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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

by 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.
        tptacek 14y ago
        No they don't. Any kind of complexity at all in M&A and major investment closings gets insane expensive no matter who's involved. Have you ever closed a VC round? I did (with 2 cofounders) during the bubble. There was nothing remotely interesting about our paperwork. It was insanely expensive.
        waterlesscloud 14y ago
        I didn't say anything about the cost. I said they'd find an efficient (for them) way to deal with it. The point was made that this could derail later rounds, and my response is that methods and approaches will be developed so that is not the case, because solving problems is what these people do.
        damoncali 14y ago
        I would assume someone will try to come up with some standard language to wrap this type of investor together into something manageable. If they succeed, it will be a non-issue. But that is a big if. It only takes one difficult shareholder to torpedo a deal. This is all very new, so who knows what will happen. What I'm comfortable saying, though, is that nobody is going to want to deal with crowd funded startups until this is all figured out. It's just not worth it when there are clean deals out there.
- ScottBurson 14y ago
  Yes. Didn't we see a story here recently about having two or three former co-founders on a cap table was blocking a VC round? It will be interesting to see if anyone can figure out a structure for crowdsourced equity that protects everyone's interests adequately.
- wmf 14y ago
  There may also be an adverse selection problem. As a founder, would you rather have $170K from YC or $200K from AngelKicker? Will all crowdfunded startups be the ones who couldn't get in to an accelerator program? If so, good luck raising a second round.
  - damoncali 14y ago
    You may also see companies that only need one round (i.e not VC-scalable businesses) going to AngelKicker. (Nice name, by the way - is the domain taken?) That would further brand AK companies as "non-fundable" in follow-ons. The more I think about this, the less relevant to the SV style startup I think this legislation is. It's better suited to other types of business.

by itg 14y ago

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.
      - tptacek 14y ago
        No they don't. Any kind of complexity at all in M&A and major investment closings gets insane expensive no matter who's involved. Have you ever closed a VC round? I did (with 2 cofounders) during the bubble. There was nothing remotely interesting about our paperwork. It was insanely expensive.
        waterlesscloud 14y ago
        I didn't say anything about the cost. I said they'd find an efficient (for them) way to deal with it. The point was made that this could derail later rounds, and my response is that methods and approaches will be developed so that is not the case, because solving problems is what these people do.
      - damoncali 14y ago
        I would assume someone will try to come up with some standard language to wrap this type of investor together into something manageable. If they succeed, it will be a non-issue. But that is a big if. It only takes one difficult shareholder to torpedo a deal. This is all very new, so who knows what will happen. What I'm comfortable saying, though, is that nobody is going to want to deal with crowd funded startups until this is all figured out. It's just not worth it when there are clean deals out there.
ScottBurson 14y ago
Yes. Didn't we see a story here recently about having two or three former co-founders on a cap table was blocking a VC round? It will be interesting to see if anyone can figure out a structure for crowdsourced equity that protects everyone's interests adequately.
wmf 14y ago
There may also be an adverse selection problem. As a founder, would you rather have $170K from YC or $200K from AngelKicker? Will all crowdfunded startups be the ones who couldn't get in to an accelerator program? If so, good luck raising a second round.
- damoncali 14y ago
  You may also see companies that only need one round (i.e not VC-scalable businesses) going to AngelKicker. (Nice name, by the way - is the domain taken?) That would further brand AK companies as "non-fundable" in follow-ons. The more I think about this, the less relevant to the SV style startup I think this legislation is. It's better suited to other types of business.