The concept of a business is hundreds of years old and history has seen most types of business financing, both benevolent and scammy. As a result, there's a massive amount of regulations around it. No matter if intentions of the business owners are benign or not, when the public invests in companies there is a need for rules governing transparency and control.
What the post is referring does exist, it's called the stock market. It is a set of rules you need to follow before you can allow thousands or millions of shareholders to invest. Committing to the rules and getting the permission to do so is called an IPO.
> No matter if intentions of the business owners are benign or not, when the public invests in companies there is a need for rules governing transparency and control. What the post is referring does exist, it's called the stock market.
When the users are the owners it's a co-op. No need for a stock market there. A lot of grocery stores in BFN are co-ops.
I disagree - a business that is owned by its customers is probably best described as a mutual company. Examples are the old NYSE, and most other stock markets before modernization, most insurance companies before the wave of demutualization in the 1990's, Savings and Loan companies. The list goes on.
I think it's potentially a good model for some businesses, for example those that do not require a large amount of R&D spending, or where this is not a race to the bottom as happened with stock exchanges.
> What the post is referring does exist, it's called the stock market. It is a set of rules you need to follow before you can allow thousands or millions of shareholders to invest. Committing to the rules and getting the permission to do so is called an IPO.
No, that's all wrong. There are business that seek direct investment -- including specifically from their customers -- without being publicly traded on any exchange; they obviously have to comply with general securities laws, but do not have to deal with anything applicable specifically to publicly-traded companies or particular exchange rule, and obviously don't have an IPO first as they aren't public.
Neither being widely held (having lots of individual shareholders) nor seeking direct equity investment from your customer base requires you to be a publicly traded firm.
There is another alternative: a second market. There are limits to that but it is feasible in a much smaller scale.
The problem is that those regulations makes impossible for small companies to IPO. The Government must think harder on how to make them more affordable. Others stock markets are not so costly.
Understood.
Is it possible to create a mutual fund that invests in start ups? May be something like a VC backed by many small investors? Small investors can be an important resource. Loyal customers, promoters, extra help, etc.
There are some hedge funds that invest in startups, along with the investment arm of other companies (Microsoft bought 1.6% of Facebook pre-IPO), but I don't know if it'll work for mutual funds. Hedge funds and companies can sit on a startup for years before getting any return, but mutual funds have to be much more liquid. It could work as a closed-end fund, but those are much less common than open-ended funds and you lose the ability to reinvest in the startups.
http://lxventures.com is a Vancouver based public company that does something very similar to what you just described. It is a very new concept, and hotly debated.
"LX Ventures is a publicly-traded startup technology incubator that launches, acquires and integrates silicon valley style early-stage, high-growth technology companies. "
To my understanding, the thing that is really new is the current strategy surrounding IPOs. From what I gather, IPOs used to be a key option for raising funding, rather than a key option for cashing out.
If you use an IPO as a source of fund raising, it seems like you'd have little trouble using the stock market to do this very thing- allow your users to invest in you.
I think (for technology companies you're correct).. Private money is 'cheap' for growing tech companies, so going IPO as a way to source further growth capital makes little sense (also worth noting, the cost of starting/ growing is accelerating down).
So, why give up massive amounts of control - in many cases having to actually listen to those owners, be forced to share information with competitors through filings, and deal with the headaches when VC money is so cheap and relatively plentiful?
Look at an example like Groupon, where many of the major shareholders had largely cashed out before ever making it to the stock market (through VC fundings). Similar situations have happened with both Facebook, Twitter in terms of pre-emptive cashing out.
"need for rules governing transparency and control."
And when they're implemented, the politicians the existing large players hired via campaign contributions are very careful to make sure the regulations favor the existing large players who pay the politicians bills, in other words the exact opposite of startups. So that's probably not going to end well for the startup.
The thing is, it's pretty hard for an ordinary person to buy a share of a company. You usually need to be able to buy a large quantity of shares, pay for a trading account, try not to get ripped off with various fees, and deal with taxes.
This is FUD. You can easily buy one share if you want to. You don't pay to open a trading account. The fees are about as transparent as they could possibly be. And the taxes are not much more complicated than normal income taxes -- if you hold for less than a year your profits are taxed at the marginal rate and if you hold for longer than that you are taxed at the long term capital gains rate.
I'm not saying it's a good idea to buy one share of a $25 stock. It's not. But modern retail trading is accessible to pretty much anyone these days.
I would also add that many companies let you bypass fees and directly buy there stocks. Which can save you significant amounts of money if you want to say buy a few shares every paycheck.
Sorry I should have put a disclaimer that I was talking about trading in the US. I'm not as familiar with retail trading in the UK. In the US you will typically pay between $7 - $10 per trade for stocks (regardless of order size). These are the sorts of retail rates you see here:
Why can't I walk up to the stock market and buy a single share of Facebook?
If you have a membership on an exchange, the marginal cost of buying one share of FB would be the liquidity removal fee of $0.0030 (three tenths of a penny)†. But you don't have membership on any exchanges, so you have to buy your share through a third party, a stock broker.
Your broker is providing a service that has costs. Exchange connectivity is not free. Brokerage staff do not work for free. The website and backend technology are not free. Clearing is not free. Those costs have to be passed on.
There is a lot of healthy competition in the retail brokerage space. It's relatively easy to move your holdings from one brokerage to another, which suggests that competition has driven transaction fees to a level that allows brokers to cover their costs and provide a small profit.
Because the stock market is not a store. The price of a share of stock does not include the cost of running the market and its infrastructure.
If you want to invest without fees, find a no-fee mutual fund with low minimum investments. At the scale where $7-10 fees are onerous, I find it highly unlikely you have the money or sophistication to be investing in individual volatile securities.
They do, its called selling a product. Tumblr didn't sell much of anything, because they did not have much of anything to sell. They provided free blogs to people. That's it. You can't complain about not making money if you did not make sure to have a clear way to make some. Reason for which one should first make sure to validate the business.
Tumblr seemed to do a very poor job of asking customers for money, and it's a lesson that everyone can take away. At the very least provide users with some money to spend with an easy incentive to spend it, and make the transaction very easy and quick.
This article is not 100% clear on whether it means "true" investment or just paying for a service, which is not the same thing at all.
But regarding "true" investment, It's something we looked at 18 months ago when raising our Series A. At the time it was impossible due to SEC regs around accredited investors and max number of investors (deeper analysis here: http://www.startupcompanylawyer.com/2012/05/26/is-crowdfundi...) so we gave up. But it would be great to have simple ways of getting it done.
Federal Credit Unions work in a similar way to the UK's Building Societies. There are other co-ops here but I don't think they have the same penetration as in the UK.
One national brand I CAN think of that is a co-op is REI, I'm sure there are others though, lots of local-focused food businesses use a co-op model.
Costco and Sam's club (wholesalers / cash n carry) offer membership benefits but I think that's more related to getting air miles on your credit card.
Cooperatives are common in rural America. One of my clients is an electrical cooperative that got started in 1939 as part of the Rural Electrification program. Grain elevators and similar agricultural infrastructure are very often cooperatives. Likewise in parts of the Midwest, telephone cooperatives are common - high bandwidth and low rates.
The flip side is that cooperatives are run like businesses. The electrical cooperative will cut a shareholder's power as quick or quicker than a for profit utility when the shareholder fails to pay their bill - I've been to my client's office on "Cut Off Tuesday."
Apologies, bad choice of word on my part. I should have said "akin" rather than "related".
The point I was trying to make is that whilst those companies offer a membership incentive structure its not a true co-op and you don't have an ownership stake in the company. You just receive some member benefits like cash back and discount coupons - similar to your credit card company giving you air miles.
Florida's Natural (a national orange juice brand in the US) is also organized as a grower's cooperative, which is similar but not identical to consumer coops like REI.
According to this site there were 724 purchasing co-ops in the US in 2009. Those would be stores like REI or food co-ops where the consumer is part-owner.
The total number of cooperatives, including worker-owned business like Land o Lakes and ACE Hardware, credit unions, and utility co-op (25% of US power generation is publicly owned) is 29,000 with revenues around $625 billion.
The idea of internet services as a cooperative is an interesting one. To some extent - that extent being outside the formal economy - the cooperative (in the business sense) model might stand in for the bazaar when describing the development of Linux (i.e. The capital was to some extent social and to some extent reduced cost).
I know the idea is a bit muddled. Something along the lines of working on Linux reduced opportunity costs compared to alternatives.
"I want to be an investor - a very small one - in the services I use. I don't want my attention to be sold to the highest bidder on the stock market."
The second sentence explains why allowing investors described in the first one is a bad idea for a startup. Investors have rights, and investor relations is time consuming. It is better if the interests of investors align with those of the business owners, e.g. making a large amount of money. Otherwise, there is real risk of being dragged down by lawsuits.
Wordpress.com has 66 million blogs and it's parent company made ~$45m - and I'm guessing a significant chunk of that came from a tiny percentage of power users.
Most users just aren't willing to pay for a consumer web product let alone invest, for something like tumblr you'ld be lucky if you could get a tiny fraction of a percent of users to even think about investing.
It's not a bad idea, but there are so many things that need considering. For example, you can't have more than 500 investors before you're required to declare your accounts. For a company that's in a growth period rather than a 'making shed loads of money that looks good to your average joe on the street' period, declaring your accounts isn't necessarily a good idea.
Secondly when you have shareholders you have to be seen to be doing things to increase value for your shareholders, and not necessarily for the long term. Raising money doesn't always coincide with making profit, so the companies would be exposing themselves to potentially hindering lawsuits (which would probably be dismissed but are definitely distracting).
One good reason is because it's illegal. You can't just go around selling shares in your company to anyone. There is a reason why an IPO is called a "Public" offering and why there is tons of regulations and paperwork. This is to prevent scams, pyramid schemes, and the like.
And forming a non-public company with more than 20 or so shareholders is a good recipe for a completely unmanageable entity.
So while the basic idea seems good, it would be difficult to pull off. I guess a ransom-type deal would work better: "Dear Users, we have a $1.1 billion buyout offer. But you could just pay us $13 each and then assuming we get $1.1 billion in revenue, we promise to maintain the service for 2 years."
There's an easy solution and it's called charge them fucking money for your product.
Every bootstrapped, for-pay startup has users who invest in them. Do those get shuttered? Sure, that happens.. but with less frequency I'm sure, especially when the business is actually turning a profit. As a user, it makes sense to pay attention to the complete cost of 'free' when choosing a service.
I think the reason most startups are hesitant to ask their user base for funding is because even selling OTC stock in a company still requires alot of regulation with the SEC. If I remember right (others feel free to weight in here), the startup has to designated a transfer agent, then the company also has to value all of it's assets, past revenue, and I don't think they can account potential revenue. Selling OTC stock in a company, I don't believe is just stick a price on it and sell it for that amount.
In other words, a startup would be better off formulating a clear and concise business plan.....or be like Mark Cuban, and sell high and go on Shark Tank...funny, what happened to Broadcast.com and the buyer? [yes, I know the buyer is Yahoo, and the basis of this article is Tumblr]
It's called an IPO, and the structures are in place for a reason.
Can you actually imagine the difficulty of keeping 170 million "investors" updated on the status of the company? You'd have to share so many reports, make sure everything is done fairly, release regular earnings. Oh, wait, that's exactly what the SEC requires for doing IPOs...
Seriously though, it'd be a scary world where everyone is an investor. Most people just aren't qualified to understand risk and make smart decisions for the future of the company. Startups would end up with no revenue and people's investments would be worthless.
Depends on the startup business model. I work in the "enterprise space" and at my last company, and the one I am just starting this is our plan. We are actually in discussion with two major enterprises who will help fund our initial development through NRE and invest.
This is possible since we are talking 5 figure sums, where the legal hurdles and time negotiating are worth it. IF the sums of money are small, this would not work.
There's a fundamental difference between investors and customers.
Users are customers, they pay if they feel the value of the product is worth XYZ.
Investors are banking on the idea/product to be worth more in the future than what it is now. They also have an appetite for risk, mainly because they understand investing and diversify.
Look up "qualified investor". Opening ownership shares up to literally thousands (if not millions) of not-qualified investors makes it impossible to get proper funding from VCs later. Imagine having to get signatures from 100,000 ten dollar investors, just to get a million dollars. Crazy.
I didn't read all of this, but isn't the current standard business plan to get as many 'free' users as possible, monetize them by adding advertising, then selling their eyeballs to Yahoo, etc. for actual money?
Asking your users to actually pay themselves would mess up step 1, right?
but isn't the current standard business plan to get as many 'free' users as possible, monetize them by adding advertising, then selling their eyeballs to Yahoo, etc. for actual money?
No. There may be a lot of people pursuing that sort of thing, but there are plenty of startups selling "stuff" (whether it's software or something else) to people with money to spend (probably businesses) for real money.
Don't fall for the silicon valley groupthink / herd mentality BS. Building a company that makes money the old fashioned way is still very feasible, and - IMO - always will be.
In the UK crowdfunding startups is becoming common using Seedrs or Crowdcube and a few startups I know have raised a few hundred thousand from their users (and wealthy individuals using these sites).
Many a startup has bootstrapped off one or two customer "investments" - Marc Andressen famously walked a cheque for 11 million USD round the early Netscape offices.
I believe he regretted taking the money be ause it made them beholden to features that customer wanted - but try telling the difference between that and a equity investment
Honestly, I don't get the down vote. Maybe a facetious tone, but 11million bucks helped one of the web's formative companies take off - and that was a customer "investment".
The person(s) who signed that cheque probably had done dozens like it before and dozens like it afterwards - whoever they were, and like hundreds of other senior corporate radicals across the globe, they take the one thing scelortic huge companies have plenty of (money) and push it back to nimble innovative companies. Its an investment in all but name. And it pays everyone dividends when it works.
seriously - if you want investment from your customers, find the big names in your email list.
I can't imagine what Facebook would be like today if every user had a share, given the community uproar (at least initially) to any new changes to the UI, feature set etc.
"I don't understand money. Well, specifically, I don't understand how companies are funded, classify shares, or any of that finance stuff."
lol - stopped reading
Yes, I think that's basically it. Right now the valuation of companies with little or no revenue is based on future cash flow from users. That makes the calculation of how much one user is worth much harder since 90% of users will just drop off and use the next free service.
Also, it's really hard to predict how much users are willing to pay for distraction and entertainment. There are some sites I get value from (e.g. buying/selling or booking things) but the vast majority is just entertainment.
Folks, we are in the beginning of the digital currency era..
the idea is that the founders of a company say "Starter", create the Starter currency.. make a evaluation of how much the whole company worth.. translate this value to Starter units.. and decide the amount to share, and sell..
Then people would buy it, indexed with bitcoins and/or dollars..
The idea is to create a digital crypto-currency the same way bitcoin is..
but indexed by each company evaluation by trading, sell/buy operations..
The problem in the USA is telling everyone you are looking for invstment. That breaks the rules of general solicitation, which the SEC was supposed to have updated last year but has been dragging its feet. So startups can only really talk to accredited investors, and can't talk to their users and tell them they're going to pay dividends or something.
However, they CAN charge their users for SERVICES :)
> The problem in the USA is telling everyone you are looking for invstment. That breaks the rules of general solicitation, which the SEC was supposed to have updated last year but has been dragging its feet. So startups can only really talk to accredited investors, and can't talk to their users and tell them they're going to pay dividends or something.
Startups can talk directly to potential investors, both non-accredited and accredited investors (how many non-accredited investors can invest in them depends on which of the exemptions from registration requirements they are taking advantage of), all current registration exemptions however, prohibit general solicitation and advertising and solicitation except that certain state-law conditions can allow general solicitation and advertising for Rule 504 "seed capital" fundraising.
The update the SEC must make under the JOBS Act for general solicitation would remove the general solicitation restriction for offerings that are restricted to accredited investors where the offering firm takes certain steps to verify that any investors qualify as accredited investors. There's also a crowdfunding option that requires an SEC-registered intermediary (and has overall limits similar to the existing seed-capital option in Rule 504.)
Its not clear to me that either is necessary (or even helpful) to a company that wishes to conduct direct solicitation directed to purchasers of the company's existing offerings who are not necessarily qualified as accredited investors.
Okay, I am a bit confused. Right now, most startups are probably advised to make a good-faith effort to ascertain that their investors are indeed accredited. If they engage in general solicitations, then the bar is higher for ascertaining this. Correct?
If I wanted to message all my users and tell them to point their investor friends towards our AngelList profile, wouldn't that be public solicitation?
> Okay, I am a bit confused. Right now, most startups are probably advised to make a good-faith effort to ascertain that their investors are indeed accredited.
There's no requirement that I see for "seed capital" (Rule 504) investors to be accredited. Offerings that make use of the Rule 505 or Rule 506 exemptions instead, however, are limited to 35 non-accredited investors (the language of the exemption requirement, in both cases, "There are no more than or the issuer reasonably believes that there are no more than 35 purchasers of securities from the issuer in any offering under this section"; in both cases, accredited investors, and certain other special classes, are excluded from the count of purchasers.)
> If they engage in general solicitations, then the bar is higher for ascertaining this.
Well, we don't know precisely because the rule required under the JOBS Act permitting general solicitation under the Rule 506 exemption haven't been written, but it would seem likely to be so once that is permitted. But the Act itself provides that the elimination of the general solicitation prohibition requires that "all purchasers of the securities are accredited investors", and that the "rules shall require the issuer to take reasonable steps to verify that purchasers of the securities are accredited investors, using such methods as determined by the Commission." This would appear to require a higher bar than the simple "reasonable belief" test in the current exemptions.
> If I wanted to message all my users and tell them to point their investor friends towards our AngelList profile, wouldn't that be public solicitation?
I suspect so (but I'm not an expert in the application of these regulations): you aren't soliciting investment directly from just the identified users, you are asking them to solicit on your behalf from a vaguely defined group ("investor friends".)
I would suspect that an offering made only to your existing users would not be general solicitation.
They can't take money from non-accredited investors (those who make below $200k per year or have less than $1 million in assets). This is the reason you can't get shares or profit sharing on Kickstarter.
The JOBS act loosened the regulations to open it up to anybody - but those changes have yet to be implemented and you presently still need to be an accredited investor to invest in startups.
As for whether they'd even want to do it, that's another question. WeFunder (a YC company) wasn't able to convince many of their batchmates to offer shares to the public when they launched and the company I tried to fund through them (Strikingly) appears to have ignored everybody who attempted to back them through WeFunder and went with traditional investors instead (or at least that's what they've done in my case).
> They can't take money from non-accredited investors (those who make below $200k per year or have less than $1 million in assets).
That should be an "and" not an "or" (meeting either the income test or the asset test qualifies for "accredited investor" status.)
And there are several conditions under which firms can make accept limited numbers of non-accredited investors along with unlimited numbers of accredited investors.
> The JOBS act loosened the regulations to open it up to anybody
That's not entirely accurate. The JOBS Act requires the SEC to do two main things in this area:
1. Remove the requirement prohibiting general solicitation and advertising for investment opportunities, if those opportunities are restricted exclusively to accredited investors and the firm seeking the investments takes steps to verify that the investors qualify as accredited investors.
2. Allow "Crowdfunding" with specified per-investor limits of up to $1 million in a 12 month period, via an SEC-registered intermediary.
Neither of these really opens things up to people who couldn't invest before: the first option allows public advertising but is expressly restricted to accredited investors; the "Crowdfunding" option is basically similar to the Rule 504 "seed capital" option, both of which have a $1 million in a 12-month period limit, and neither of which is restricted to any particular class of investors ("seed capital" restricts general solicitation but allows the firm to sell securities directly, "crowdfunding" allows general solicitation but requires the firm to act through an SEC-registered intermediary.)
The accredited investor requirement is right on. It doesn't stop crooks who don't care about law, but without it we'd have rampant 1920's-style fleecing of individuals by smooth talking con artists.
That's not to say there aren't some wealthy people out there whose only successful product was stock, but at least they were forced to do it through proper channels and often endured the boilerplate shareholder lawsuit that's in the top drawer at certain law firms during economic downturns.
I came here just to post this. Then I noticed that you already mentioned it. The JOBS act is new, and companies aren't taking advantage of it yet. It was only passed a month ago after all...
That said, how do Co-ops work? As well as companies like REI or Vanguard? Purchasing an REI membership makes you a holder of the company, and same thing with Vanguard funds... or many credit unions. Is there a reason why the JOBS act was needed when customer-owned businesses already existed?
Whether you realize it or not, I believe you've just asked for a dissertation on the myriad rules covering ownership of incorporated entities.
I'm not qualified to give it to you, but I can say it's not nearly as simple as "IPO or accredited investors only!". You need only consider one scenario to realize this: You don't need to be an accredited investor to incorporate a company.
What the post is referring does exist, it's called the stock market. It is a set of rules you need to follow before you can allow thousands or millions of shareholders to invest. Committing to the rules and getting the permission to do so is called an IPO.