In case it wasn’t obvious, being an entrepreneur is risky business. Even those that get investments have a relatively small likelihood of a successful exit. So early-stage investment firm First Round Capital has a plan to alleviate some of the risk: an entrepreneur’s exchange fund.
For those not aware, an exchange fund in this regard is exactly what it sounds like: company founders are given the option to give up a small piece of the stock they own in their venture in exchange for a piece of the action of the larger pool of all the First Round portfolio companies that choose to participate. Basically, this allows these entrepreneurs to diversify their own holdings without having to sell any stock. More importantly, it lowers their risk of walking away with nothing while adding an incentive to see other companies in the portfolio succeed.
As First Round managing director Josh Kopelman writes, “One of the benefits of having a fairly large portfolio is that our portfolio companies can offer a lot of value to each other. Whether it is sharing interview techniques, technical management strategies, sales leads, perspectives on the advertising market, or doing deals – it is always great to see portfolio companies helping each other succeed.” And with this exchange fund, all of these companies have more reason than ever to help each other out.
Kopelman notes that First Round itself doesn’t receive any financial benefit from the establishment of this fund.
First Round’s portfolio includes companies like Get Satisfaction, Gnip, Mashery, RockYou, StumbleUpon, Wikia, Xmarks, Xobni, and many others. Notably, their portfolio also contains two hot location properties right now: SimpleGeo and Hot Potato. And they participated in mobile payment company Square’s big first round.
[photo: flickr/michael spencer]