YC’s Altman Thinks Reddit’s Community Ownership Experiment Could Be A Model

The thought of using crypto-currencies to back shares of a company first crossed Y Combinator head Sam Altman’s mind about two years ago.

“It was an idle thought that popped into my head,” he said. “It was not until Reddit reached out to me about fundraising that I thought about it again.”

So when he decided to lead Reddit’s $50 million Series B round today, it was a chance to put this concept to the test. He said that over the years, many community-based and social networking companies have wanted to let users in on stock, but it was too logistically and legally difficult until crypto-currencies became popular.

“No one wants to make 100,000 stock certificates and send them out to contributors,” he said. “It’s even hard to keep track of all the changes in SEC rules. It’s mechanically difficult to do.”

On top of that, the SEC limits the number of shareholders that a company can have until it has to start divulging financials in a similar way to what publicly-traded companies have to share. When the JOBS Act passed in 2012, that expanded that number from 500 to 2,000 total shareholders, which is still far lower than the number of shareholders a broad-based community site with millions of users might want to have.

He’s not the only one who has tinkered with this idea.

A Palo Alto-based crypto-currency crowdfunding startup called Swarm from Joel Dietz and Belgian designer Jef Cavens is trying to fund itself through this method.

How does it work? 

SWARM is a crowdfunding platform that allows for crypto-equity fundraising. Instead of incorporating in a physical jurisdiction, the company incorporates directly on the bitcoin blockchain by creating a coin. Each individual “coin” becomes an equity share in the company/project (we call them Distributed Autonomous Organizations, or DAOs). Coins can then be sold to investors to raise funds or traded like corporate shares on the stock market.

They’re trying to do a “decentralized” Demo Day on November 5th with a series of projects.

Another early model was Ripple Labs, a startup backed by Andreessen Horowitz, that created its own crypto-currency based IOU system called the Ripple. The plan was to distribute most of the 100 billion Ripples, keeping some for the company. If the value of the system increased, so would the value of the Ripples and then the company. Today, the total value of all Ripples in circulation is $134.9 million, making them the third-most valuable crypto-currency ecosystem behind Litecoin and Bitcoin. But part of the Ripple team broke off and started an alternate project with a very similar model called Stellar, as a non-profit in partnership with Stripe. The total value of all Stellars is $4.1 million.

These are all very, very early experiments. As far as Altman has consulted with various securities lawyers, such a concept should be legal even if all the details aren’t ironed out. Anyone who ends up in possession of a crypto-currency backed by shares in Reddit would have to be responsible for their own capital gains taxes. Given that Altman has criticized public markets for pressuring companies to be too focused on short-term quarterly results, I’d be curious to see how a crypto-currency and community-based model would insulate companies against day-traders and speculators.

“Reddit will have to do the work to figure this out and implement it,” said Altman, who added that he led the round in part because its structure was so non-traditional that it would have been difficult for a conventional venture firm to lead. Andreessen Horowitz and Sequoia Capital are participants in the $50 million Series B round announced today.

If it works, you might see it elsewhere.

“I certainly hope this could be a model for community ownership,” he said.