"Hey Founder, great company - we're interested in investing - but can you explain this COS line where 20% of your Revenue disappears into something called SAFER? That is brutalizing your margins."
"Well, in the early days we agreed to send a certain % of Revenues, in perpetuity, without dilution or adjustment, to earlier investors. So ya, that's where it's going."
"Oh. Ouch. I guess that makes your company less valuable to us, since the future cashflows are skimmed off. Ahem, excuse me, not the future CASHFLOWS, but the REVENUES are skimmed off. Double ouch."
"Ya. But back then we obviously would have raised from LITERALLY ANY INVESTOR that had just been willing to do a regular SAFE, but we couldn't, so had to do this weird thing."
"Sorry to hear that. We're obviously out as potential investors - this doesn't seem like an equity structure we can work with. Maybe find another investor who likes SAFER's, and keep stacking these future Revenue rights? Just make sure you have enough Revenue left over to pay your staff etc. Best of luck!"
Feels like this would make a total mess of a cap table. It’s effectively equity in all the ways that matter for minority preferred shareholders, except that it isn’t represented on the cap table and it’s got baked in pari passu treatment, which growth investors (rightfully so) won’t like. Even convertible notes mess with cap tables in ways I’d rather not repeat, as it prevents accurately valuing employee equity grants. Also, none of this would be eligible for QSBS, which is a knock against it for the investor.
Additionally - what is the purpose of repurchases if they don't also reduce the exposure the company has to claims on liquidation? Noting that "repurchase" is probably dangerous nomenclature - if these were to actually be interpreted as equity repurchases by the IRS, it could endanger QSBS status for all shareholders.
"That ten-year investment cycle was invented for a world where early stage companies could quickly gain access to public capital, a world that ended with devastating Sarbanes-Oxley act."
This seems wildly off. Tech unicorns aren't public for their own particular reasons, but the notion that a company worth tens of billions of dollars can't comply with regulation is silly. The median revenue of companies coming public is typically significantly below $100m, with a median time to IPO still in the 6-8 year range.
Why aren't tech unicorns going public and making their employees rich(er)? That's a totally different discussion that has little to do with Sarbanes-Oxley.
1. The top 3% seed-stage investors are killing it.
2. This seems to be engineered for the bottom 90% of investors. To squeeze out some yield. But venture capital is ruled by the power law.
3. Forcing seed stage tech founders to think about this complexity makes no sense.
I can’t speak to the rest of the things some of you are talking about, but I can speak to this.
It really sucks realizing you’re at a 90% company instead of a 10% company. Statistically speaking you’ve not only worked for one of those, but you’ve worked for two or more in a row. Pain is information and sooner or later everyone tries to act on it. There may be nothing that can be done. Or maybe there’s another undiscovered strategy out there to make a YC for the 90%. Or even just the 25% would be huge news. People are going to search high and low for a way out. And some will continue even if someone proves mathematically that it’s impossible.
(You haven’t lived if someone hasn’t asked you to solve an uncomputsble problem, or offered to let you solve one NP-complete problem in lieu of an easier NP-complete problem).
What is to fix? Gamblers gonna gamble, humans gonna human, markets measure sentiment, both sides of the market [founders and investors] violate the 7 deadly sins all day long – greed, pride, lust, envy, sloth, wrath, gluttony – all of it
If I knew that, I’d be too busy to converse on hacker news.
I think the world would be better off if we had an 80/20 rule like the rest of the world seems to. But slow companies also deserve a bit more respect for finding the 20% in the 80%. I think that’s half undiscovered territory and half a shift in perception.
Slow companies can find that 20%, it's just that they can't raise $2m at a $12m valuation from seed-stage venture capital. The risk/return doesn't make sense.
In some places, there are legal obligations and consequences that can trigger with shareholder counts. For example, pitch 17 firms with NDA protected IP in the slide deck, than your project could be considered public domain. Or... issue ownership to more than 30 shareholders, and you now have a filing obligation regardless of investor tier (YMMV, in some places... I recall it is 300 names that trigger a requirement to enter an exchange whether your group is fully ready or not).
This is one of those things you had better get more than one corporate lawyers opinion on in your geographic region. Seriously, don't even think about YOLO'ing it with share structures. Hard pass if you are unsure...
I would not touch this with a 10-foot pole, and would be likely to reject an investment possibility based solely on this being on the cap table.
It is marketed as being a way to preserve angel-investor equity in the event of an outsized exit.
What it actually does is minimize that equity, in exchange for earlier cash-flow repayments. If the business wants to grow, repaying money at that stage is the worst thing possible.
And as far as an investment in a business that will never grow: it seems less-desirable than simply getting dividends, and the complexity on the cap-table will make an acquisition less desirable.
>That ten-year investment cycle was invented for a world where early stage companies could quickly gain access to public capital, a world that ended with devastating Sarbanes-Oxley act.
I'm sure this had nothing to do with the massive glut of VC money driven by insanely low interest rates which drove irrationally favorable terms for that VC money.
I get the desire for something like this from the perspective of a founder / early investor. The question is does doing this become a form of poison pill that VCs will then look down upon in later rounds.
Maybe this would be better suited for the calm company crowd?
This seems like a good idea at first glance as an alternative to VC vs bootstrap dilemma. I particularly like the clause to buy out investors with revenue, most companies we see getting funded IMO are not viable for VC but would be perfectly fine mid sized businesses that just require some investment to get started.
> The Shenanigans process begins right after the early check writers are too small to lead the next round and extend through the exit process.
I got my morning chuckle. It’s good to know there are still people out there thinking sophisticated thoughts based on naive assumptions.
As if the shenanigans phase doesn’t start the moment the founding engineers are being interviewed (or for some people, before the cofounder is selected. Self-delusion is still shenanigans).
I guess the metaphor is something like they associate unicorns with someone getting most of the pie (cake), and they want to give more equitable slices to everyone?
"Well, in the early days we agreed to send a certain % of Revenues, in perpetuity, without dilution or adjustment, to earlier investors. So ya, that's where it's going."
"Oh. Ouch. I guess that makes your company less valuable to us, since the future cashflows are skimmed off. Ahem, excuse me, not the future CASHFLOWS, but the REVENUES are skimmed off. Double ouch."
"Ya. But back then we obviously would have raised from LITERALLY ANY INVESTOR that had just been willing to do a regular SAFE, but we couldn't, so had to do this weird thing."
"Sorry to hear that. We're obviously out as potential investors - this doesn't seem like an equity structure we can work with. Maybe find another investor who likes SAFER's, and keep stacking these future Revenue rights? Just make sure you have enough Revenue left over to pay your staff etc. Best of luck!"