17 ms·

Oculus Facebook deal could ignite equity crowdfunding

72 points by bernardlunn 13y ago

samstave 13y ago
https://news.ycombinator.com/item?id=7471344 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."
HelloMcFly 13y ago
The font on that article is all over the place.
- dadrian 13y ago
  Agreed, I couldn't concentrate enough to even read it because the font kept changing.
hershel 13y ago
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.
- swalsh 13y ago
  What prevents scams on kickstarter?
  - squidfood 13y ago
    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).
    - smsm42 13y ago
      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.
- forgottenpaswrd 13y ago
  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.
  - 7Figures2Commas 13y ago
    > 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.
Jonovono 13y ago
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 http://www.fcaa.gov.sk.ca/SKEC
bashcoder 13y ago
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-replacement-for-convertible-notes http://blog.ycombinator.com/announcing-the-safe-a-replacemen...
- bashcoder 13y ago
  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.
tormeh 13y ago
Crowd investment is already happening. Check out Seedrs. The companies are mostly uninspiring, but that will hopefully change at some point.
- stefek99 13y ago
  I was just going to mention Seedrs: http://www.seedrs.com/invest http://www.seedrs.com/invest (among many others but they seem to be the most popular choice in the UK)
- onehp 13y ago
  There's wefunder too (https://wefunder.com/ https://wefunder.com/) who are getting set up to allow unaccredited (lower net worth) investors once the JOBS act goes through.
- tuty767 13y ago
  You have RockThePost as well https://rockthepost.com https://rockthepost.com where they connect investors with early stage tech startups
- yangmeyer 13y ago
  There is also Seedmatch (https://www.seedmatch.de https://www.seedmatch.de) and FundedByMe (https://www.fundedbyme.com https://www.fundedbyme.com)
philmcc 13y ago
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-title-iii-crowdfunding-moves-closer-to-reality/ 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.]
- bernardlunn 13y ago
  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.
fragsworth 13y ago
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.
- STRiDEX 13y ago
  Your example sounds like something more in the realm of taxes, but I get where you're going.
  - fragsworth 13y ago
    Well, taxes are imposed on everyone. In this case, only people who want to participate in the investment would pay for it.
- kiba 13y ago
  You still have to convince the town residents to pony up the money or see it as a good idea.
- ianbishop 13y ago
  Isn't that what a traditional co-op is?
  - andygates 13y ago
    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.
- serge2k 13y ago
  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.
ig1 13y ago
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.
- backprojection 13y ago
  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.
  - joncalhoun 13y ago
    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.
  - mattzito 13y ago
    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.
    - 13y ago
notastartup 13y ago
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.
aaronbrethorst 13y ago
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.
- BrainInAJar 13y ago
  > 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.
everyone 13y ago
What language is this article written in?
mcphage 13y ago
Is the problem that people had with the Facebook deal really just that they didn't get a cut?
- yaeger 13y ago
  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.
siglesias 13y ago
We already have "equity crowd funding." It's called an IPO.

72 points by bernardlunn 13y ago

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

HelloMcFly 13y ago

The font on that article is all over the place.

dadrian 13y ago
Agreed, I couldn't concentrate enough to even read it because the font kept changing.

hershel 13y ago

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.

swalsh 13y ago
What prevents scams on kickstarter?
- squidfood 13y ago
  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).
  - smsm42 13y ago
    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.
forgottenpaswrd 13y ago
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.
- 7Figures2Commas 13y ago
  > 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.

Jonovono 13y ago

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

bashcoder 13y ago

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-replacement-for-convertible-notes http://blog.ycombinator.com/announcing-the-safe-a-replacemen...

bashcoder 13y ago
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.

tormeh 13y ago

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

stefek99 13y ago
I was just going to mention Seedrs: http://www.seedrs.com/invest http://www.seedrs.com/invest (among many others but they seem to be the most popular choice in the UK)
onehp 13y ago
There's wefunder too (https://wefunder.com/ https://wefunder.com/) who are getting set up to allow unaccredited (lower net worth) investors once the JOBS act goes through.
tuty767 13y ago
You have RockThePost as well https://rockthepost.com https://rockthepost.com where they connect investors with early stage tech startups
yangmeyer 13y ago
There is also Seedmatch (https://www.seedmatch.de https://www.seedmatch.de) and FundedByMe (https://www.fundedbyme.com https://www.fundedbyme.com)

philmcc 13y ago

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-title-iii-crowdfunding-moves-closer-to-reality/ 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.]

bernardlunn 13y ago
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.

fragsworth 13y ago

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.

STRiDEX 13y ago
Your example sounds like something more in the realm of taxes, but I get where you're going.
- fragsworth 13y ago
  Well, taxes are imposed on everyone. In this case, only people who want to participate in the investment would pay for it.
kiba 13y ago
You still have to convince the town residents to pony up the money or see it as a good idea.
ianbishop 13y ago
Isn't that what a traditional co-op is?
- andygates 13y ago
  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.
serge2k 13y ago
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.

ig1 13y ago

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.

backprojection 13y ago
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.
- joncalhoun 13y ago
  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.
- mattzito 13y ago
  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.
  - 13y ago

notastartup 13y ago

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.

aaronbrethorst 13y ago

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.

BrainInAJar 13y ago
> 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.

everyone 13y ago

What language is this article written in?

mcphage 13y ago

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

yaeger 13y ago
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.

siglesias 13y ago

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