How to Get Equity Without Really Trying

Wahooly has a novel idea: Give a stake to people who promote them on social media

Before a startup can raise money, it needs users—proof that the concept works. But to attract those users, it needs that money. The result of this catch-22? A bunch of startups stuck in first gear, without users, money, or the means to get either.

Wahooly, a startup itself, has tapped elements of social media, advertising, and good old-fashioned competition to rectify the problem. The company describes itself as Klout-meets-Kickstarter-meets-Shark Tank (even though its name sounds more like Yahoo-meets-the Cleveland Indians-meets-Bitly).

Wahooly wants to help users meet startups and startups meet money. How? Wahooly users get stakes in the startups they choose to use and promote across their social platforms. Until now, your robust, hard-earned Twitter following wouldn't earn you more than a couple of bottles of Klout Perks wine. But now, those followers could earn you a stake in the next LinkedIn. All you have to do is promote it, shamelessly. "All of these people who have influence are becoming megaphones," said Dana Severson, Wahooly's founder. Megaphones with equity.

If that sounds like a legal minefield, it's because it is. The Securities and Exchange Commission forbids average Joes and Janes from investing directly into risky ventures like startups. But today's stingy lending market is stifling small business growth, prompting members of Congress to consider loosening the rules. Last week the House voted in favor of a bill allowing small businesses to crowdsource up to $2 million in investments. A positive development for startups, yes, but not without risks. Craig Newman, a securities lawyer who's a partner at Richards Kibbe & Orbe, warns that crowdfunding could "mov[e] from a well-intentioned capital-raising idea to the functional equivalent of a digital boiler room,” adding, “All you need is one online version of a Madoff, and the entire idea is going to come to a very quick halt.”

Wahooly technically engages in crowdfunding—it offers shares in startups to a growing base of 16,000 users—but the company’s survival doesn’t depend on crowdfunding’s legality. To get around current SEC requirements, Wahooly has structured itself as a venture capital fund. Users give the company permission to make investment decisions on their behalf as part of the platform’s terms of service. It’s a way to avoid nasty battles when payday finally occurs in the form of an IPO or sale.

How large a piece of equity each Wahooly user gets depends on how hard they work to promote the startups they choose. Wahooly holds a fixed piece of equity in each startup (it aims to launch officially with 200 startups in January; 41 are already on board), and users compete with each other for the biggest chunk of that equity based on influence, engagement, and usage. “If you don’t choose to do anything, you get diluted,” Severson said.