I do understand how it works. It's the standard fund arrangement, except that you are dealing with very high risk (junk level of risk) securities. These are still born businesses with no market or valuation based in assets/profits. Hence my lottery ticket comparison. However, you do reduce risk a little by spreading the risk. But the fund is also a startup. Meaning that people who give you their money have a bigger chance of losing because your stability and the security of the funds are directly tied. If you go down in two years any long term investment potenti is lost. Given that on average a startup takes about two years to develop to a profitable level (no ramen), your finacial unstability (because you are a startup) does diminish the chances of this working out.
Of course, I want this to work out and would love to eat crow. But it is a very risky strategy to take. Though give how Cherry got 5 million to wash cars, I can't see how this wont manage to make billions (which is the aim of YC).
Each FundersClub fund is its own independent LLC entity, which is basically the point of the article describing why the SEC is green lighting the process.
If FundersClub does go down, each fund's LLC survives, with it's investors owning their fractional claim on the funds' assets.
Similarly to buying stock in a company using ScotTrade or equivalent. If ScotTrade goes down, you still own the equity you purchased and which they were holding as your custodian.
Of course, I want this to work out and would love to eat crow. But it is a very risky strategy to take. Though give how Cherry got 5 million to wash cars, I can't see how this wont manage to make billions (which is the aim of YC).