7/21/19 Weekly Update part 1

Last Week’s Progress

See previous update for context. I missed the last few weeks of updates due to travel, handling a few personal things, and refactoring my organizational system.

How you can help

  • Forward this email to an engineering VP or manager that is working at a VC backed company. They can book time with me to learn more.

  • Reply to this email with thoughts/ideas/criticisms/anything really. Your feedback enormously fuels my motivation.

Insights from the last few weeks

  • A few executives have successfully negotiated allocations. The key is that they don’t mention involving a syndicate/SPV or outside fund so that the discussion doesn’t get complicated. This makes sense as its functionally the same to the company as an executive investing out of a personal entity.

  • Asking for allocations of $500k at minimum and about $5mil at max depending on round size seems to be ideal. $500k allocation leads to the SPV having an expense ratio of 2% (assuming total lifetime SPV cost is $10k).

  • Nav Talent/Ventures seems to combine career management for recent grad engineers and investing in companies that those engineers found or join. I’m not sure if they share carry on those investments with the engineers.

  • Carver Edison gives public company employees greater participation in stock programs without saddling them with more debt. It’s similar in spirit to an executive syndicate in that they source institutional capital and help employees turn it into more retail equity by providing employees with interest-free ESPP participation loans.

Fintech VC friends, reply with your take (see mine below) on Carver Edison as they look to be pre-seed.

Potential business models

Generalist fund of funds

  1. Fund manager creates a limited partnership (NewFoF Fund I) with LPs (most likely family offices, HNW individuals, etc. as this may currently be too novel for institutions)

  2. Executive contacts fund manager (or vice versa) about interest in anchoring an allocation in executive’s future or current employer.

  3. If fund manager is interested, it signs a right of first refusal agreement with executive on filling allocation.

  4. Executive negotiates allocation and provides documentation of such to fund manager.

  5. When the executive’s employer announces a round, the fund manager creates a SPV (Exec-Company-Round Series LP).

  6. Fund manager instructs NewFoF Fund I to fund the SPV in total or in part (if executive wants to include investors in addition to NewFoF Fund I)

  7. Fund manager executes docs and wire on behalf of SPV to invest in company.

  8. SPV allocates carry to executive and fund manager.

  9. Executive routes all communication with company re the investment to fund manager.

  10. Upon exit, carry is distributed at SPV level to fund manager and executive. Fund manager’s carry is then allocated to partners, employees, etc.

Specialist fund of funds

Same as above but focused on specific stages, industries, roles, etc. Example: LPs and GPs are all former or current COOs and the fund invests in SPVs of allocations sourced by COOs.

Advisory group

  1. Executive reaches out to advisor.

  2. Advisor helps executive negotiate allocation in upcoming round and pro-rata

  3. Executive creates an SPV via SPV-as-a-Service provider (AngelList, Assure, etc.)

  4. Executive and advisor source commits from executive and advisor’s network

  5. SPV provider collects funds and documents from investors

  6. SPV provider executes investment documents and wires funds to company

  7. SPV provider earns between 0-5% carry. Advisor collects between 1%-5% carry. Executive collects remaining carry.

DIY

Executive executes Advisory group steps without an advisor and uses an SPV provider that doesn’t charge carry. Executive earns 20% carry

DIY will likely dominate as this technique gets more popular. The vast majority of executive level talent can with minimal effort raise >$500k for a company where they have extreme conviction (as evidenced by willingness to be full time for potentially 4 years)

I will share a detailed guide that any executive can use to negotiate and fill allocation themselves.

The fund of funds structure may make sense for helping anchor large (>$2mil) allocations or pro-rata.

This coming week

  • Share first iteration of guide for executives to sourcing and closing an allocation

  • Weekly update podcast and Vlog

  • Post on fund/SPV admin infrastructure providers

  • Post on carry sharing + no action letter logistics/strategy

  • Reach outs to startup engineering managers and VPs

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Disclaimer

I'm not a professional CPA, lawyer, CFP, RIA, B/D, ERA, etc. or anything else. All content is informational only and is not intended as professional/investment advice/counsel or an offering of any kind.