Founders have little to no diversification. They are all in on one idea, company, and mission. It's an insanely high-risk, high-reward endeavor. As founders become increasingly wary of this level of risk concentration, they begin to think about ways to mitigate it. One idea I've heard repeatedly is the notion that a group of founders can self-assemble and contribute a percentage of their equity in their company to a shared pool. That way, if they fail and one of the other founders in the group succeeds, everyone else can benefit to some degree. It's a coordinated equity swap. I've heard this idea many times over, but I have yet to see it work in practice (although I am hopeful that someone can find a way to make this work for founders in either a programmatic or bespoke way).
I have found a solution to this problem, and it has worked marvelously well. Whenever I tell people about it, they think it's batshit crazy. But then they usually come around and see how unique, important, and beautiful it is. I think more people, founder or otherwise, should do it. Here's the story.
Steve Martocci and I have known each other for nearly twenty years. We built GroupMe together and when you found a company with someone you form a bond that stands the test of time. After GroupMe was acquired, our interests diverged. Steve had an idea for a company that would change the music industry, and I wanted to shake up the world of small business lending. But we knew we always wanted to work together and bet on each other no matter what.
So we made an agreement. We would do all of our investing and company building together, even if we wanted to do totally different things. For every company I would start, Steve would own a meaningful piece of my equity/carry (e.g. ~15%), and vice versa. And for every investment we wanted to do, we'd always bring it to each other and offer to split it evenly. It has worked out, and we have been able to make concentrated bets with our time over the years building companies and now doing venture capital while diversifying risk.
The neat thing about this agreement is that nothing is papered. It's just a code we live by. I feel very lucky to have this deep sense of trust and respect with a partner like Steve. I acknowledge how rare it is. And I think more founders should try to find something similar. In the short term it might feel strange, but over the long term it's extremely powerful economically, psychologically, and emotionally. This concept doesn't just have to apply to founders, it could apply to anyone. Making bets and investments in people you admire and work well with produces returns that cannot be measured in cents or dollars.
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Never have I imagined I would read something so poetic about equity swaps. Honestly, it's quite beautiful and moving.
every time i tell someone that my groupme co-founder and i have an arrangement where we have unconditionally committed a meaningful chunk of our equity in our ventures to each other in perpetuity, they initially think we are batshit crazy maybe more people should be crazy like this https://jared.xyz/the-deal
@jake relevant
very cool. how exactly do you execute it? is each of you on the other's cap table and have full voting rights? have other founders/investors raised concerned about it?
Historically we have been on each other’s cap tables as individuals. We have been on each other’s boards as well. And we have LLCs that we use for investing.
This is awesome. Thanks for sharing. The idea of scaling this level of trust within an asset management setting is alluring. Have you given thought to how it might be done? It strikes me as a different trust-scaling problem to solve than Uber and AirBnB. Cc @sydneyjason
I like the paperless code. And it makes intuitive sense…once you’ve been in the trenches with someone and “made it” through to a meaningful exit, there’s a level of authentic trust that’s hard to replicate. That relationship can go as deep as a marriage. You want them to be successful and they want the same for you. Perhaps it’s why I’m still collaborating with a business partner on a fourth startup now (his 8th)…
thats a great idea
Exploring a unique approach to risk mitigation for founders, @jaredhecht.eth shares insight into how an innovative equity-sharing agreement between partners can diversify risk while building trust. This collaboration wasn't just about finance but creating a lasting bond that redefines success for entrepreneurs.