Fun idea, but holy conflict of interest: the founders want to take an investment from this fund in order to get a personal cut of the fund's returns, but the other common holders (think early employees) want the fund that provides the best value to the company as a whole. Maybe there's a way to manage it, but otherwise this seems to put the founders on one side and early employees on the other.
The obvious solution (which I'd recommend) is that the cut should go to the funded company, not the founders. The majority of the cut would still go to the founders, since they own a majority of the stock. But this gets everyone (founders, employees, investors) on the same page.
Overall, this is a great idea. The point of a value added investor is to increase the likelihood of positive outcomes. This is a great way to do that.
I don't know. If they give a founder a sliver of a point in the fund, that's motivating. If they give it to the company, then the employees are getting... what? 0.1% to 2% of a tiny sliver of the fund? The more you spread this around the less motivating it is... Might be a nice benefit, but their goal is to change behavior (motivate potential founders to be interested in their fund and motivate portfolio founders to help each other).
The other problem is that it's founders who invest time to support portfolio companies, not shareholders/employees of the company, so the incentive seems appropriate and aligned IMHO. I can personally speak to the fact that the best support, in my experience, seems to come from founders currently operating their own company, currently in the trenches, and they usually have the least time to offer.
The last thing we want to have happen is to make a founder uncomfortable or to misalign their interest. For our fund to do well, we need every company to do well.
The amount of carry involved is interesting but in no way will misalign a founder's interest in their own company doing well. Their interest in seeing their own company perform is many more orders of magnitude higher than the shared carry.
The other thing to consider is that the shared carry will give the founders of other companies in the portfolio added incentive to help. This help would benefit every shareholder.
For our fund to do well, we need every company to do well.
That's an odd statement. Even in the most successful of funds, the vast majority of companies return modest amounts of capital or no capital at all. The general rule is that most of a fund's overall return will come from ~20% of the portfolio companies.
Based on the article instead of being alone it's allowing founders to work as a network. Pass on opportunities, etc. YC has a large founder network which benefits it's companies.
That's a good point and honestly, that kind of sucks for early employees, but it's not going to affect whether or not a founder decides to take money from this fund or if it's successful.
Early employees at many successful startups have a long, accomplished history of getting royally screwed over on their equity to work ratio. In my experience, I've seen how that can build into real resentment over time, but of course they can't leave until they've vested, so they're just stuck doing all the work and getting compensated well, but no where close to they might deserve or what the founders end up with.
Employees, early or not, have absolutely zero input into what investments founders decide to take. It's also possible that employees may join before a start-up gets an investment from this fund, making the (potential) screwed-overness even worse. Employees can get as mad about this as they want, but they'll have pretty much zero recourse in any situation.
I suspect only founders with lower-than-average confidence in their own companies would choose a bit of diversification over a better deal for their company elsewhere. I wonder if that could create an adverse selection effect. Maybe I'm misremembering, but wasn't that the main problem with First Round Capital's exchange fund?
That said, Kent's a great guy to work with - if you don't like his experimental fund structure, the opportunity to work with him should more than make up for it.
Everything comes out of the fund's carry. Founders give up nothing. We want to work with founders who believe they will each be creating the most impactful company in the portfolio.
But this is about much more than diversification, it's about the community that forms when the founders have an interest in one another's success.
I am no expert, but do you think this will create, "too many chefs in the kitchen?"
In my experience, buying love is not nearly as effective as winning it.
When a founder helps a fellow company out of the goodness of their hearts or just for Karma, or with hopes of reciprocity, that help will likely be more valuable than a bunch of founders who feel somewhat invested in the other companies and maybe think they know better.
I think this is an interesting experiment...but I wonder how this will actually play out. I can see it having the exact opposite effect you are hoping for.
I imagine the theory here is that a fund with founders helping each other out will actually provide MORE value than just having 1 VC partner who thinks about your business for a few hours a month.
Comments
Fun idea, but holy conflict of interest: the founders want to take an investment from this fund in order to get a personal cut of the fund's returns, but the other common holders (think early employees) want the fund that provides the best value to the company as a whole. Maybe there's a way to manage it, but otherwise this seems to put the founders on one side and early employees on the other.
The obvious solution (which I'd recommend) is that the cut should go to the funded company, not the founders. The majority of the cut would still go to the founders, since they own a majority of the stock. But this gets everyone (founders, employees, investors) on the same page.
Overall, this is a great idea. The point of a value added investor is to increase the likelihood of positive outcomes. This is a great way to do that.
I don't know. If they give a founder a sliver of a point in the fund, that's motivating. If they give it to the company, then the employees are getting... what? 0.1% to 2% of a tiny sliver of the fund? The more you spread this around the less motivating it is... Might be a nice benefit, but their goal is to change behavior (motivate potential founders to be interested in their fund and motivate portfolio founders to help each other).
The other problem is that it's founders who invest time to support portfolio companies, not shareholders/employees of the company, so the incentive seems appropriate and aligned IMHO. I can personally speak to the fact that the best support, in my experience, seems to come from founders currently operating their own company, currently in the trenches, and they usually have the least time to offer.
The last thing we want to have happen is to make a founder uncomfortable or to misalign their interest. For our fund to do well, we need every company to do well.
The amount of carry involved is interesting but in no way will misalign a founder's interest in their own company doing well. Their interest in seeing their own company perform is many more orders of magnitude higher than the shared carry.
The other thing to consider is that the shared carry will give the founders of other companies in the portfolio added incentive to help. This help would benefit every shareholder.
That's an odd statement. Even in the most successful of funds, the vast majority of companies return modest amounts of capital or no capital at all. The general rule is that most of a fund's overall return will come from ~20% of the portfolio companies.
Based on the article instead of being alone it's allowing founders to work as a network. Pass on opportunities, etc. YC has a large founder network which benefits it's companies.
To be fair, Venture Capitalism in general is a gigantic conflict of interest.
Already there is a big split between incentives for a founder and incentives for an early employee, and even moreso between the company and investors.
That's a good point and honestly, that kind of sucks for early employees, but it's not going to affect whether or not a founder decides to take money from this fund or if it's successful.
Early employees at many successful startups have a long, accomplished history of getting royally screwed over on their equity to work ratio. In my experience, I've seen how that can build into real resentment over time, but of course they can't leave until they've vested, so they're just stuck doing all the work and getting compensated well, but no where close to they might deserve or what the founders end up with.
Employees, early or not, have absolutely zero input into what investments founders decide to take. It's also possible that employees may join before a start-up gets an investment from this fund, making the (potential) screwed-overness even worse. Employees can get as mad about this as they want, but they'll have pretty much zero recourse in any situation.
I suspect only founders with lower-than-average confidence in their own companies would choose a bit of diversification over a better deal for their company elsewhere. I wonder if that could create an adverse selection effect. Maybe I'm misremembering, but wasn't that the main problem with First Round Capital's exchange fund?
That said, Kent's a great guy to work with - if you don't like his experimental fund structure, the opportunity to work with him should more than make up for it.
Everything comes out of the fund's carry. Founders give up nothing. We want to work with founders who believe they will each be creating the most impactful company in the portfolio.
But this is about much more than diversification, it's about the community that forms when the founders have an interest in one another's success.
I am no expert, but do you think this will create, "too many chefs in the kitchen?"
In my experience, buying love is not nearly as effective as winning it.
When a founder helps a fellow company out of the goodness of their hearts or just for Karma, or with hopes of reciprocity, that help will likely be more valuable than a bunch of founders who feel somewhat invested in the other companies and maybe think they know better.
I think this is an interesting experiment...but I wonder how this will actually play out. I can see it having the exact opposite effect you are hoping for.
I imagine the theory here is that a fund with founders helping each other out will actually provide MORE value than just having 1 VC partner who thinks about your business for a few hours a month.