Mark Gritter (markgritter) wrote,
Mark Gritter

Time to get curmudgeonly again

Minnesota was already the home of W3i and their "pay people to buy iPhone games" product (the discontinued "Apperang"). Now we have another entry in the "shortcuts to building a user community" field, Wahooly. This MN-based startup recruits users for other new startups, by offering equity to the users. Signing up (and blogging/tweeting/FBing about your experience) earns you shares in the company.

The legality is questionable, as one commenter on BusinessInsider mentions:
I am a not a lawyer so this is more so a question than a complaint... If you are distributing equity and charging a "processing fee" how is this not supposed to be registered with the SEC? Unless you are limiting it to qualified buyers it sounds no different than doing an unregistered retail security offering..,

To which one of the founders replied basically that the mechanism was part of the company's "key differentiators". (Mmm... secret sauce.) Even without getting into the issue of qualified investors, having additional stockholders on the rolls may produce additional costs later on--- during funding rounds, or when the number of investors gets too large.

But, legalities aside, I have trouble believing this is a good idea. (I'm speaking Minnesotan here; natives should be able to interpret the code.) I won't deny that it can be hard to find people to try a new service. And being paid in equity is fair game--- I probably can't give details, but Tintri has paid for some services with stock. But paying customers is the wrong way to start a relationship, and paying opinion-makers directly is even worse. You want your customers to be motivated by the love of your product. Wahooly's customers are going to be those who love the idea of getting stock in an early-stage startup.

To be fair, they may be the sort of early-adopters you'd want to find anyway! But, consider the difference between somebody attending a sales event because of the "free gift" and somebody who first decided that they wanted to buy. If your startup isn't exciting enough that tech bloggers and early adopters are banging at your door--- or if you don't know how to attract such people long-term--- then you have problems that outsourcing to Wahooly probably can't fix.

There's not a bright line here. Something like Tech Field Day only pays "expenses" out of the money they collect from presenters. I'm not opposed to tech bloggers having a nice day tooling around the Bay Area learning about the sponsors' products. And "advisory boards" sometimes give stock to people who can champion a company's products in unique ways. But, to me, paying customers--- even in equity--- seems like it violates some high-tech version of Yog's Law. If you do start by paying customers, are they the sort of customers that will bootstrap you to a wider audience? (In the Apperang case, the goal was explicitly to get onto the top lists in the App Store, and bootstrap that way.)

Could you hire a marketing guru for an equal (or lower) amount of equity? A good one will have contacts that can generate buzz, and will have ideas for acquiring first customers.

Fundamentally I don't believe there's a shortcut to be found here, and I don't like attempts to sell one.
Tags: advertising, rant, startup
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