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The Crowd SAFE and Gumroad

Vikrant Duggal
Vikrant Duggal
• 2 min read

On Monday of this week Sahil Lavingia announced he was raising $5 million in new capital for Gumroad via Republic. I received the invitation around Noon and I saw about $1 million committed. While I did not invest, I want to share my thoughts on the opportunity.

I know the feeling of crushing a crowdfunding goal. I was part of the team that helped Hitch become the most backed bottle in crowdfunding history with over 15,000 backers.

Congratulations to Gumroad and 7,000+ investors.

There are generally two ways to invest in a company: a priced round, or a convertible instrument.

What is a priced round? A priced round is an offering and sale of newly-created stock in the company at an agreed-upon per share price. In Gumroad's case Naval Ravikant and Jason Fried invested in a priced-round and outside of the founder, those are the only two other equity holders.

What's a convertible instrument? A convertible instrument (e.g. convertible note, or SAFE) is where you enter a transaction and there is a possibility of the valuation of the company to be postponed. With Republic, each company can customize its Crowd SAFE. In Gumroad's case they include both a valuation cap ($100 million) and a discount (20%). Republic states that investors will receive whichever term is more favorable if there's a trigger event. In the case of Gumroad, an acquisition, or IPO fits the definition of a trigger event.

If the in the trigger event the company is valued greater than $100 million then investors get the benefit of the $100 million valuation. If the valuation is below $100 million they'll get a 20% discount.

If you were one of the 7,000 individuals who invested on Monday, you now have a financial stake in Gumroad, but you are not an immediate holder of equity.

In context, though this is amazing. In May 2016 when the U.S. Securities and Exchange Commission enacted Title III of the JOBS Act (aka "Regulation Crowdfunding," or Reg CF" for short) the game changed. What was once an asset class only available to the accredited investor now became more boradly accessible. Under Title III, the majority of the population can now invest in startups for the first time.

The rules currently allow an entrepreneur to raise up to $5 million in a 12-month period from non-accredited investors. Investors can invest a limited amount per 12-month period based on their income and net worth.

This means more investors and more startups.

On a personal note it's been awesome to see how far Sahil has come. I first met him in 2013 and his journey has been real. Last week I shared an essay on 67 statistics about the creator economy. There is a lot of momentum around companies that are supporting this economy. If you're an investor or a founder passionate about the space don't let this news scare you away from helping creators.

I'm curious to see what will change. $6 million is a lot of dough for a company with zero employees.

More importantly, I'm excited to welcome a new generation of investors - all 7,000 of you.

VC