Comment by jackcosgrove | Hacker News Reader

Comment by jackcosgrove | Hacker News Reader

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There is currently a risk asymmetry in startup world that drives away people who could do good work.

Investors know the long odds of success, so they invest in twenty to thirty companies and wait for one to get big.

Founders and employees can't diversify like that, because you only have so many working years. To mitigate this we have decided to award successful founders with huge paydays as a lure to others to throw their hats in the ring. This has some malign effects, namely unsuccessful founders and employees get bupkis. It also attracts the wrong sort of personality to be a founder, selecting for too much risk appetite. (At least what I consider the wrong sort for building a sustainably profitable business.)

I have an idea for how to solve this and I wonder if it's already been tried or if there are holes in it. The idea is to spread the risk of starting a company across something like an accelerator class. If one company in that class gets big, it would be contractually obligated to hire and grant shares from some pool to other members of that class. This would be at the cost of the winning founders' stakes.

The upside for winners would be much lower, but the downside would be lower too. This would attract a different sort of person to this accelerator, and be a differentiator for selecting talent.

This idea comes up here every once in awhile (often in the form of "a batch of startups where some % of the stock is shared across the batch).

I'm not saying it can't work, what do I know, but a challenge you'll have to address here is:

* By the time you're at the first big-money investment, the priced A round, you're dealing with investors who make just a couple investments a year.

* Despite that, the most promising startups are chased by VCs, not the other way around.

* If you're one of those promising startups, what would motivate you to take money from the investor structured the way you propose?

Most returns in startup investment come from a small fraction of breakout successes. Even if you got, like, 25% of startups to join this kind of funding compact --- which would be a huge, a momentous achievement on the same scale as the creation of YC --- the math here might not work out to where the shared-fate component of the deal was meaningful for any of the failed startups.

It has indeed been done: https://founderpool.co/faq

Discussed at the time: https://news.ycombinator.com/item?id=23907342

This looks like it's a bit more flexible than my accelerator idea, while in the spirit of it. Thanks!

https://www.pandopooling.com/blog-posts/why-pooling-income-c...

There's your startup idea: communist ycombinator. ;)

Ycommunator

Ycomrade

<3

Diversified ycombinator :+1:

I think you need to try harder finding a good name :D

All41-14All

What if startup founders and employees are paid in shares of the investment fund?

Well, having been in an accelerator there were folks (startups) in my class who shouldn't have been there. i.e. their startups failed but it was blatantly clear why -- mainly immaturity and not listening to advice.

I think your idea would only work if there were rigorous selection process, but also some mechanism to "fire" founders who aren't contributing or insist to make terrible decisions.

I'm not really sure I would feel comfortable investing in an accelerator class concept like this. Seems like it would suffer heavily from adverse selection.

Maybe if the terms were really good, like 20% of the company for $10,000 or something.

Not having to remunerate failed founders and starting employees for their effort is a cornerstone of the VC business model.

They're investors. Why would they pay you for failing to generate a return?

"Failing for generating a return" makes it sound like a skill issue, when it was probably mostly bad luck with the business model you tried out. Negative results can be as valuable as positive results in science, why not in business?

Greedy optimization can also get you stuck in local minima. Why does any investor participate in VC? As an asset class it underperforms. There's something more that motivates people than return. Cool factor, bragging rights, and also I think a concern for growth and the macro outlook.

In my model the reserved pool of shares for failed founders would come out of the winning founders' pool. It's spreading risk across founders, not diminishing the stake of investors.

It doesn't matter whether it's a skill issue or not. They're investors. They are voluntarily offering money in exchange for a chance at a return. When you buy two shares of Tesla for $1000, you don't expect to pay them if they're driven out of business.

In the main, VC LPs put money into VC firms because they have portfolio allocation constraints for decorrelated investments, is how I understand it. It's definitely not out of charity.

1. This is Socialism

2. You’re not creating the correct incentive system. It creates the opposite incentive you want - it rewards those people who do nothing and let others do all the work. You could easily get in a situation where all people in this co-op do nothing, under hopes someone else hits it big.

It's just portfolio theory applied to entrepreneurship.

1. Cool!

2. Wouldn't the incentive be to abandon your failing startup and go work for one of the more promising ones in your class?

> This is Socialism

No, it is not. Socialism supposing involuntary participation. As long as participation is voluntary for all agents, it is capitalism.

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