Questions related to pool selection process
Founders pledge a small portion of their vested equity to a pool consisting of equity contributed by other similarly situated, mutually selected founders. This group becomes jointly vested in each other’s success, and each member has a long-term hedge provided by the overall performance of the pool’s equity.
Your transfer of a portion of your personal equity stake in your own startup is governed by the transfer rules that your company has in place. In some cases, this could require approval by your board of directors. We can help explain to your board why participation in FounderPool is a win/win that helps ensure that you as a founder remains aligned with the interests of your company’s investors (by providing some measure of hedging against a loss that allows the founder (you) more flexibility in pursuing an ambitious, long-term, high-value exit for the company — while building a helpful network and focusing on your company instead of financial worries).
You are welcome to apply and explore the opportunity, with no obligation to join a pool. We will help you meet like-minded entrepreneurs, and explain the details of our program. Should you and others you meet through FounderPool (or know already) mutually agree to form a pool, we’ll be there to help.
The equity you transfer to a pool will appear on your capitalization table as the pool being the owner of a small portion of your company’s common stock. This should not have any financial or legal ramifications that would be of significance to potential new preferred investors. And your participation in the program should be seen as a positive thing by VCs. You didn’t “cash out” (sell your shares and put money in your pocket), and yet you took a step to align yourself with a community of other founders and advisors who can be of future benefit for hiring, operations, customer introductions, strategic advice, and much more — all while increasing your risk tolerance in a way that lets you strive for a large long-term outcome for your own company.
Questions related to legal stock transfers
You get to rank and select the companies/entrepreneurs you want to share equity with, and the other entrepreneurs do the same. Pools are self-selected by mutual agreement of prospective pool members.
FounderPool serves as an administrator and community service provider to the pool, funded by an administrative fee and a profit-sharing arrangement. Founders do not need to contribute any cash, just a small percentage of their founder equity. Some pools elect to include a small number of cash-contributing pool members to help with diversification and financing of pool formation and administration, and to bring experienced mentors and investors into their pool’s social circle, but this is not a requirement.
The initial application process isn’t too time-consuming, and hopefully the questions are a fruitful chance to reflect on your own company. After applying, you’ll have a brief screening interview and chance to meet a member of the FounderPool team. If you’re a good candidate for pool participation, we’ll introduce you to other prospective pool members in a round-robin, founder-speed-dating type of introduction, or with other formats that facilitate the introductions you’re seeking, and offer opportunities for deeper follow-on conversation, collaboration, and diligence if you wish.
Pool construction happens by peer selection.
All founders with a FounderPool profile get to see and rank their top startups/entrepreneurs in their cohort, based on their own assessment of company factors (such as team, traction, product, vision and market), and their desire to be in a pool with those particular peers. FounderPool assists in helping groups of people to meet and coalesce into a decision, and then pools are formed by mutual consensus acceptance of all the members. If you don’t make it into a pool, or choose not to join, you are welcome to stay involved and try again later.
It is an inevitable part of pursuing a high-risk, innovative entrepreneurial path that there is a meaningful probability of failure. Mitigating against the financial impact of this risk is part of the advantage of being in a pool. But the community matters too: founders will get to know and trust each other, and perhaps find ways to work together. Founders and employees from one company may wind up working for another, or one company may merge with another. One founder may get guidance from others that helps steer a clear path to success. Ultimately the purpose of the pool is to benefit everyone from the accumulating social capital of their network, to be better founders and operators. But no matter how good the team and the business idea and execution, the outcome is uncertain. So the other purpose of the pool is to help mitigate financial risk by having everyone share in the financial outcome of the group as a whole — with the aspiration that even if most companies fail, as a whole everyone could come out ahead.
Pools are made by common collective agreement of the participants, so ultimately the answer to the question is, founders can decide to handle things as they prefer, and no one is required to do anything they don’t want to do. However, in general founders would elect to have everyone’s contributed equity valued according to its fair market value at the time of formation. Even if the company is relatively new or there have never been any transactions in the founder’s equity share class, fair market value can still be determined by various industry-standard methods that help founders to be assured that their ownership interest in the pool, in absolute terms and relative to others, is fair and equitable. FounderPool can help with this process. Full details are available to those who apply and are exploring the possibility of joining a pool.
The equity contributed to a pool must be already vested and otherwise free of risk of forfeiture beyond the rights standardly established for common shareholders, except in the rare exception of pool members who collectively decide otherwise. So in the standard pool arrangement, the pool’s ownership of its equity interest in a company is not subject to revision due to a change in the status of the contributor.
Pools are formed by voluntary collective mutual agreement, so in theory could be very small or large. A typical range for a pool might be 12 to 60 individuals from 8 to 40 companies. But larger groups are possible, and smaller, tight-knit groups, perhaps because they know each other already or want to focus on a narrow vertical, can also be accommodated.
It shouldn’t. Great founders don’t start companies purely to get to a financial milestone. Great founders want to make a big impact on the world.
When pool members hit milestones, it breeds a competitive spirit, or perhaps a sense of collective obligation, among the others who then want to live up to the benchmark set by their peers. This mechanic strengthens the entire group by design, generating an esprit de corps.
And as a practical matter, any breakthrough and exit liquidation is likely to happen years down the road, when everyone has already been working hard on their companies, and in any case the financial potential available to the founder from success of their own venture would still remain a compelling opportunity.
Traditional angel investing requires post-tax cash to invest and requires extensive efforts to generate deal flow, meet founders, conduct due diligence (typically on your own rather than with the benefit of a circle of other potential investors), persuade companies to take your money, and maintain relationships so they are not merely a financial transaction. With FounderPool, you’re leveraging your illiquid equity, for diversified exposure to other great startups easily, and you get the benefits of a community of aligned entrepreneurs who are invested in helping you build your own company. In addition, most small-scale (syndicate) angel investors don’t have deep ongoing relationships with the companies (indeed often are prohibited from even identifying themselves to the company), and don’t have a shared mutual interest (the companies aren’t endeavoring to help the investor’s own company). Larger-scale angel investors can sometimes build that type of community, but even then it’s usually one-on-one with the angel and the companies, not an entire collective community advancing the entire group as a whole. And to achieve that as an angel with twenty companies would usually require $500,000 to $1,000,000.
That said, if you are an experienced angel investor, we think that participating in a pool can be an important part of your portfolio and help contribute to your dealflow and your own success.
Situations may vary, but most successful applicants have a company that has raised external institutional money, or capital from experienced angels beyond friends-and-family, and/or has a revenue-earning product in the market.
Connect with us and we can help answer your questions.
Our onboarding team can answer your questions on a 10-min zoom call.