Exchange Funds
Allowing founders to pool their equity since the 1960s.
Archimede Mulas - Founding Partner
April 2020
April 2020
It is in times like these that we understand the vulnerability of start-ups, and for a founder, the volatility of their net worth.
We built Collective Equity Ownership as an exchange fund, or also known as a swap fund. It is an arrangement where we allow shareholders of venture backed tech companies to pool their shares together with shareholders of other tech companies. In exchange, the shareholders a portion of the diversified fund equal to the value of the shares they contribute (note – requirements for US exchange funds are different to the ones in the UK).
The idea for Collective Equity Ownership stems from the same concept of founders swapping equity with each other. A good example is the story of Jack Abraham the founder of Invite Media, who swapped some of his shares with the two co-founders of Milo, Nat Turner and Zach Weinberg. In 2010, three years after their swap, DoubleClick, a subsidiary of Google purchased Invite Media for $81 million and six months later, eBay purchased Milo for $75million. The precise amounts earned from the share-swap were not disclosed by Abraham, who did however say that there was only a mere $100,000 difference between each-other’s earnings.
The first structured exchange funds date back to the late 1960s in the US. They were offered to shareholders of publicly traded companies, usually management teams who only had shares of companies they worked for.
It is in times like these that we understand the vulnerability of start-ups, and for a founder, the volatility of their net worth.
We built Collective Equity Ownership as an exchange fund, or also known as a swap fund. It is an arrangement where we allow shareholders of venture backed tech companies to pool their shares together with shareholders of other tech companies. In exchange, the shareholders a portion of the diversified fund equal to the value of the shares they contribute (note – requirements for US exchange funds are different to the ones in the UK).
The idea for Collective Equity Ownership stems from the same concept of founders swapping equity with each other. A good example is the story of Jack Abraham the founder of Invite Media, who swapped some of his shares with the two co-founders of Milo, Nat Turner and Zach Weinberg. In 2010, three years after their swap, DoubleClick, a subsidiary of Google purchased Invite Media for $81 million and six months later, eBay purchased Milo for $75million. The precise amounts earned from the share-swap were not disclosed by Abraham, who did however say that there was only a mere $100,000 difference between each-other’s earnings.
The first structured exchange funds date back to the late 1960s in the US. They were offered to shareholders of publicly traded companies, usually management teams who only had shares of companies they worked for.
One of these companies could have been Google if the founder of EB Exchange agreed with Sergey Brin on Google’s $2bn valuation at the time.
For shareholders of private tech companies, the first exchange fund similar to the one created today by Collective Equity Ownership, was built in the US by EB Exchange (EBX) in 1999. EB was short for Eleven Baskets exchange, from the saying “don’t put all your eggs in one basket," having had 11 companies in their first fund EBX1.
The 11 companies in EBX1 included the founders of OpenTable. Their second fund, EBX 2, built in 2002, had 15 exits and 6 liquidity events with 26 companies in the fund. One of these companies could have been Google if the founder of EB Exchange agreed with Sergey Brin on Google’s $2bn valuation at the time. EB Exchange continued to build exchange funds, closing EBX 3 in 2007 with 30 companies up to EBX 5 in 2012.
The 11 companies in EBX1 included the founders of OpenTable. Their second fund, EBX 2, built in 2002, had 15 exits and 6 liquidity events with 26 companies in the fund. One of these companies could have been Google if the founder of EB Exchange agreed with Sergey Brin on Google’s $2bn valuation at the time. EB Exchange continued to build exchange funds, closing EBX 3 in 2007 with 30 companies up to EBX 5 in 2012.
With the success of EB Exchange in the US, the UK had its own cohort of entrepreneurs who wanted to pool their equity together in 2012. The group was run by Founders Club. It was backed by the likes of Edmund Truell (former Chairman of the British Venture Capital Association) and chaired by Andre Jaeggi (fund of funds veteran). Founders Club had support from 15 VCs from Europe and the Valley who advised on the selection of the 11 companies that joined the club. Similar to Collective Equity Ownership, founders could only join if their company had raised more than £10m in equity funding and were backed by a number of top quartile institutional investors.
However, Founders Club was not structured as an exchange fund. Instead of contributing the shares to a fund-like structure, the shareholders pledged a number of their shares to each-other, with a promise to share a portion of the returns with the club. A pledge however is not enforceable, which forced Founders Club to stop its operations after their first pool.
However, Founders Club was not structured as an exchange fund. Instead of contributing the shares to a fund-like structure, the shareholders pledged a number of their shares to each-other, with a promise to share a portion of the returns with the club. A pledge however is not enforceable, which forced Founders Club to stop its operations after their first pool.
Having met just about every major VC fund seeking to raise funds, I immediately recognised ..exchange funds.. as the logical progression for the ecosystem of entrepreneurs and investors. - Andre Jaeggi
This natural progression evolved into accelerator programs and venture capitals creating their own structures. First Round offered to their own portfolio of founders their Entrepreneur’s Exchange Fund in 2010. Kindred Capital in the UK created an innovative carry structure whereby the founders of the companies in which Kindred invests can share in the venture-fund’s upside. Founder Institute (FI), an accelerator in the US, runs Equity Collective as a part of their accelerator program for their founders and mentors. Founder Institute shared that many cheques had been mailed to their founders over time.
Without an exchange fund, truly diversifying is next to impossible for founders of venture backed companies. Secondary transactions are becoming more common in today’s tech ecosystem as part of a primary round and in-between rounds. These secondaries are offered by few with many complications (ie. discounts, rights of first refusal, board seat, alignment of interest) and do not offer diversification to the shareholders.
Through the help of many partners, Collective Equity Ownership has successfully structured the first ever exchange fund for the UK market. With the support of other founders in the fund, and the cash from Collective Equity Ownership (both upfront and over time) founders can double down on their own company without having to push for an early sale.
Collective Equity Ownership (CEO) is the provider of an exchange fund in the UK. CEO allows shareholders of venture-backed tech companies in the UK, to pool some of their shares together with shareholders of other companies. In return shareholders can participate in liquidity events of each other's companies on top of their own.