Sunday, December 11, 2011

Trading Influence for Equity, Wahooly Boosts Startups, Raises Ethical Questions

[ 2 February 2012: Wahooly has started now. See note at Google Plus Wahooly Post ]

Perhaps one day people will run out of ideas for new Internet startups but I don't think that we are there yet. Alongside all the me-too photo sharing and social network sites there are some brilliant new concepts that remind me how creative people can be. Wahooly.com is one of these.

Wahooly is a new web service scheduled to roll out in January 2012 that effectively trades influence for equity in startups. Their business model is simple yet compelling: a startup approaches Wahooly and offers a small percentage of their equity in return for the support of influencers to get their business started.  This is an intriguing idea though there are some ethical complications, as we shall see later.

Let's just suppose you have a new video sharing service -- not a great idea, but this is just an example -- and you need a critical mass of early users.  You offer 5% of the equity to Wahooly which then signs up a certain number of Wahoolians who will support your company in return for a share of this 5%. In other words, you use your time and influence to help the startup actually get started up and in return you get a small share of the equity. Maybe one day there is an IPO or an acquisition and you can cash in your stake.

Like many interesting business ideas, Wahooly brings together two groups that have complementary needs. On the one hand there are many startups needing help to get traction at the beginning -- maybe their first million users or their first million uploads. On the other hand there are plenty of people who wished they had an initial stake in Google, Facebook or Twitter and would like a chance to have even a tiny stake in new startups.

You can join up on the website but the first startups won't be available until January. The only company available today is Wahooly itself, and this little detail is, in a way, very reassuring. Warhooly effectively eats its own dog food and is one of the startups that you can get a share of. The first 25,000 users to sign up will get on average around 0.0002% of the equity though the exact figure depends on how much influence you contribute, a factor that will be calculated with some help from Klout.

While the idea is brilliant it does have one major downside risk: to many people there are ethical issues associated with promoting a company that rewards you with some material benefit -- even if it is long term and uncertain. It might also breach some rules if this conflict of interest is not disclosed. Personally I do not see this as being a real problem because people who are seriously influential are not likely to risk their reputation for the sake of a few dollars, but it is likely to be a PR issue for the company. Maybe the founders have a workaround for this problem, or maybe someone will be inspired by this example to make something new that isn't tainted by ethical doubts. Whatever happens it will be interesting to see how the story unfolds when the service officially starts.

Disclosure: to write this post I joined Wahooly's inaugural class so presumably I have a very small stake in the company. There is a possibility that I might materially benefit from the company one day, though to be honest I am not counting on it for my retirement.


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