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The $40,000 T-Shirt: Oculus Rift and Ownership in Crowdfunding
Kickstarter backers experienced a rude awakening when Oculus Rift was acquired by Facebook.
Monetary pledges, developer time and emotional investments in the virtual reality startup offer no legal recourse and no payoff for a company that is acquired for $2 billion. Only people with equity stakes — private stock — in the company enjoy the windfall.
See also: What Is Oculus Rift — and Why Should You Care?
It was just a matter of time until one of Kickstarter's projects blossomed into what investors call a "unicorn," and began to beg the question — should companies using crowdfunding to launch a business also offer some stake in the company?
The answer, at least from President Barack Obama and Congress, was "yes." They decided that in 2012 when they passed the JOBS Act, which put equity crowdfunding on track for legalization. However due to a slow regulatory process that continues to drag, the average person is still unable to buy equity positions in startups.
Numerous companies are awaiting the finalization of the rules from the SEC, which regulates securities trading in the U.S. Once the regulation is in place, platforms will be able to offer anyone the opportunity to purchase small stakes in startup companies.
Which means Oculus Rift pledgers might have been inline for a big payday if they had bought stock instead of a T-shirt.
The $25 pledge, the $40,000 payoff
Kickstarter offers absolutely no equity positions in companies. Pledges go toward projects for various reasons, including presales of products (like Oculus Rift), goodies like T-shirts, or even just personal thanks.
Equity, on the other hand, gets much more complex.
An initial investment, known as a seed round, typically requires a company to give up 15% to 30% of its interest in the company, split between an employee option pool and investors.
Oculus Rift's efforts on Kickstarter netted $2.4 million when it set out to only bring in $250,000. That indicates significant user interest in the product, but does not really help with a valuation.
However, let's say that Oculus Rift launched a crowdfunding equity round capped at $250,000 for 20% of the company. This system could offer investments at a variety of levels including $25.
This would give the company a $1.25 million valuation. The $2 billion price tag would have yielded a roughly 1,600 times return. That would have made the $25 pledge for an Oculus Rift T-shirt (plus $15 for shipping and handling) worth about $40,000.
In reality, it's not quite that straightforward: equity investors would be susceptible to having their investment watered down by additional fundraising rounds. But this example provides some idea of the reason that some people eagerly anticipate equity crowdfunding.
Stock, but at what cost?
Turning $25 into $40,000 is an idea that tends to be so appealing that it can cause people to ignore the downsides to early stage equity investing.
The percentage of early stage investments that return any money is small, with those achieving a multi-billion-dollar sale miniscule. Oculus Rift is the first billion dollar business to come out of Kickstarter's more than 58,000 projects.
And while the prospect of a big payday is nice, Oculus Rift backers that paid for a development kit got what they paid for. They may be disappointed by the sale, but that has less to do with the lack of payoff as concerns over the future of the company.
"I backed Oculus because I wanted to see this dream realized and I saw that with the dev kit they delivered to me," said Justin Herrick, an Oculus Rift backer. "If there was an option to back and receive some small sliver of equity, I would have done it, but if I had to choose between the two, I would made the same choice."
To backer John Susek, the idea of taking equity in the company is a different proposition from the pledge.
"I would love to [buy equity]," he said. "But it would be for different reasons."
"I don’t feel particularly cheated by Oculus with respect to the Kickstarter and what I got out of it. I paid $335 and got a VR headset," Susek added. "But that doesn’t mean I’m not disappointed they didn’t stay independent."
Complicationstarter
The upside of equity crowdfunding brings with it numerous complications that can be detrimental to a startup.
Adding a large number of new shareholders, for example, can have an adverse effect on a young company and limit interest from larger investors.
"Because then you get design by committee," Susek said. "I really like the idea of a singular vision — [Oculus Rift founder] Palmer Luckey, Steve Jobs, Zuckerberg, etc."
Startups also open themselves to legal risks. If Oculus Rift had gone through a round of equity crowdfunding, upset backers could have turned into litigious opponents.
"I think that it is going to be highly unattractive to a company to deal with a lot of small investors, anyone of whom can sue the company or cause other sources of stress for the company," said David Teten, partner at venture capital firm ffVC.
Teten has been closely involved with the crowdfunding world, with ffVC being a seed investor in Indiegogo, a rival to Kickstarter with a broad international reach.
The upside of sticking with normal pledging over offering equity is great for startups, which can risk losing some control of the company by bringing in too many investors.
"That money was practically free," Teten said about Oculus Rift's Kickstarter. "By contrast when you're raising money for equity, the more you've giving away at a given price, the more diluted you are."
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The Oculus Rift, Explained
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