Building trust in venture capital: We have just made our new deal terms publicly available
As part of our commitment to being a founder-oriented, long-term venture partner, we’ve introduced our new simpler and more flexible standard investment instrument, which is now entirely available on APX.vc here.
How long should an early-stage startup fundraising take? At APX, we thrive for speed and simplicity over heavily negotiating terms that are never enforced. Still, it has begged the question: why do we often see ourselves in lengthy calls and back-and-forth emails to discuss our initial deal terms when we could just openly tell everyone what we do and how we invest? After all, as a very-early-stage VC, we don’t rely on traction but rather focus on promising solutions with a powerful team, so couldn’t we make fundraising fast and simple for our startups so that founders can really focus on their business?
By now, we have completed more than 100 investments only at APX (plus another 100+ investments with our earlier fund) and started asking ourselves questions about what really matters to us and our targets. We realised it was time to assess our investment approach to address what — positive and negative — experience has taught us. Not only is the market constantly changing, but access to funding has also become significantly easier over the last years, making it necessary to rethink how we can quickly respond to investment opportunities.
What’s more, the array of early-stage founders has become wider, ranging from first-timers to highly sophisticated and experienced founding teams in search of their right venture partners. We noticed the urge for carefully drafted and fair agreements to remain attractive for everyone within the VC ecosystem.
Our new investment scheme: standard convertible loan agreement
We originally structured our initial investments as straight equity investments and immediately jumped into our startups’ captable. We then quickly dropped this investment format and shifted towards convertible loan agreements (or similar instruments in other jurisdictions) due to their execution speed and flexibility. A convertible loan agreement is a short-term debt that converts into equity in the future that is fairly used by the venture capital industry worldwide. Until today, almost 70% of the 100+ initial investments at APX were designed as convertible loan agreements and we intend to continue this trend going forward.
Our convertible investments so far have been built out of our then standard template, whose terms have been constantly adjusted to respond to the market movements. Over the years, we came to better understand the needs and concerns of early-stage founders and, more recently, we decided to prepare a wholly revised convertible loan agreement with leaner and more flexible terms.
This work has now concluded and we have decided to make it entirely available on our website alongside an extensive set of explainers based on questions and concerns often raised by startups during the signing process.
By doing so, we hope to enhance transparency and trust within the venture capital ecosystem. In addition to our heavily simplified terms backed by general commentaries, another crucial novelty of our new agreement is the immediate availability of our follow-on funds. As announced earlier this year, we’re committed to investing up to EUR 500k before a series A round in each of our startups provided certain basic conditions are met. For that, we’re now making sure that the different investment tranches to trigger this total amount over time are expressly regulated by our new investment instrument not only to ease the overall follow-on process but also to reinforce certainty.
Our first tranche is structured as a standard convertible loan agreement. In this context, we make the money available immediately upon signing, but we only convert our investment into equity in the context of an upcoming qualified financing round. This way, we allow startups we invest in to push back any legal bureaucracies related to increasing capital to a later point in time while we increase their speed in obtaining funds.
Our follow-on tranches are already governed by our standard investment agreement and their structure is super flexible now. As the ability to fundraise and obtain market validation of ideas, products or solutions is important to unlock our investment, we aren’t setting their specific conditions or structure of our follow-on investment yet, but rather intend to tag along on the lead investor’s terms in the next equity or debt round. In practice, we have seen a significant decrease in the time between our initial and follow-on investments, with several of our current portfolio companies having unlocked our follow-on investment in further convertible rounds within a few weeks after the deployment of our initial funding. We trust this will improve the founders’ ability to fairly attract further investment without limitations while allowing us to continue funding successful businesses.
Nevertheless, we know from experience that one size might not fit all startups. While we’ve worked on a standard instrument to function as the framework for our investment in the majority of our portfolio, we acknowledge that some of the deal terms and economics might require amendments — particularly when the startup has already received commitments from notable qualified VC investors. In such cases, we are open to discussing alternative investment solutions to properly address the case.
Making investment decisions easier for startups
By openly communicating our deal and clarifying certain VC technicalities or legal jargon in our contracts, we’re helping early-stage startups better understand all terms before deciding to seek investment. We don’t believe in arrangements made behind closed doors — we’ve always strived for transparency, and we are optimistic that we can enhance trust within our portfolio by publishing every element of our deal terms.
We see the publication of our new investment agreement as a start of a new learning journey. Our investment instrument and the accompanying set of commentaries are not intended to be prescribed or limited in scope. Instead, they’re working tools that should be adjusted on an ongoing basis to rapidly respond to the movements in the VC industry and the needs of startups.