RocketClub Floats Sweat Equity Crowdfunding Hub To Attract Startup Users
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restaurants, and clubs 10 times a month for four months. They must also complete a survey and refer five of their friends to the app.
In exchange for their efforts, users may be eligible for a small stake in a startup’s future financial success—if it succeeds at all. Rather than shares, they gain “stock appreciation rights” through RocketClub as an intermediary. This means they own rights to some of the financial gains if and when the value of company shares goes up at some later time. This could happen if the startup is acquired or completes an initial public offering, for example.
The first users to take part may also get a financial stake in RocketClub itself, which is eager to build up its own bank of active users, Chan says. Candidates have to refer three friends to RocketClub, fill out two feedback surveys, and sign up to help one of the other startup campaigns.
As of Monday, RocketClub had enlisted 2,542 users for its own campaign, exceeding its goal. A total of six other companies are using the site to recruit users, and more startups are slated to join them next week, Chan says.
Chan is betting that users will be motivated to champion an app or other product if they have a financial stake in its success. Chan calls this idea “crowd ownership.”
RocketClub aims to succeed as an alternative to the more common methods that startups rely on to gain its early users, which include paying for ads and marketing campaigns, Chan says.
Plug and Play’s Masrour is eager to see the RocketClub model work—not only because the accelerator has a 2 percent stake in the company, but also because RocketClub might supply a starter set of users to other young companies that come out of Plug and Play’s programs. As it is now, app developers are spending money raised from investors to buy an installed base of users, Masrour says. And those users may have downloaded the startup’s app just to gain credits so they can get something else, such as access to the next level of a digital game, he says.
“You don’t want to pay for a user who’s never going to use the app,” Masrour says.
The RocketClub model has another advantage to startups and their investors, compared to equity crowdfunding, Masrour says. Because the users would not actually own shares, startups would have an easier time lining up later funding rounds from venture firms, he says. Some observers have pondered whether VC’s would shy away from startups that already had thousands of small investors with shares gained through equity crowdfunding.
Masrour says he believes the users recruited by RocketClub will eventually benefit from their small financial stake in the startups they help. But RocketClub needs to establish that trust among users, he says.
“They want to know how they’re going to benefit,” Masrour he says. Masrour acknowledges that the terms of RocketClub’s agreement with the users are complicated.
Attorneys who advised RocketClub declined to be interviewed, but here’s how Chen explains in more detail the chain of transactions involved.
First, a startup pays RocketClub a listing fee—which can be a combination of cash and its own shares—to begin a campaign to attract users. The small company also signs over to RocketClub rights called warrants for the future purchase of a small percentage of its shares— at least one percent of the company’s equity at the time—at a very low price. If those shares go up in value at some point due to a specific event such as an IPO, RocketClub would exercise its right to buy the shares at the low price, sell them at the higher market price, and use the profit to pay the early users who helped that startup gain a following.
But proceeds from the eventual sale of those shares would probably be split among many users. For example, in RocketClub’s own campaign, the first 2,000 members will share one percent of the company, the next 4,000 members will share the next one percent, and the last 5,000 members will share a one percent stake.
Also, when RocketClub exercises its options to buy shares in a successful startup and then sells them at current market rates, it will subtract management fees from the net proceeds before distributing the remaining money to users, Chen says. The percentage fee will depend on how long RocketClub has carried the administrative and legal responsibility for the securities, but will range from 30 to 50 percent, he says. One upside for the users: until they receive money from the stock sale, they bear no tax liability for the holdings, he says.
Chen says users will have a standing similar to that of contract workers for RocketClub, and their financial stake in the startups they help will be set up as a form of deferred compensation for their services. The users have no direct employment relationship with the startups themselves, he says.
Chen says RocketClub’s revenues will come mainly from listing fees paid by startups. (These were waived for the first companies participating.) RocketClub may also get a share of a startup’s revenues when the users it supplies to those companies become their paying customers as well, he says.
In fact, one of the first startups campaigning for users on the RocketClub site requires those users to become its paying customers to qualify for their stock appreciation rights. The tasks set by Oakland, CA-based Noble Brewer include subscribing to its deliveries of beer made from home-brew recipes. Subscriptions start at $60 for one delivery of four 22-ounce bottles of beer.
Whether that three-party exchange involving money as well as labor, goods, and stock appreciation rights will heighten the scrutiny of RocketClub by securities regulators remains to be seen.
As for the potential benefits to users, anyone who considers spending more than a few hours working on behalf of RocketClub’s startups with the primary goal of financial gain would be wise to request a copy of the detailed legal agreement setting out terms for the potential payoff. The agreements for each startup campaign may be different. For example, the documents may specify which events—IPOs, acquisitions, etc.—would or would not trigger a payout to users with stock appreciation rights.
It would take an expert lawyer to fully evaluate the provisions of RocketClub’s own pilot document, which the company shared with me. Called the “stock option campaign agreement,” it outlines RocketClub’s obligations to users who sign up to help the company grow. Chen says the agreement includes sections that protect the company in case its model isn’t exempted from certain securities regulations.
To my untrained eye, one provision seems to suggest that RocketClub would be relieved of the obligation to issue stock appreciation units to users if regulators insist that those rights, or other parts of RocketClub’s user compensation plan, must be registered under the Securities Act. Chen responded to many of my questions, but his answer about that provision wasn’t clear to me. He indicated that the company is still tweaking the language of the agreement.
Although RocketClub’s website contains many simplified phrases such as “Get Company Shares” to encourage users to join up, it also wisely gives visitors another bit of advice.
“Startups are high-risk ventures. You should sign up to support a company with the assumption that your shares may never be worth anything,” the message reads. “We advise you to get involved because you truly believe in the company.”