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If there are initial investors into a startup via crowdsourcing, are there any protections given to these investors against the tricks that veterans would play,

If there are initial investors into a startup via crowdsourcing, are there any protections given to these investors against the tricks that veterans would play, like dilution, preferred shares, etc? It seems pretty easy to me for someone to set up a startup, get initial funding through crowdsourcing, and then as it needs another round of cash infusion, it lets a bigger VC come in and dilute the hell out of the initial investors. It's actually less of a risk for VCs because they can let retail suckers take on the higher risk during the initial round, and if the startup survives, then they can swoop in and invest in a more promising company, and dilute the initial investors into nothingness.

citadrianne 14y ago
Those kinds of protections will be decided by the SEC, although I don't know if they'd think of that. But now is the time to tell them because it's in a public commenting period: http://www.sec.gov/comments/jobs-title-iii/jobs-title-iii.shtml http://www.sec.gov/comments/jobs-title-iii/jobs-title-iii.sh...
itg 14y ago
VC's were pushing hard for this bill under the guise of "job growth" and every politician bought into it. There were numerous folks who said it allows for fraud and the bill was pushed without looking at the can of worms it opens. It benefits the VC's while reducing protections for investors. I wonder how long before we start hearing stories about retail investors getting screwed over by VC's in the media and makes people even more wary putting money into the crowd-sourcing fad.
- damoncali 14y ago
  I don't think the VC's like the crowd sourcing parts. That does nothing but cause them headaches. They like the other bits that let them stretch the truth about IPOs. I don't expect crowd sourced deals to get crammed down by VC's - there is too much risk in those deals to deal with a bunch of non-professionals. I expect crowd sourcing to be a red flag that kills your chances of raising professional rounds.
  - dllthomas 14y ago
    I think it depends on how it's done. If there's a whole bunch of individual deals for small amounts, I don't expect a VC to want to clean up the mess. If there's one or two deals for small amounts of money and equity, I expect them to get bought out of it - what's $20 thousand on a $5 million round? But I also expect there to be organized consolidation of crowdsourced money into a single package with a single set of terms, which would make it less hairy for a VC (and the terms could be set up to help limit dilution) - in particular, I expect this is where the "Raise your crowdfunding here!" startups will go.
    - tptacek 14y ago
      The buyout might be $20k, but from experience I'd bet that the legal fees to resolve that buyout even if nothing janky happens during the closing is going to be low-mid 6 figures --- just for that one issue, not counting the rest of the closing costs. And if jankiness occurs, I'd assume that's curtains for the round. You'd want to watch and see whether VCs and VC-friendly lawyers like WSGR and Orrick come up with standard documents for crowdfunding, but I'm with 'damoncali in thinking that selling equity on something equivalent to Kickstarter is going to be the kiss of investor death for the next several years.
      - damoncali 14y ago
        To make things worse, it's a mess to try to find former employees/contractors with .5% to try to buy them out. Can you imagine trying to find the 20 guys who each put in $250 and aren't answering their email? The jank required (and +1 for appropriate use of the word "janky") to derail a professional round may be nothing more than "can't find everyone".
        waterlesscloud 14y ago
        I'm pretty sure the professional VCs and the law firms that represent them will find an efficient way to deal with the issue. That's what they do.
wilschroter 14y ago
None of these evolutions in funding happen in a vacuum. There will be new structures to accommodate crowdfunding investors as well as basic provisions. Remember too that VC's fund an incredibly small number of early stage deals compared to millions of companies that get started each year. Not sure that companies that are heading in the venture funded track are necessarily the model for this.
gersh 14y ago
Can you crowdsource all the way to IPO? Do the crowdsourced investors get right of first refusal? Can you do something like: Round 1) 1000 investors put $100 Round 2) 10000 investors put in $1000/each Round 3) 10000 investors put in $10000/each Round 4) IPO Will VCs become more like activist hedge funds, that invest in public companies. If startup stocks are liquid, will VCs have to deal with mark-to-market valuation of their portfolios?

citadrianne 14y ago

Those kinds of protections will be decided by the SEC, although I don't know if they'd think of that. But now is the time to tell them because it's in a public commenting period: http://www.sec.gov/comments/jobs-title-iii/jobs-title-iii.shtml http://www.sec.gov/comments/jobs-title-iii/jobs-title-iii.sh...

itg 14y ago

VC's were pushing hard for this bill under the guise of "job growth" and every politician bought into it. There were numerous folks who said it allows for fraud and the bill was pushed without looking at the can of worms it opens. It benefits the VC's while reducing protections for investors. I wonder how long before we start hearing stories about retail investors getting screwed over by VC's in the media and makes people even more wary putting money into the crowd-sourcing fad.

damoncali 14y ago
I don't think the VC's like the crowd sourcing parts. That does nothing but cause them headaches. They like the other bits that let them stretch the truth about IPOs. I don't expect crowd sourced deals to get crammed down by VC's - there is too much risk in those deals to deal with a bunch of non-professionals. I expect crowd sourcing to be a red flag that kills your chances of raising professional rounds.
- dllthomas 14y ago
  I think it depends on how it's done. If there's a whole bunch of individual deals for small amounts, I don't expect a VC to want to clean up the mess. If there's one or two deals for small amounts of money and equity, I expect them to get bought out of it - what's $20 thousand on a $5 million round? But I also expect there to be organized consolidation of crowdsourced money into a single package with a single set of terms, which would make it less hairy for a VC (and the terms could be set up to help limit dilution) - in particular, I expect this is where the "Raise your crowdfunding here!" startups will go.
  - tptacek 14y ago
    The buyout might be $20k, but from experience I'd bet that the legal fees to resolve that buyout even if nothing janky happens during the closing is going to be low-mid 6 figures --- just for that one issue, not counting the rest of the closing costs. And if jankiness occurs, I'd assume that's curtains for the round. You'd want to watch and see whether VCs and VC-friendly lawyers like WSGR and Orrick come up with standard documents for crowdfunding, but I'm with 'damoncali in thinking that selling equity on something equivalent to Kickstarter is going to be the kiss of investor death for the next several years.
    - damoncali 14y ago
      To make things worse, it's a mess to try to find former employees/contractors with .5% to try to buy them out. Can you imagine trying to find the 20 guys who each put in $250 and aren't answering their email? The jank required (and +1 for appropriate use of the word "janky") to derail a professional round may be nothing more than "can't find everyone".
      - waterlesscloud 14y ago
        I'm pretty sure the professional VCs and the law firms that represent them will find an efficient way to deal with the issue. That's what they do.

wilschroter 14y ago

None of these evolutions in funding happen in a vacuum. There will be new structures to accommodate crowdfunding investors as well as basic provisions. Remember too that VC's fund an incredibly small number of early stage deals compared to millions of companies that get started each year. Not sure that companies that are heading in the venture funded track are necessarily the model for this.

gersh 14y ago

Can you crowdsource all the way to IPO? Do the crowdsourced investors get right of first refusal? Can you do something like: Round 1) 1000 investors put $100 Round 2) 10000 investors put in $1000/each Round 3) 10000 investors put in $10000/each Round 4) IPO Will VCs become more like activist hedge funds, that invest in public companies. If startup stocks are liquid, will VCs have to deal with mark-to-market valuation of their portfolios?