However, in the scheme that you imply, where a VC does this for every founder that they’ve invested in (mandatory!) that problem goes away. You may be on to something here.

All ideas get a second outing, and this (Link: Nivi : Can Entrepreneur’s Diversify their Stock across their Investor’s Portfolio?.) is no different. Can’t lay my fingers on it just now, but I remember reading about something like this both in the …

There was something like this back in 2000–I think it was called an exchange fund, but it was for companies that had been bought or gone public and the execs or founders were locked up. They were able to do tax-free exchange of stocks with other execs in the fund, so everyone would get some diversification without having to tax a tax hit in doing it.

But doing it sooner and making the founder almost a limited parter is a great idea. Really great.

http://csertoglu.typepad.com/sortipreneur/2005/05/what_drives_ven.html

check out this article from wired http://www.wired.com/wired/archive/13.04/pension.html its about someone doing the same sort of thing for apiring artists so that they can have a pension fund.

Edwyn

Nivi has an interesting post suggesting how maybe VC’s could let entrepreneur maybe put 25% of their stock in a pool with all the other similar startups in the VC’s portfolio. this enables entrepreneurs to diversify risk across the whole portfolio a…

This is very similar to what I’m doing with Remote IQ; the intended result is a portfolio of startups and founders that share equity; a web2 incubator if you like that builds and spreads risk across multiple “investment products” for which we plan to attract VC interest. Likewise we offer VC’s the option of either spread risk in Remote IQ, or direct investment in our startups once they’ve proven themselves in Alpha.

d

All of this discussion, of course, needs to be steered towards venture capitalists, and the magnitude of benefits that risk alignment makes available for them. Everyone understands that if changes are made, then founders will be more comfortable taking more risk (which might translate into better portfolio performance), but here’s another important benefit that the “founder’s pool” can accrue to the venture capitalists.

Quite fundamentally, we can changing the way we think about vc financing; away from it being a straight injection of cash, and towards thinking of it as a “financing package” which includes other securities, and perhaps fringe benefits.

VCc need to compete and differentiate their money. If they have another dimension to their “product”, it just gives them more bargaining strength for negotiate better deals. It’s like employers differentiating themselves by emphasizing the complete spectrum of the remuneration package (rather than salary).

For vcs, it’s not just the amount of money available, it’s not just how much “value add” you can offer, it’s the “risk profile of the financing package” you can offer to your entrepreneurs.

For example: Bessemer can do an early stage deal, but the financing package they offer includes complementary securities (like interests in other Bessemer investees). For entrepreneurs, they get the money, but they also benefit from an improved personal finance risk profile – making Bessemer financeer of first choice.

The point is: Entrepreneurs diversifying their risk is good for venture capitalists.