Oculus Facebook deal could ignite equity crowdfunding | Hacker News Reader

Oculus Facebook deal could ignite equity crowdfunding

bernardlunn.wordpress.com

72 pointsbernardlunn46 comments

    The Oculus founders got $2.4m of free seed funding via Kickstarter.

No they didn't. They took money for pre-orders.

    I believe that the Oculus Facebook deal will accelerate the equity
    Crowdfunding revolution.

I don't doubt this for a second, but I bet you that the vast majority of people who are allowed to invest in startups through the JOBS equity crowdfunding provisions are going to lose their shirts.

    even if a lot of people who gave free funding to Oculus via
    Kickstarter in return for a beta product and a T Shirt feel
    a bit burned today.

Why should any of them feel burned? They spent money in order to get a t-shirt or an Oculus DK1.

    FWIW, the terms were clear, the folks who ponied up cash were
    promised an early version of the product and got what “it said
    on the tin”.

Yep, exactly.

    Personally I think how millions of people make a living
    [via crowd funding]...is more interesting than...the VR
    Oculus story.

Citation needed on that "millions of people" figure, and what does this have to do with equity? Do you really think that the next musician who funds their first album through a Kickstarter is going to hand out equity to their backers?

    If Oculus had been in the Valley they would have easily got
    Angel funding – and given 25% to those Angels.

Um, Oculus raised almost $100mm after their Kickstarter. I would be astonished if they didn't give up at least 25% of the company across those two rounds. Still, it's pretty cool that they were able to skip raising a seed round, and I don't doubt that the founders retained more equity than they would have otherwise.

    Nobody wants a bunch of T Shirts plus being the first kid
    on the block with a new toy for $500m of equity value.

If Oculus had sold equity instead of product pre-orders I don't believe for a second that their Series A round would have worked out nearly as well. I'd much rather walk into a meeting with a VC with 7,400+ pre-orders for my expensive gadget tucked under my arm than a list of people who ponied up a thousand bucks for a sliver of equity in my company.

    However we are still in the really, really early days of
    crowdfunding, the days when we have not yet moved from the
    “first they laugh at you” phase.

Right, because the Indian independence movement is exactly like crowdfunding.

Thank you for being the voice of reason. It's not as if Kickstarter is somehow deceptive as to exactly what you're doing when you help crowdfund a project. You are not owed equity, or votes in the company, or anything in particular except then very clearly spelled out rewards on the project page.

The sense of entitlement people have after this Oculus thing is insane. Your entitlement as a backer is what you were promised as a reward. That's it.

> Right, because the Indian independence movement is exactly like crowdfunding.

Grandiose, self-important valley startup wank talk. Like "disrupting the market" by making another bullshit website or app.

This is a truly awful comment that should never be on Hacker News at all, let alone upvoted. This is not because of what it says about "the valley", but because of its form. It could be about anything else and be just as bad. Please don't post this sort of thing.

(Edit: I completely rewrote my comment here, because I'm still getting the hang of this. Also, all these feedback comments I've been adding are an experiment in comment quality and transparency. We're going to keep experimenting until we find things that work. I doubt that this experiment is going to work, because I'm getting tired of writing these, and some of you are no doubt tired of reading them.)

I like the feedback comments. Explaining what kind of comments are not wanted will help I believe. Thanks.

I think these comments are awesome, but I can't imagine having to write them regularly.

The "I'm burying the story" stuff is especially useful.

I'm going to keep writing them for a while while we brainstorm alternatives. It's good to do things manually for a long time before you figure out how to automate them. That's how I wrote my HN moderation software.

I especially love how you generally stick to criticizing the action vs. the person -- sort of like "this comment isn't appropriate for HN; please do better" vs. "please die".

(I was just going through all your comments after seeing one; this is really becoming the new 'pg: "Please stop"')

Someone needs to buy Paul Graham a baseball cap with those words embroidered onto it.

I -guess- each $300 backer could've received $150,000 of stock/cash...

...if this kickstarter happened 6 months from now, as an equity kickstarter.

The 6 month number is sort of arbitrary, but the SEC is currently evaluating Regulation Crowdfunding. Title III of the JOBS act.

(for more info, here https://blogs.law.harvard.edu/corpgov/2013/12/06/jobs-act-ti...)

Regulation Crowdfunding will allow "funding portals" (kickstarter/indiegogo/etc) to facilitate equity based crowdfunding, with a limit of up to $1,000,000.

We'll pretend that Oculus at $1mm KS has the same destiny as Oculus as a $2.4mm KS. [I think in an equity world, people would be less inclined to invest after that wall is hit.]

We'll ALSO pretend (here's the bigger stretch) that the subsequent rounds of financing at $16mm and $75mm somehow magically didn't affect the equity of the seed round. [Hahaha, hilarious.]

If the KS had stated that the $1mm was to own 25% of the company (I bet he'd've done more, but we'll go low) that means that each $300 backing is equivalent to %0.0003 of $1mm.

%0.0003 of 25% equity is %.000075 of Oculus.

%.000075 of 2 billion dollars is $150,000.

[I think. %50 chance I mucked this math up at some point.]

I was only suggesting that the people who pony up the early cash get some token equity. Lets say give up 5% to enthusiastic early adopters who share your passion rather than 25% to angels. If say the $300 netted you $3,000 bonus on exit, you can have a party and celebrate the founder's good fortune. Its a win/win (founders get lower cost of capital than angel route, early adopters make some cash. Methinks we will see more of this, but only time will tell.

The big problem that equity crowd-funding faces is that the seed rounds of most top-tier companies are already over-subscribed; that means the only startups who'll end up raising on equity crowd-funding sites are those who can't raise the money from good angels.

Given angel investing follows the power law with the majority of returns coming from a small number of companies not having access to the top 10% of the deals vastly reduces your chance of having a decent return.

What if, rather than offering equity, crowdfunders got voting rights instead. I feel that most of the outrage from the Oculus deal is that people feel betrayed. They could almost not have picked a worse outfit to have been bought by (rightly or wrongly, the point here is sentiment). If there had been a shareholder-esque vote, I think it's unlikely the deal would have been approved.

So maybe that could be the deal going forward - sure I'll put up $100 to fund your project, but that comes at the cost of you not selling out in the future.

EDIT: Clearly the weight of your vote would be proportional to your investment.

This would be disastrous for startups - for $100 you get a say in what we do?

How deep does that go? Change of control events? That would basically mean that a startup would have to disclose that they were in negotiations for acquisition/investment/whatever, with whom, and for how much. That would basically mean potential acquisitions would become public knowledge - it's hard enough keeping them quiet when it's just the startup, their investors, and the acquirer involved.

Well your vote would be proportional to your investment, $100 out of $2.4M, in this case.

> That would basically mean potential acquisitions would become public knowledge

That would kind of be the point, it would be about fairness. People may not want to invest in a promising project that could change the world, just for it to be bought up by the next FB/Google.

I don't know of any founder who would agree to this. Every founder I have met would never want to give a third party that much control unless absolutely necessary, which means the only companies who would agree to it are the ones who have no other choice.

I think the sale would still have gone though. For a lot of people putting in a small amount of money and getting a HUGE return on it is reward enough in it's own. So if some people put in 500-1000 and ended up getting 10x or more their investment back during an acquisition, unless they had some huge personal investment, it'd be hard to turn down that kind of money in the bank. I think this would be especially true if things went to scale. The big players would call the shots though and do the same thing as they do at the board now, choose the option that makes them the most $.

https://news.ycombinator.com/item?id=7471344

So I am not the only one who thinks this;

"Personally, I think this illustrates a severe gap in how crowd-funding works. 10K drops by an individual are no different than an angel investor. There should be a chip-in-level for crowd-funding campaigns that require the OP to provide some % equity into the project."

Crowdfunding could be a powerful way to fight against monopolies.

For instance, if a town's population cares enough, they can decide on their own to invest $500-1000 per person in a series of fiber cables (and get equity for it), making the initial costs more appealing to everyone involved.

Then the crowdfunding participants would receive dividends on the lease payments for the lines.

Isn't that what a traditional co-op is?

Offering equity as well as gadgets is an interesting spin on the co-op model. It works well enough; generally it's chosen for something that doesn't want explosive growth but instead is serving a community -- and that might not gel with the "get rich" urges of some startup types.

Then the cable company improves their service and everybody wins.

Wait sorry, I meant they toss a bunch of money to the politicians and they make those crowd funded ISPs illegal.

Your example sounds like something more in the realm of taxes, but I get where you're going.

Well, taxes are imposed on everyone. In this case, only people who want to participate in the investment would pay for it.

You still have to convince the town residents to pony up the money or see it as a good idea.

Is the problem that people had with the Facebook deal really just that they didn't get a cut?

That would be stupid of them as nowhere did it say that was even a possibility.

As the article says, everyone got what it said on the tin. After they received their shirts and the dev kit, the kickstarter campaign was done. Period.

The only people who like to make a stink now are people like this Notch fellow who throw a tantrum cause they don't like the business model of the company that acquired Oculus.

Completely ignoring the facts that as a tech company, facebook really does a lot of good things. Open Sourcing inhouse technology. Backer of the open hardware project to mention two examples.

They all be better served to stay quite until it becomes evident that facebook backtracked from their original statements and starts to call the shot at Oculus. But that is of course not how angry, emotional people act. On the internet or in real life.

I for one would have pre ordered the DK2 last week if I had the money and I would pre order it today. And I look forward to call a lot of people out on their hypocrisy once the final product launches and I notice people who swore they were boycotting this and who swore they were so done with Oculus suddenly raving about how great this thing is.

Crowd investment is already happening. Check out Seedrs. The companies are mostly uninspiring, but that will hopefully change at some point.

There's wefunder too (https://wefunder.com/) who are getting set up to allow unaccredited (lower net worth) investors once the JOBS act goes through.

There is also Seedmatch (https://www.seedmatch.de) and FundedByMe (https://www.fundedbyme.com)

I was just going to mention Seedrs: http://www.seedrs.com/invest

(among many others but they seem to be the most popular choice in the UK)

You have RockThePost as well https://rockthepost.com where they connect investors with early stage tech startups

The font on that article is all over the place.

Agreed, I couldn't concentrate enough to even read it because the font kept changing.

We already have "equity crowd funding." It's called an IPO.

The main problem with crowdfunding is prevention of scams. The SEC which is responsible for implementing this bill,have an expensive list of demands(papers, lawyers) for companies wanting to go that route, making the whole process not worthy for companies.

Until a solution for this problem will be found, it's hard to see crowd-funding becoming an option.

What prevents scams on kickstarter?

A scam where you don't get one product you ordered is a different order of magnitude than one where you lose a long-term stake in a company.

(For Kickstarter, it's the same thing that prevents scams over any online exchange really - nothing except you might go after someone for fraud).

Yes, the former is much worse - you're immediately don't get a useful product, instead of not getting a paper which may or may not bring you some money somewhere in the future if 1000 things align right. Note that most sales of product actually end up in product being sold, while most startups end up failing and wiping their investors clean. That is without any fraud - just plain statistics.

Not the main problem by far.

I had backed hundreds of projects. Next year I would make a thousand or so.

How many scams I got into? Zero.

It is pretty easy to spot who is serious and who is not, who will deliver and who wont. The great thing about capitalism is being left to carry the risk yourself.

> The great thing about capitalism is being left to carry the risk yourself.

When it comes to equity investments, and not Kickstarter-like donations, the type of disclosures that the SEC is going to require are in line with what any serious investor would want even if they weren't required. Managing risk (which is not the process of asking your gut for its opinion) requires some level of transparency.

Obviously, many investors are not sophisticated or diligent, so they won't even review the disclosures available to them, but you also have to look at equity crowdfunding from the perspective of the people raising capital. Disclosure provides them with desirable protections too. The last thing any founder needs is several hundred ignorant and/or lazy shareholders who are going to be calling up an attorney when their $1,000 investment doesn't produce the expected return, even if the expected return was completely unrealistic.

Bottom line: this notion that markets don't demand some level of disclosure and transparency without regulation is silly.

Saskatchewan just started allowing something like this to exist. No one has taken advantage of it (from what I have heard). I am thinking of looking more into it:

http://www.fcaa.gov.sk.ca/SKEC

It's possible that new investment instruments, such as YC's Safe [0] which removes the friction of convertible notes by offering warrants for future equity, could facilitate this sort of thing.

[0] http://blog.ycombinator.com/announcing-the-safe-a-replacemen...

My point being, the OP lists four methods by which he thinks crowdfunding can work (pre-order plus reward, equity, debt, and donation).

Each method has its own set of concerns for regulatory issues, requirements for qualified investors, upside potential, tax implications, etc.

My point is that there may be other possible options, and I point to Safe as a good example of how VC can innovate and remove friction from raising startup capital.

What language is this article written in?

equity crowdfunding is a bad idea. it's an open invitation for government regulation for something that works really well right now.

Next time you want to make a game on kickstarter and share the wealth with "investors", you are going to be facing the SEC and fending off people's lawsuits.

Not to mention people getting scammed appearing on News would ruin the whole crowdfunding movement.

Reply on news.ycombinator.com