A VC: Getting a piece of my action

FTA: The public markets have failed to solve this problem so it's going to get solved in some other way.

The public 'markets' haven't failed to solve this problem so much as the government regulations that surround being public, such as Sarbanes-Oxley, have made it impractical for smaller (< $1B) companies to go or stay public in the US. It's impossible for a company doing $100M in revenues to justify a $5M fixed annual cost for SOX compliance, which doesn't even begin to take into account the compliance costs of other general and industry-specific regulations.

Few things-

First of, there is a way: if you're confident that a start-up you like will succeed, you can invest in it by joining at a sub-market salary and taking a high equity stake. This way you're investing ( $market_rate - $negotiated_rate ) * 4.

Yet this approach has issues: you can't join multiple start-ups at the same time and of course you're taking a long term and substantial risk. Yet it also provides a filter of "investors": if you can get hired in start-up run by competent people, presumably you're able to judge the likelyhood of a start-up's success.

If we take substantial public investments in start-ups, we'd have people with no domain knowledge and in no financial shape making investments in start-ups that generate the most (or the most targeted) PR. This is very much what happened during the housing bubble (people with no knowledge of real estate buying "investment properties" using borrowed money at prices they couldn't afford to pay).

Bottom line is that investment in a start-up is risky. There are tons of faux-entrepreneurs who'd abuse this method as a chance to flip a quick buck (take an initial investment, float more and more PR about the company and sell their stock for a profit to investors who took are hoping for a quick profit).

There is another issue everyone is talking about: public markets are effectively closed for <$500mm companies. M&A is slowing, especially at prices between $100mm and $1bn -- the types of companies that are too big for Flickr-style exit and too small for an IPO.

Running a profitable mid-size company may be great for the founders (take bonuses/receive dividends after hiring a professional to run the company while you either step-away or step-down to a CTO/VP of Engineering), but what about the employees? The employees in this situation are not likely to see anything for the equity, other than through secondary private equity markets (which are not common in cases other than Facebook and are limited).

This leave employees screwed: either wait for the "next Google", work at a public company (where the equity may be worth something, but the quantity of it isn't substantial and you have little ability to affect the worth of your equity), be employee 1-5/founder of a small "built-to-flip" company (limits you to, essentially, consumer web-start ups) or work for a salary/bonuses.

Here's an idea I'd suggest: allow limited sales of early equity by employees to non-accredited investors who believe that the company will achieve phenomenal growth later on making their equity worth something.

well SOX only deals with U.S. public companies. Whats stopping the startups from basing their parent company in some other country and selling the "stock" on the open market? Or if possible, just selling the "stock" on a foreign exchange, does the sox apply then?

i.e. PG LTD, the owner of YC Inc and HN Inc would list 10% of his company for sale on lets call it CEX(Canadian Equity Exchange). He would want to raise $100,000 in exchange for that equity, so he'd list 100,000 shares at $1/share. Then he would put an "invest in us" link on his main site. And U.S. consumers, would be able to go to CEX.com, review the terms, and then buy some equity.

So let's say a certified investing company emerges that will take the small investments of people like us and combine them into large rounds of investments. They do this in rounds saying that after 6 months or so, they'll sit down with a company that has had interest shown and work out deals that can be voted on by the people interested in investing.

How would this be fundamentally different from a public stock exchange, except that investments would be much slower than the instantaneous trading we can do now?

Often, I've thought that it would be really fun to invest a very small amount of money into a start-up, say $25 to $50.

Even though I wouldn't have any delusions about a real ROI, it would be fun to be part of the "insider's circle", such as a founder's forum or special deals for micro-shareholders.

Ah the US regulatory system. The problem was never too much regulation or too little regulation, but rather, completely random regulation written hastily by people who have minimal domain knowledge, and complete unwillingness to change regulations after they have been made.

Reposting from a previous thread: http://news.ycombinator.com/item?id=363509

Amazing. I have always wondered why micro-financed model isn't the solution for all the financial worries of startups and the VC play.

This is the "change" that would make a lot of things easier, ensure startups keep up their momentum and not waste in VC fund raising process. More you have angels who are truly angels backing founders. (I understand this can hurt lest rational thinking is lost)

Micro financing at angel level (be it 5 friends/colleagues or more) is great. Someone needs to institutionalize this or have some learnings on how to deal with accountability, resolving dispute and the like.

For people in India, Israel, Ukraine and the rest of east Europe the startup costs are quite low. $100K is like close to upper end angel funding.

I know of at least 6-7 ex-Trilogy startups in India - brilliant guys, doing it right, when it comes to funds Indian VCs are most risk averse they wouldn't invest in anything other than jobs, matrimony, real estate and travel. I have always wondered why would it really bother for couple of ex-Trilogy in US to invest. For 2 guys to put something like $50K it would be hardly anything.

There are very well founded reasons for the qualified investor rules. Anytime you read someone wanting to relax them make sure they aren't trying to pick your pocket.

If you have a spare money and you want to invest in a company check HN everyday for "Review My Startup". Out of the few dozens that launch here every year, I am sure you can find a good investment (with enough due diligence).

oh i hate these pricks and their "oh i know you would give your nuts to be in the same room as me, here are some pointers" posts

fuck you douche, i neither want or need your money

who will want money from you is the dipshits who threw a substantial amount of cash into your sorry funds in the first place...right now they are probably wondering if your zero-return, high-risk investment vehicle is worth the paperwork. something tells me you will be returning their calls