Pooled Liquidity
PEHub.com posts about an interesting San Francisco-based company, EB Exchange Funds, that pools Entrepreneur’s stock in their company into a shared vehicle with other Entrepreneur’s stock, to provide increased liquidity. When one of the fund’s firms achieves a liquidity event, each member of the fund shares in a portion of that distribution.
The structure is aimed at first time founders whose total net worth is likely held in the stock of their company. Other firms, as PEHub mentions like the Founder’s Fund, have created other structures that involves taking a small amount of equity off the table for founders.
Some, like Ron Conway, an angel investor, think that the practice by “third-rate VCs” is “buying off entrepreneurs”.
First-time entrepreneurs - the target segment - are likely to be young, let’s say under 30. $100,000-$300,000 is a significant amount of money for them. Through my lens, as an entrepreneur, it is a question of when not if it is a bad idea or not.
Clearly, taking any money out at the seed or angel investment stage is a bad idea that creates a bad set of incentives. But for a Series A round of $5m or greater, the lines begin to gray.
There is a small market for private equity funds that target firms with $10m-$20m in revenue and cash out a piece of the founder’s equity for company’s worth around $100m.
If you think an average series A investment has a post-money valuation of $12m-$15m, it is a question of what low point is “paying off” entrepreneurs and where to draw the line.
Driving down the socially acceptable valuation will also have the effect of first-time founder’s holding out for larger outcomes, of which MyBlogLog is a great example.
Your thoughts?
