Frequently Asked Questions
How does Common Tide Work?
Common Tide is a private fund that allows startup founders who meet the qualification criteria to invest 1% - 5% of their company’s equity into the fund, thereby becoming Limited Partners in the fund, gaining exposure to other fund assets besides their own equity and diversifying their financial risk. Further, Common Tide facilitates community and founder-to-founder relationships among their network of LPs, so that founders can access mentorship and peer advice to support their personal and professional journeys.
Why should I make this investment if I know that my startup will succeed?
There's a paradox among startup founders. We all know that in a few years’ time, our company will be a unicorn and we will be a billionaire. And yet, for 99+% of founders, this prediction is wildly untrue. In fact, nearly 67% of startups that raise seed funding fail to exit or raise follow-on funding (source: CB Insights). Even more, we have no objective way of knowing what our outcome will be.
In the event that a (great) liquidity event isn't in your future, your investment in Common Tide may become your most valuable financial asset related to your startup. And if you do achieve a fantastic exit, then the risk hedge that your Common Tide investment represents shouldn't materially diminish your financial outcome.
How do I know which Common Tide portfolio companies will succeed?
You don't, we don't, and your investors don't. Early stage VCs are pretty good at separating companies that likely will never be successful from companies that could be successful. Beyond this, a VC should be confident that some of their portfolio companies will deliver incredible returns, while recognizing that at the time of their investment, they have no objective knowledge as to which companies these are. Hence, portfolio investing.
Exactly like a traditional venture fund, we are confident that out of the total number of companies in Common Tide, some will fail, some will return their initial investment, some will deliver a moderate return, and some will deliver a large return. And in this portfolio return lies the expected return for our Limited Partners.
What are the qualification criteria to invest my equity into Common Tide?
1) Your startup has raised its first institutional investor-led financing of $1m+ within the previous three months;
2) The investment was structured with a defined price per share or a valuation cap; and
3) You own at least $1m in assets of the company, on paper, when using your investors' price per share or the financing's valuation cap
Investors may be required to meet additional eligibility requirements and must complete all fund documentation as a condition to admission as a Limited Partner.
Why does my startup need to have raised its first institutional investor-led $1m+ round?
Achieving this milestone should indicate that an institutional investor, often with a fiduciary responsibility to their own investors, has made a bet that your startup could be wildly successful. This benchmark is necessary in order for Common Tide to fulfill its VC-backed startup market thesis.
Why is there a three-month qualification window?
The three-month qualification window addresses four concerns:
1) Equal founder confidence
You should be incredibly confident in your business -- perhaps the most confident you've ever been -- right after you close the financing round that qualifies you to invest in Common Tide. By convincing you to make this investment at this point in time, we ensure that you invest with equal confidence in your business as the other Limited Partners had in their businesses when they invested.
2) Equal startup risk and uncertainty
Founders believe that their company is destined for greatness, but doubt that the same is true of other startups. The truth is that at this moment, no one -- including your investors -- knows whose company will ultimately succeed. This fact is why startup investors create portfolios and don't invest all of their capital into a single company.
3) Negative selection bias
There is a fear that the "best" founders will chose not to invest in Common Tide because they know that they'll have a positive startup outcome. This fear is unfounded, because again, there is no objectively accurate prediction of future outcomes. As long as your confidence in your startup and the risk and uncertainty of your startup's outcome is equal to that of other Limited Partners when they invest(ed) in Common Tide, negative selection bias is nullified.
4) Equal window of opportunity
Your qualification window is the only time period when you can invest in Common Tide. There are no second chances. With this constraint, we prevent founders whose startups raised their qualification financing long ago and who now believe that their company is not likely to have a positive financial outcome from investing their equity in Common Tide. And because founders who are well past their qualification financing and whose companies are doing well would rationally decide not to invest in Common Tide, it's imperative to ensure that all founders are investing in Common Tide with similar risk.
Why must my startup's financing have a defined price per share or a valuation cap?
Common Tide aims to value your equity investment at the price your investors paid to invest in your startup, and we need to be able to calculate the applicable share price.
Why do I need to own at least $1m in assets of the company, on paper, when using my investors' price per share or the financing's valuation cap?
This asset test is how we define a founder at this stage of a startup.
Why am I joining the peer community of Common Tide?
Peer community and the ability to provide and receive support from a peer community of startup founders is a foundational pillar to most entrepreneurs’ success. In investing in Common Tide, you're investing in a medium/long-term financial asset. In joining the peer community, you're gaining access on Day One and committing six hours per quarter to Common Tide's networking platform for Limited Partners to help others on their professional and personal journey, and those Limited Partners are likewise accessible to you.
How do I know these people are valuable to the network?
Founders who invest in Common Tide come from backgrounds that run the gamut, from first time founders to serial entrepreneurs, with diverse careers, different perspectives, and various assets to contribute to the community. The one thing in common amongst these founders is that we all want to help you succeed and are available to speak with you as a de facto advisor.
Why is your peer community any more valuable than the ones I'm already in?
Many founder communities are premised on larger events, webinars, and group activities. The founder networking community of Common Tide, maintained by Founder Services Company, is focused on enabling founders to provide and receive advisory board-level support from each other. With a default to 1x1 connections and relationships, you'll access the mentorship, advisorship, guidance, and peer support that is critical to every entrepreneur’s journey.
Why should I commit six hours per quarter to my peer community?
The premise of Founder Services Company only works if you give and receive. It's a pretty sweet deal. In sharing your support with your co-Limited Partners, you receive access to their support as well. The time commitment is also probably less than you already spend supporting other founders. And these support services come at no additional cost to you, because you’re an investor in Common Tide.
What's the investment process from start to deal signing?
Here's the general outline of the investment process:
1) Meet the qualification criteria
2) Discuss the opportunity with Common Tide, your lead investor, and your co-founders
3) Sign an MNDA and receive the investment document package for your review
4) Share with Common Tide the required diligence materials and the amount of equity you want to invest
5) Execute the investment document package and become a Limited Partner in Common Tide
How is my equity valued (and what happens if I raise at a different valuation than someone else)?
Your shares are valued by Common Tide at the price your investors paid for their shares in your most recent financing. With this mechanism, you get credit for the valuation at which your company raised.
How does pricing my shares work with Pre-Money/Post-Money SAFES and convertible notes?
Investors investing in an instrument with a valuation cap should assume that the cap will be reached and that they'll convert at the cap when the next financing round occurs. In effect, the cap is setting the valuation ceiling of the current round (notwithstanding a Pre-Money cap, which we treat as a Post-Money cap in this case). We make the same assumption and value your common stock as if your investors convert at the cap.
Why can I only invest between 1% and 5% of my own equity?
1% of your equity is the floor of the investment range so that the value of your investment is meaningful to yourself and to Common Tide. 5% is the ceiling of the investment range so that you are not so diversified as to become unaligned with your investors. And maintaining financial alignment with your investors is a major reason why we expect that your investors will support your making this investment in Common Tide. Founders who "sleep better at night" because they are slightly de-risked, but for whom their real wealth will still come from the success of their company, are founders well positioned to do everything possible to deliver a return to their investors. And besides, your investors do say that they're founder friendly, right?
How much of my time will I spend on this opportunity before I invest?
We hope that this investment process takes less than a days' worth of time (spread out over the course of many weeks). You should be spending your time building your business. We want you to be fully informed and educated about this investment, and we want to minimize the time it takes for you to do this.
With whom should I speak before making this investment?
You should first speak with your lead investor, cofounders, legal and tax advisors, and anyone else with whom you'd like to discuss this opportunity.
Do I need board approval to make this investment?
You might. Typically, a priced round includes certain stock transfer restrictions in the investment agreement (eg. ROFR, Co-Sale). The process for waiving these restrictions will be detailed in the agreement. If your company has raised on a convertible note, SAFE, or other not-yet-equity instrument, you likely do not have the same transfer restrictions. Either way, we can help you quickly understand the details of your specific circumstance.
What will my VCs think?
In a vacuum, they'd likely prefer that you have no financial diversification (ie. "burn the boats!") so that your startup must succeed in order for you to have any type of positive financial outcome. Talk about pressure! But VCs are people too, and they realize (or should, anyways) that this investment helps you without hurting their interests at all. It's no different that you choosing to sell your equity in a secondary transaction down the road (if your startup achieves sufficient success to make this possible). You're just diversifying at an earlier time in your company's trajectory.
While some may be hesitant to say it out loud or may fear that this harms their investment in your company, we believe most VCs probably think this is an incredibly smart investment for you to make, given the risk that you're taking as a startup founder.
What will my VCs say?
We typically see three types of VC responses: enthusiastic endorsement, neutral support, and reluctant acceptance. In all cases, smart VCs will counsel you as to any alternatives that you have (both now and, potentially, in later stages of the company), will want to understand why you want to make this investment, and may offer additional points of consideration. Assuming that you remain excited to make this investment, we expect that your investors will be supportive of your decision.
What is the investor signaling risk?
Investing more than 5% of your common stock could raise a flag to an investor about your commitment to the company, which is why the 5% ceiling exists. There's also the potential that the investors in a subsequent financing will want to know more about your Common Tide investment. However, your limited diversification shouldn't make you or your company any less investable.
What will my lawyer say?
This is new type of venture fund, and they probably haven't seen this in action before, so they might have questions. They'll probably want to know how the underlying entities are structured, how the securities and tax components of the fund and your investment work, what risks you're taking, and how you're protected from these risks (they are lawyers, after all). Our team is available to speak directly with your advisors to help them get up to speed as efficiently as possible.
Am I becoming an investor in all of the other Common Tide portfolio companies?
Indirectly, so to speak. You are investing in a fund that owns the common stock of other companies. The fund, not you, is listed on each company's cap table. As you are an investor in the fund, you have financial exposure to each of the fund's investments.
How do I make money?
By investing your stock into Common Tide, you are becoming a Limited Partner in a Common Tide fund. As such, the way you make money looks similar to how a Limited Partner in a traditional venture capital fund makes money. When Common Tide portfolio companies have liquidity events, Common Tide receives proceeds (cash or, in some cases, stock) in exchange for its shares of the company. These proceeds are then subject to certain fund reserves and payment of fees to Common Tide and other service providers. Thereafter, Limited Partners receive distributions. The fund’s offering documents detail more precisely how profits are calculated and distributed to investors.
Can I sell my stake in Common Tide?
You cannot. Your investment in Common Tide is an investment in a venture fund, and similar to investors in traditional venture funds, you should not expect to sell or transfer your membership interest in Common Tide.
When do I owe taxes?
You should not owe taxes until you receive distributions from the fund, and we expect that these distributions would be taxed as long term capital gains against the tax and cost bases set when you originally acquired your shares (likely at the founding of your company). Very importantly, you should not owe taxes on your initial investment into the fund, as this investment is not a taxable event. We strongly recommend that you consult your tax and legal advisors before investing in the fund.
What tax forms do I receive?
As is standard for investment partnerships, you will receive annual K-1 statements from Common Tide.
How does Common Tide make money?
Common Tide charges an annual management fee and earns a carried interest ("carry") on net profits of each fund, similar to many other venture capital funds.
How will I keep track of my investment?
Common Tide uses First Rate Vantage as our technology platform, which allows you to monitor the fund's performance and track your investment.
What is the expected return?
Common Tide expects to deliver the median return of the VC-backed startup market. We'll share specific return projections with you directly. As with any investment, the fund’s performance is not guaranteed, and all VC investments are subject to loss.
What is the timeline of returns?
While accuracy around the timeline of returns is nearly impossible to predict due to the startup nature of the fund's investments, we expect the fund's return timeline to follow that of a traditional early-stage venture capital fund. In this type of fund, LPs expect to wait multiple years before receiving distributions.
How are voting rights handled?
You maintain voting control over the stock you invest in Common Tide, subject to certain conditions agreed upon at the time of your investment.