VOLUME 10 • ISSUE 1 • PRINT
DO FOUNDERS CONTROL START-UP FIRMS THAT GO PUBLIC?
Brian Broughman & Jesse M. Fried
Black & Gilson (1998) argue that an IPO-welcoming stock market stimu- lates venture deals by enabling VCs to give founders a valuable “call option on control.” We study 18,000 startups to investigate the value of this option. Among firms that reach IPO, 60% of founders are no longer CEO. With little voting power, only half of the others survive three years as CEO. At initial VC financ- ing, the probability of getting real control of a public firm for three years is 0.4%. Our results shed light on control evolution in startups, and cast doubt on the plausibility of the call-option theory linking stock and VC markets.
VOLUME 8 • ONLINE
HOW DO I SELL MY CROWDFUNDED SHARES? DEVELOPING EXCHANGES AND MARKETS TO TRADE SECURITIES ISSUED BY START-UPS AND SMALL COMPANIES
Janet Austin
Governments worldwide are increasingly recognizing that assisting the development of start-ups and small to medium enterprises may be critical to fostering job creation and economic growth. As such, there is a concerted effort to rework securities regulation to encourage the funding of these businesses through innovative approaches such as crowdfunding. However, one major problem with investing in securities issued through crowdfunding is that investors typically have limited-to-no ability to sell the securities. There are a number of over-the-counter, venture and small company markets trying to bridge that gap and proposals in some countries to develop new markets for these types of securities. However, such markets present significant regulatory challenges, as they have historically been plagued by fraud and “pump and dump” manipulation schemes. This Article considers these regulatory challenges and explores how regulators can work to improve the integrity of these markets as a way of encouraging their development.
VOLUME 5 • ONLINE
VENTURENOMICS: ADJUSTING FOR THREE STANDARD PRACTICES MAY REDUCE VENTURE-BACKED COMPANY PRE-MONEY VALUATIONS BY 90%
Jeff Thomas
While recent valuations attributed to venture backed companies may be shocking, the VC Math used to calculate the valuations is flawed. This is because VC Math: (i) treats unissued, and even non-existing, stock options as outstanding shares of stock; (ii) ignores the fact that much of the common stock and options to purchase common stock have not yet been earned; and (iii) values common stock and convertible preferred stock equally despite the fact that convertible preferred stock was intentionally created to be worth more.
VOLUME 4 • ISSUE 2 • PRINT
CROWDFUNDING: THE REAL AND THE ILLUSORY EXEMPTION
Jason W. Parsont
Crowdfunding is commonly defined as raising small amounts of capital from a large number of people over the Internet. To avoid the expense of securities regulation, companies often crowdfund by giving away rewards (such as a free t-shirt) instead of selling stock or other securities. In April 2012, Title III of the JOBS Act sought to change this status quo by directing the Securities and Ex- change Commission (SEC) to facilitate securities-based crowdfunding through websites like Kickstarter. Congress and the President believed this would broaden access to sidelined capital and help companies grow and hire. But this “retail crowdfunding” exemption, open to all investors, was not the only means of crowdfunding in the bill. A last minute compromise, which has been largely overlooked, expanded the ability of issuers to use the private placement exemption, as revised in new Rule 506(c), to crowdfund from accredited investors. This “accredited crowdfunding” exemption provides a less regulated capital-raising alternative to retail crowdfunding that is available to the same companies and more.
VOLUME 4 • ONLINE
MAKING EQUITY CROWDFUNDING WORK FOR THE UNACCREDITED CROWD
Jeff Thomas
The Jumpstart Our Business Startups (JOBS) Act creates a new “crowdfunding exemption” that will allow companies to raise up to $1 million every twelve months by selling their stock (or other unregistered securities) to both accredited and unaccredited investors, provided that the sales are made through registered intermediaries. This article summarizes why the crowdfunding exemption is important, explains how its expected costs are problematic, and proposes ways to mitigate those costs without sacrificing investor protection.