50 ms·

500 Startups still owes money to its latest group of startups

203 points by moritzplassnig 9y ago

jacquesm 9y ago
Did they get the stock?
- moritzplassnig 9y ago
  I doubt because 500s didn't fulfill their part of the contract.
- kcorbitt 9y ago
  IANAL, but I assume a competently-written contract would have explicitly listed the cash 500 Startups was supposed to invest as consideration for its equity share, so if the money never shows up the contract is void. Incidentally, this is one of the advantages of a human-run judicial system over the wild west of "code is law"-style equity on a public blockchain. If it comes down to it and there's a fight over how much equity is owed to 500 by one of the startups in this group, it can be resolved by a judge with access to all the context after hearing the best arguments available to both sides. EDIT: The reason why this is a good example is that 500 Startups provides more than a straight cash-for-equity trade. They also provide mentoring through their accelerator program, introductions to later-stage investors, etc. Those considerations (as well as HOW late the payment is eventually made, whether that can reasonably be considered hardship for the company, etc.) can all be weighed by an impartial judge in resolving a disagreement.
  - seibelj 9y ago
    I'm not defending "code-is-law" as a valid solution to this, but wouldn't a smart contract require the cash (crypto) to be sent in before allocating equity? The issue in this situation is that no money was ever wired. In a smart contract, that means the "invest" function would not be executed and the "equity tokens" not assigned.
    - khuey 9y ago
      Yes, it would. In the real world requiring "payment up front" for all contracts isn't really feasible. A lot of low-margin businesses live or die on the cash flow terms of their contracts.
  - nostrademons 9y ago
    This isn't a particularly good example, because on a blockchain, both the currency received and the equity percentage of ownership of the company are numbers that go onto the blockchain and can be cryptographically enforced. A blockchain simply wouldn't let you write a contract that says "I give $X in exchange for Y% equity in this entity" unless it could prove that you have ownership of $X. The real advantages of a human judicial system come when there's a judgment call involved in the contract. For example, "I own X% of 500 startups and have control over future investment decisions, unless it can be shown that I have violated the laws of the United States, some of which happen to be about sexual harassment." What constitutes sexual harassment? Damned if a blockchain knows. It's hard enough for humans to come to agreement on that, let alone computers.
    - matthewowen 9y ago
      But what if the contract is "I will give you $X in three months time in exchange for Y% equity in this entity"? It's not unusual to enter a contract that obliges you to pay money you do not yet have at some future date when you do expect to have it. If your contract system doesn't allow that then it isn't a very useful contract system.
    - modeless 9y ago
      > A blockchain simply wouldn't let you write a contract that says "I give $X in exchange for Y% equity in this entity" unless it could prove that you have ownership of $X. A blockchain absolutely would let you write a contract that does that, and it could be on purpose or by accident. If you want to be sure your contract doesn't accidentally or maliciously do that, you have to audit it ahead of time because once it's executed, you're screwed. There's no judge who can come in after the fact and nullify some of your contract provisions based on fraud or mistakes or conflict with existing laws or other totally reasonable considerations that aren't explicitly coded into the contract ahead of time.
- nraynaud 9y ago
  I suspect that the real ownership of the stock doesn't need to be really solved until a stock operation that need signature happens.
moritzplassnig 9y ago
I wonder if the paperwork (eg. term sheet or whole contract) got signed before Dave McClure left and (some) LPs are holding back their money now. Is that a realistic scenario?
jessaustin 9y ago
If they're out of money, they're out of money. Was it all just coming out of McClure's pocket? IANAL, but presumably a substantial failure to adhere to contract terms on 500's part will release the startups from their contract requirements?
frankdenbow 9y ago
Happens for companies in StartupChile frequently
- sontek 9y ago
  StartupChile is significantly different. With SUP you have to prove the funds were used appropriately as part of the fund. It is an equity free government program. The terms of the agreement are that you are reimbursed for approved expenses. This is much different and worse. This is a traditional investor / incubator that took equity in these companies and promised them the money and isn't paying them.
  - newaccount99 9y ago
    Sort of but not quite. The guy you're responding to has been through Sup Chile, and so I have I. They're nice people but there have been many unexplained delays of money across the generations that have nothing to do with anything you've mentioned. Also, only some generations follow or have followed a reimbursement model. Mine didn't.
    - WillPostForFood 9y ago
      How active is StartupChile now? Their website says it is down, and is full of dead links: http://www.startupchile.org/programs/ http://www.startupchile.org/programs/
    - sontek 9y ago
      I also went through SUP, which is why I responded. I can only speak for while I was there. Delays were minimal and usually caused by documentation and not them withholding secretly. That may have changed in later rounds.
matte_black 9y ago
How has Dave McClure’s departure affected fundraising for 500 Startups?
- stevenj 9y ago
  I'd imagine the whole scandal has negatively effected the firm and its future.
_Marak_ 9y ago
I've had a bad feeling about Dave McClure and 500 Startups since their Geeks on a Plane trip to India. I was living in India at the time with a few other American open-source engineers. I reached out to 500 Startups and GOAP several times about the trip and couldn't even get a response. The whole premise of GOAP felt like a way for Dave McClure to travel to remote places with attractive women. I'll probably get heavily down-voted for this comment, but I think it's not very far away from the truth.
- hkmurakami 9y ago
  I always felt that something's amiss when you name your Korea fund "500 Kimchi" and let that hit media headlines. I mean wouldn't people in South Korea find this to be derogatory?
  - Scoundreller 9y ago
    Good question: would they? If you named your Canadian fund “500 Maples”, nobody would have a problem. “500 Poutines” just wouldn’t get taken seriously.
    - deleted 9y ago
      [deleted]
    - hateduser2 9y ago
      I think when you swap south korea for canada, which is pretty culturally identical to america, you lose all the history of racism against eastern people and countries. So I wouldn't blame them if they did, and I would kind of expect them to actually, and would consider alternate views exceptions or even misguided. Its not necessarilly bad but it looks pretty bad.
      - GordonS 9y ago
        It works both ways though - there is plenty racism from many in the east against western people both black and white. As a (very!) white person I've experienced this first hand in several places in Asia.
tty7 9y ago
Once they hit 500 startups, did you _actually_ expect them to continue to pay?
- matte_black 9y ago
  I was actually in a 500 Startups batch over 2 years ago, and they did pay.
  - Xorlev 9y ago
    I think it was just a tongue-in-cheek joke about the name.
api 9y ago
I wonder how this fits in with the decline in accelerator and seed funding activity?
blargh1 9y ago
1) Huge screw up by Techcrunch for not catching this. Do they even produce quality journalism anymore? 2) Why is 500 Startups interviewing for the next accelerator period when they can't fund the previous one?
tjpd 9y ago
"While we were completing legal documentation related to Dave McClure's resignation from 500, funding for certain companies was delayed. Since then, we have resumed fundraising, as well as funding our investment commitments. We have been regularly communicating with our companies regarding the status of their investment and expect to complete all outstanding investments in December." Here's my outsider's guess: Dave was almost certainly a Key Person in 500's Limited Partnership Agreement. When a Key Person leaves, for whatever reason, that triggers a Suspension Event and the start of the Suspension Period. During the suspension period, the LPs are not required to contribute capital except for certain things (e.g. management fees, follow-ons). The LP's (some threshold or some combination of them like the LP advisory committee) then have 60-90 days to vote whether or not to continue with the fund. 500 would already have called down some capital so that meant they could make a few investments but otherwise, during the suspension period they likely couldn't make any new ones. Since then they got their LPs on board with the idea of continuing without Dave and now can fulfill all their obligations. That would make sense to me because 500 as an institution is much more than just one man.
- piker 9y ago
  The LPs would likely be on the hook for capital calls related to a binding committed investment under the docs.
- austenallred 9y ago
  Except the implication is they “invested” in companies they didn’t have the cash for. It’s not acceptable to say you’ll invest in a company and then go fundraise to fulfill that commitment. Those things need to happen in reverse order.
  - kirillzubovsky 9y ago
    Although I would love to agree with you in theory, in practice in Silicon Valley everyone is selling first and building second (or not at all). It's not unlikely that 500 was fundraising with one hand and investing with the other, and when their master sales person left, the process got a little tangled.
throw17121 9y ago
I participated in an accelerator run by a large corporate VC. They were supposed to give part of the cash up front (for common stock) and part after (in exchange for a note). During the initial negotiation, they offered to let me take it all up front for common stock. Because we had plenty of cash on hand, and because I wanted to use the post-program note to kick start a funding round, I said I'd just do the regular deal. When I asked them about the note after the program ended, they said they thought I didn't want all the cash and so they wouldn't give it to me. Years later, and I've only just now gotten them to give the promised funding. I was shocked that they would behave this way considering the damage it can do to their reputation if word got out.
- rhizome 9y ago
  And yet...word doesn't get out.
  - throw17121 9y ago
    I decided not to publicize it without giving them several chances to fix things. They did eventually fix it, and for reasons I won't disclose (because disclosing would make identification much easier), publicizing what happened to me would no longer be terribly helpful.
    - neotek 9y ago
      >publicizing what happened to me would no longer be terribly helpful. To you maybe; what about everyone else?
      - throw17121 9y ago
        The unhelpfulness isn't related to my getting the funding. It's about changes at the VC
- wellboy 9y ago
  Why not write an anonymous post, better for others to know.
mtviewdave 9y ago
Recently 500 Startups started offering coworking space at their Mountain View location: http://go.500.co/coworking http://go.500.co/coworking Seems to me to suggest they're looking for alternative ways to raise money.
- matte_black 9y ago
  Or they are planning to downsize the accelerator program and are looking to start making the workspaces self sustaining so they don’t have to close them down.
- borski 9y ago
  This has always been the case. They're just publicizing it now.
hatfieej 9y ago
My company just finished this batch. 500 was upfront that funding would not happen until at least 2 months after the batch starts. My impression is that communication has been weak after Dave leaving and that has allowed room for speculation. Personally, 500 has been good to us.

Did they get the stock?

moritzplassnig 9y ago
I doubt because 500s didn't fulfill their part of the contract.
kcorbitt 9y ago
IANAL, but I assume a competently-written contract would have explicitly listed the cash 500 Startups was supposed to invest as consideration for its equity share, so if the money never shows up the contract is void. Incidentally, this is one of the advantages of a human-run judicial system over the wild west of "code is law"-style equity on a public blockchain. If it comes down to it and there's a fight over how much equity is owed to 500 by one of the startups in this group, it can be resolved by a judge with access to all the context after hearing the best arguments available to both sides. EDIT: The reason why this is a good example is that 500 Startups provides more than a straight cash-for-equity trade. They also provide mentoring through their accelerator program, introductions to later-stage investors, etc. Those considerations (as well as HOW late the payment is eventually made, whether that can reasonably be considered hardship for the company, etc.) can all be weighed by an impartial judge in resolving a disagreement.
- seibelj 9y ago
  I'm not defending "code-is-law" as a valid solution to this, but wouldn't a smart contract require the cash (crypto) to be sent in before allocating equity? The issue in this situation is that no money was ever wired. In a smart contract, that means the "invest" function would not be executed and the "equity tokens" not assigned.
  - khuey 9y ago
    Yes, it would. In the real world requiring "payment up front" for all contracts isn't really feasible. A lot of low-margin businesses live or die on the cash flow terms of their contracts.
- nostrademons 9y ago
  This isn't a particularly good example, because on a blockchain, both the currency received and the equity percentage of ownership of the company are numbers that go onto the blockchain and can be cryptographically enforced. A blockchain simply wouldn't let you write a contract that says "I give $X in exchange for Y% equity in this entity" unless it could prove that you have ownership of $X. The real advantages of a human judicial system come when there's a judgment call involved in the contract. For example, "I own X% of 500 startups and have control over future investment decisions, unless it can be shown that I have violated the laws of the United States, some of which happen to be about sexual harassment." What constitutes sexual harassment? Damned if a blockchain knows. It's hard enough for humans to come to agreement on that, let alone computers.
  - matthewowen 9y ago
    But what if the contract is "I will give you $X in three months time in exchange for Y% equity in this entity"? It's not unusual to enter a contract that obliges you to pay money you do not yet have at some future date when you do expect to have it. If your contract system doesn't allow that then it isn't a very useful contract system.
  - modeless 9y ago
    > A blockchain simply wouldn't let you write a contract that says "I give $X in exchange for Y% equity in this entity" unless it could prove that you have ownership of $X. A blockchain absolutely would let you write a contract that does that, and it could be on purpose or by accident. If you want to be sure your contract doesn't accidentally or maliciously do that, you have to audit it ahead of time because once it's executed, you're screwed. There's no judge who can come in after the fact and nullify some of your contract provisions based on fraud or mistakes or conflict with existing laws or other totally reasonable considerations that aren't explicitly coded into the contract ahead of time.
nraynaud 9y ago
I suspect that the real ownership of the stock doesn't need to be really solved until a stock operation that need signature happens.

I wonder if the paperwork (eg. term sheet or whole contract) got signed before Dave McClure left and (some) LPs are holding back their money now. Is that a realistic scenario?

jessaustin 9y ago

If they're out of money, they're out of money. Was it all just coming out of McClure's pocket? IANAL, but presumably a substantial failure to adhere to contract terms on 500's part will release the startups from their contract requirements?

frankdenbow 9y ago

Happens for companies in StartupChile frequently

sontek 9y ago
StartupChile is significantly different. With SUP you have to prove the funds were used appropriately as part of the fund. It is an equity free government program. The terms of the agreement are that you are reimbursed for approved expenses. This is much different and worse. This is a traditional investor / incubator that took equity in these companies and promised them the money and isn't paying them.
- newaccount99 9y ago
  Sort of but not quite. The guy you're responding to has been through Sup Chile, and so I have I. They're nice people but there have been many unexplained delays of money across the generations that have nothing to do with anything you've mentioned. Also, only some generations follow or have followed a reimbursement model. Mine didn't.
  - WillPostForFood 9y ago
    How active is StartupChile now? Their website says it is down, and is full of dead links: http://www.startupchile.org/programs/ http://www.startupchile.org/programs/
  - sontek 9y ago
    I also went through SUP, which is why I responded. I can only speak for while I was there. Delays were minimal and usually caused by documentation and not them withholding secretly. That may have changed in later rounds.

matte_black 9y ago

How has Dave McClure’s departure affected fundraising for 500 Startups?

stevenj 9y ago
I'd imagine the whole scandal has negatively effected the firm and its future.

_Marak_ 9y ago

I've had a bad feeling about Dave McClure and 500 Startups since their Geeks on a Plane trip to India. I was living in India at the time with a few other American open-source engineers. I reached out to 500 Startups and GOAP several times about the trip and couldn't even get a response. The whole premise of GOAP felt like a way for Dave McClure to travel to remote places with attractive women. I'll probably get heavily down-voted for this comment, but I think it's not very far away from the truth.

hkmurakami 9y ago
I always felt that something's amiss when you name your Korea fund "500 Kimchi" and let that hit media headlines. I mean wouldn't people in South Korea find this to be derogatory?
- Scoundreller 9y ago
  Good question: would they? If you named your Canadian fund “500 Maples”, nobody would have a problem. “500 Poutines” just wouldn’t get taken seriously.
  - deleted 9y ago
    [deleted]
  - hateduser2 9y ago
    I think when you swap south korea for canada, which is pretty culturally identical to america, you lose all the history of racism against eastern people and countries. So I wouldn't blame them if they did, and I would kind of expect them to actually, and would consider alternate views exceptions or even misguided. Its not necessarilly bad but it looks pretty bad.
    - GordonS 9y ago
      It works both ways though - there is plenty racism from many in the east against western people both black and white. As a (very!) white person I've experienced this first hand in several places in Asia.

tty7 9y ago

Once they hit 500 startups, did you _actually_ expect them to continue to pay?

matte_black 9y ago
I was actually in a 500 Startups batch over 2 years ago, and they did pay.
- Xorlev 9y ago
  I think it was just a tongue-in-cheek joke about the name.

api 9y ago

I wonder how this fits in with the decline in accelerator and seed funding activity?

blargh1 9y ago

1) Huge screw up by Techcrunch for not catching this. Do they even produce quality journalism anymore? 2) Why is 500 Startups interviewing for the next accelerator period when they can't fund the previous one?

tjpd 9y ago

"While we were completing legal documentation related to Dave McClure's resignation from 500, funding for certain companies was delayed. Since then, we have resumed fundraising, as well as funding our investment commitments. We have been regularly communicating with our companies regarding the status of their investment and expect to complete all outstanding investments in December." Here's my outsider's guess: Dave was almost certainly a Key Person in 500's Limited Partnership Agreement. When a Key Person leaves, for whatever reason, that triggers a Suspension Event and the start of the Suspension Period. During the suspension period, the LPs are not required to contribute capital except for certain things (e.g. management fees, follow-ons). The LP's (some threshold or some combination of them like the LP advisory committee) then have 60-90 days to vote whether or not to continue with the fund. 500 would already have called down some capital so that meant they could make a few investments but otherwise, during the suspension period they likely couldn't make any new ones. Since then they got their LPs on board with the idea of continuing without Dave and now can fulfill all their obligations. That would make sense to me because 500 as an institution is much more than just one man.

piker 9y ago
The LPs would likely be on the hook for capital calls related to a binding committed investment under the docs.
austenallred 9y ago
Except the implication is they “invested” in companies they didn’t have the cash for. It’s not acceptable to say you’ll invest in a company and then go fundraise to fulfill that commitment. Those things need to happen in reverse order.
- kirillzubovsky 9y ago
  Although I would love to agree with you in theory, in practice in Silicon Valley everyone is selling first and building second (or not at all). It's not unlikely that 500 was fundraising with one hand and investing with the other, and when their master sales person left, the process got a little tangled.

throw17121 9y ago

I participated in an accelerator run by a large corporate VC. They were supposed to give part of the cash up front (for common stock) and part after (in exchange for a note). During the initial negotiation, they offered to let me take it all up front for common stock. Because we had plenty of cash on hand, and because I wanted to use the post-program note to kick start a funding round, I said I'd just do the regular deal. When I asked them about the note after the program ended, they said they thought I didn't want all the cash and so they wouldn't give it to me. Years later, and I've only just now gotten them to give the promised funding. I was shocked that they would behave this way considering the damage it can do to their reputation if word got out.

rhizome 9y ago
And yet...word doesn't get out.
- throw17121 9y ago
  I decided not to publicize it without giving them several chances to fix things. They did eventually fix it, and for reasons I won't disclose (because disclosing would make identification much easier), publicizing what happened to me would no longer be terribly helpful.
  - neotek 9y ago
    >publicizing what happened to me would no longer be terribly helpful. To you maybe; what about everyone else?
    - throw17121 9y ago
      The unhelpfulness isn't related to my getting the funding. It's about changes at the VC
wellboy 9y ago
Why not write an anonymous post, better for others to know.

mtviewdave 9y ago

Recently 500 Startups started offering coworking space at their Mountain View location: http://go.500.co/coworking http://go.500.co/coworking Seems to me to suggest they're looking for alternative ways to raise money.

matte_black 9y ago
Or they are planning to downsize the accelerator program and are looking to start making the workspaces self sustaining so they don’t have to close them down.
borski 9y ago
This has always been the case. They're just publicizing it now.

hatfieej 9y ago

My company just finished this batch. 500 was upfront that funding would not happen until at least 2 months after the batch starts. My impression is that communication has been weak after Dave leaving and that has allowed room for speculation. Personally, 500 has been good to us.