didn't really try very hard.

I can't find it back but did HN react the same when Kickstarted got launched? Is there really that big a difference between "first to get a Pebble" and "first to get some Pebble shares"?

> Why is it stupid to invest $5k in a startup but not to invest $500k in a startup?

Because if you invest $500k, you get information rights, and a significant number of votes. If you invest $5k, you get nothing, and you just have to hope the company makes good decisions. It's like buying a $5k lottery ticket -- it's an investment based entirely on trust without any information, accountability, or influence over the outcome.

I suspect that the real reason companies want to crowdfund is to raise money without giving information and voting rights to their investors.

> it's an investment based entirely on trust without any information, accountability, or influence over the outcome

Assumes that an investor's extra-monetary 'influence' on a company is +EV.

They get votes. If they invest enough, they get enough votes to have influence.

Even if it's not, they have information about the finances and plans of a company that are highly relevant to the decision to invest.

And it also protects them against the worst case, where management acts in ways that are plainly hostile to shareholder interests.

Do people really want information rights and votes on a $5K investment? How little is your time actually worth?

That's a set-and-forget "investment" if there ever was one.

"Because if you invest $500k, you get information rights, and a significant number of votes. If you invest $5k, you get nothing, "

No - not at all.

First, there is no such thing as 'information rights'.

Second - when you 'invest' - you get shares. Those shares have 3 'rights' generally: 'votes', 'dividend rights' and 'liquidity preference'

Those rights differ depending on class of shares and specifics of the deal.

Whether you invest $5 or $5 million - it could very well entail the exact same terms.

For example, most later stage investors do not get enough votes to influence the outcome, they don't get a seat on the board, and they don't get any real liquidity preference.

> First, there is no such thing as 'information rights'.

Information rights are real, and they are defined in statute law.

But, that's not why you are posting here. I see that you have been attacking my posts because of a vendetta you have in an unrelated thread. How pathetic!

>I know Silicon Valley is conservative but this is killing it.

The area that is generally known as the innovation capital of the planet is conservative? Can't say I agree.

Most comments seem critical of the specific offer and risks of investing badly, not the idea of allowing smaller investments.

"Why is it stupid to invest $5k in a startup but not to invest $500k in a startup?"

In addition to the $500k buying more information and actual shareholder rights, someone who is investing $500k is likely doing so from a fund, or otherwise isn't going to miss the $500k if the investment goes belly up. The $5k investor would probably be hurt a lot more by losing the $5k, AND they don't get the information necessary to make an informed decision.

I don't think anyone is opposed to this for classist reasons like you're suggesting. You're bringing up Kickstarter as an example of a successful crowdfunding service, but in this context Kickstarter seems like more of a cautionary tale.

Kickstarter is definitely a mixed bag, but I don't blame Kickstarter itself for that. Kickstarter is awesome, and many awesome things now exist that wouldn't have existed without it. I love Kickstarter.

The problems with Kickstarter are with some of the people using it. It's all just human nature, I don't think there's anything that Kickstarter (the company) can really do to curtail it.

Problems include people starting projects from scratch via Kickstarter, and making promises about schedules and deliverables when in many cases those things are literally unknowable when they start accepting money from people. Sometimes people get in over their head, and don't realize how deep of a hole they've dug themselves into until it's way too late.

Problems also include people giving money to Kickstarters and assuming that the schedules are real, that the products will turn out as they've been pitched, and that they will receive what's been promised to them. Hopefully everything works out, but realistically you've got to be OK with the worst-case scenario (you get nothing back) when you back a project.

I see Kickstarter as more of an angel investment vehicle, and I think Kickstarter tries to present itself in this way. If something looks promising, I might put some money into it, but beyond that I have no expectation that I will ever get anything out of it. It's a pleasant surprise if I do. However, no matter how many times Kickstarter tells people that Kickstarter is not a store, there's a continuous stream of people who seem surprised when things don't turn out as expected, and will scream for refunds and devote insane amounts of time to ruining the lives of the people who bit off more than they could chew when they started raising money.

Basically, in addition to its merits, Kickstarter can be a brutally productive factory of sadness, for the people with Kickstarters as well as the backers. Given that something like 90-95% of startups fail (I could be wrong, but those are the numbers I usually hear), Republic sounds like it could be an even bigger factory for vastly more sadness, without the success stories that make it all worthwhile. The few people who luck into putting money into a successful startup will surely get very angry and entitled when they see a small business that they gifted money to becoming successful, but they don't see an equivalent return on their investment. The 90-95% of the people who lose their money when the startup folds will surely also be surprised and angry, and demand their money back if they don't think the startup was competently run (not that they have any way to really know this). It just sounds like all downside with very little (if any) upside.

> Crowdfunding investing is highly speculative and every investment may result in a loss. By investing small amounts across multiple companies, you can reduce your risk compared to a large investment in a single company.

But there's only four companies.

> Do your own research. Read the documents provided by each company you plan on investing in. Get independent legal, accounting, financial advice. If you have any questions or need more information, ask the company.

Sounds expensive.

Maybe we crowdfund the advice too? Is someone going to make a robo-VC like lendingrobot?

One of the tags for projects is "Women Founders". In theory that shouldn't make a difference as to how investable a project is or isn't? It seems as ridiculous as giving the founder's favourite colours or ethnicity. I just don't understand what they were thinking when they put that feature in.

I can see this having all the same problems Kickstarter has with video games:

- A bunch of people whose only experience with the industry is as consumers, with no real knowledge of how investing or the field they're investing in works

- Companies that have little more than an idea and big promises, lacking the skill, manpower, and knowledge of how to see a product through from conception to release (plus a lack of knowledge on how to obtain those things)

- Companies that stop updating and eventually just run off with the money

- People who think they're entitled to a refund if what they invested in fails

Will "Angel Investor at Republic" overtake "CEO and Founder at Company That Is Literally Just A Facebook Page" as the job title of choice for wannabe tech bros?

Jared Friedman, YC Partner, post from 3 days ago, on raising money online and the differences between the various crowdfunding services, Angellist syndicates and YC:

http://www.themacro.com/articles/2016/08/raising-money-onlin...

How is this different than wefunder.com?

This really does seem the same. Actually, I invested in one there just so say I could.

But there's some weird things on this site:

- there's something called investment clubs where you can recommend companies to nearly-passive investors and get 10% of something out of it. But there's no inventory on this site either so why are they being paid for no work? I'm sure I could guess every investment just from the name of their club and skip the middleman.

- several companies are just selling you bonds ("revenue share" and "loan money"). Seems strictly worse than buying some regular bonds, and why does a startup want to return capital anyway?

It's not 'now' that it's suddenly possible.

CrowdCube (European startup) has been doing this for years.

Why is a US bank account necessary while being a US citizen is not required?

Probably due to anti-moneylaundering requirements...

Is this a signal to the smart money that it's time to get out?

I think it is.

(But personally -- although I can't prove that I'm smart money just yet -- I'd recommend avoiding tech stocks in the first place. Don't just think of the fate of Myspace and Netscape; think of Iomega and Sun Microsystems...)

What could possibly go wrong?

oops, never mind :)

Wrong article.

Better investment plan: Send me your money via paypal and I'll call you an idiot.

Those are called findoms, but you'll have to try advertising somewhere else.

Reply on news.ycombinator.com