Today, digital ideas are easier and cheaper than ever to launch.  This has unleashed a whole army of young entrepreneurs with an idea and a dream. Long gone are the days of investing millions of dollars into one “idea.” Our generation has seen what happens when an individual invests all his time, money, and sweat into “the big idea” – 9 out of 10 of those startups fail miserably. We’ve heard the horror stories of VC capital and funding, and have rationally chosen to not go down that path. Many of us have built our companies from the ground-up on sweat equity and our time.   It’s easier, faster, and allows us to flex our creative muscles and spread our entrepreneurial wings.  And many of us have embedded a social mission and purpose in the core of our business and brand.

From an investor viewpoint, it’s even harder today to comfortably invest into entrepreneurs. How do you differentiate between two similar founders with great ideas? Investors understand that the success of startups are a combination of many different things including the idea, founders, management team, luck, timing, network, connections, etc. How can investors invest and minimize the risk while maximizing their return?

What if we created an option market for startups based around the idea of micro-investments? Why invest into one idea when you get invest into dozens?

According to Wikipedia, “an option is a contract between a buyer and a seller that gives the buyer the right—but not the obligation—to buy or to sell a particular asset (the underlying asset) at a later day at an agreed price.”

What if we could allow investors to diversify their investments over many promising entrepreneurs. Rather than investing into one entrepreneur, they can spread investments over dozens. And if any of those startups take off, they can invest additional capital in exchange for equity. Why would anyone invest $250,000 into one startup when they can buy options for $25K in 10 different startups? Odds are that one of them will take off and be successful.

How would it work?

An investor can buy an option for $5,000 – $25,000 which grants them the option to invest further capital for equity into startups at a discounted rate when certain revenue milestones are reached. The investor can sleep at night knowing that he will invest more money when startups gain some traction. The entrepreneur can sleep knowing that he can focus on building his business and not worry about raising angel investment down the road.

Ideally, I think hitting revenue milestones should be the main trigger (there can be others), and there will be timeframes, etc. Since the investment amounts are so low, the investor wouldn’t spend too much time on traditional due-diligence. The shift focuses from the idea to a combination of the idea and capability of the entrepreneur. I think the perfect target would be young entrepreneurs that have worked a couple of years (think post Y-Combinator). Also, none of the investors would get equity (since they’re buying options). Lastly, I think if we had general legal documents for these type of investments, it can streamline the whole process. If this work, it can also allow an options market for investors to sell options to each other.

How is this different from convertible debt?

Since ideas are so cheap today, it shifts the power from the investor back to the entrepreneur. It levels the playing field and allows both sides to create a favorable deal that’s FAIR to both sides.

What do you guys think? Will it work? Why or why not?

This article was written by Michael Karnjanaprakorn (Co-Founder of All Day Buffet).  You can follow his updates on twitter.com/mikekarnj