EB Exchange fund aims to reduce founder risk

EB Exchange Funds, a San Francisco-based investor that aims to reward entrepreneurs with liquidity, launched its fourth fund this week, founder Larry Albukerk told PE Week.

He expects to close the fund by late summer.

The little-known firm creates a portfolio by inviting executives to contribute some of their common stock from their startups to a larger pool, from which they each will share distributions when any one of the other companies in the pool has a liquidity event.

Over the first three funds, the firm brought in between 50 and 75 executives nationwide from as many as 35 venture-backed startups.

EB Fund IV will likely have between 20 and 30 startups’ stock represented. The firm is also looking to sign deals with institutional limited partners that would create a cash fund to buy founders’ stock. Albukerk declined to disclose fund size, citing ongoing negotiations, but indicated it would be in the tens of millions of dollars.

The new fund comes as VCs look for innovative ways to keep their founders and startup executives happy. The time it takes for a company to reach liquidity can be a problem for first-time founders. Firms such as Tudor Ventures have touted their willingness to provide cash to founders as they go through the investment rounds, and The Founders Fund has designated a special class of stock, called “Series FF,” that is designed to offer a little cash to the entrepreneurs before any liquidity event.

It’s becoming an increasingly attractive alternative for entrepreneurs as the time to liquidity increases for venture backed startups. “If we could give them some diversification and cash, that helps a lot for them, especially people who have left the company or have been there for eight or nine years,” Albukerk says. “If they sell off 10% to 15% of their holdings, they still have the potential for a really big upside.”

Albukerk’s first fund, called Eleven Baskets, closed in 1999 and held stock from 11 companies. One of its holdings is San Francisco-based OpenTable, an Internet-enabled restaurant reservation service that some analysts have predicted may launch an IPO later this year.

The firm’s second fund, raised in 2002, had 26 companies represented in the pool. The fund would qualify as “top quartile” when compared to venture funds of the same vintage, Albukerk says. It had 13 liquidity events, about half of which were positive for the fund, Albukerk says.

The firm collects no management fee. It fronts the money to organize the fund and prepare the legal documents, benefiting only on the back end if there are liquidity events. Albukerk would not say how much carry the firm collects, describing it only as “significantly less than industry standards.” —Alexander Haislip