FounderPool: A community for founders to share risk and diversify their equity
founderpools.com
founderpools.com
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.
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.
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.
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. :-)
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.
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 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.
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.
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.
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.
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?
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?
Only three people are with Founderpool. me, manoj and geoburke
"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...
We believe this scales beyond startup founders to education, athletics, and any domain where the outcome distributions follow some kind of power laws
Employees have little individual power to impact strategy and are more likely the victims of poor management decisions.
Agree with employee pools. That is the next step version for founderpool and it is literally the most requested!
Even at massive scale, similar business diverge in profitability due to strategy decisions during all market conditions, including pandemics and other blackswan events
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.
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
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?
If the founder has liquidity, before joining the pool, he would be joining the pool right?
Or did I misunderstand?
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.
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).
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.
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.
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 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
[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.
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.
> 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.
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...
One more risk founders and entrepreneurs need to brace for : Regime uncertainty. Political uncertainty added to market risk, macro, pandemics, on and on...
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.
I really like this idea, but it reminded me of the tontine episode of Archer.
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?
"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.
Source?
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.
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.
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...)
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?
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?
Also it's not either/or. Participating in a pool does not block the founder from liquidating shares on the open market.
Most "valuation events" for startups are seed or series X fundraisers, no? So how could founders who bootstrap participate in this, if at all?
(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/)
edit: I see, bootstrapped is their own pool so the two valuations never get compered against each other.
Tax implications for the founders are similar to their founder stock obligations, when liquidation happens
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.
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.
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".
Even in a shock scenario, there are sector winners (see biotech and funeral homes in covid pandemic)
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.
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.
We are exploring ways to structure the pool with a portion of it in cash/capital. more coming
But it is true that larger pool across sectors is more diversified
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.
What sort of support are founders expected to provide to other founders in the pool?
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
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
Having said that, there is a reason coop pools like insurance are managed by third parties.
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.
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).
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.
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.
We believe that this exception to the ROFR or transfer restriction becomes a standard clause built into most term sheets in the future.