Not a week goes by that we haven’t questioned our decision to introduce a new set of terms into the funding landscape. They raise eyebrows. They cause founders and investors to pause. They introduce a learning curve we’ve already climbed with standard convertible notes and preferred rounds.
But, in those existing structures are embedded intent and the ground rules for a relationship that lives well beyond a single round of funding. They hard code a status quo that the startup world has come to accept whole cloth and put founders on a path that we’re actively seeking to help them gain control over.
Yes, it would have been easier to just stick to the status quo. But, doing so would simply continue to perpetuate the status quo. We couldn’t just talk about rethinking founders and investors toxic relationship to funding, we had to hard code our values of optionality and incentivize an early revenue/profit mindset that the status quo actively seeks to have them avoid.
We know that fundraising can feel distracting, frustrating and complicated. We’ve taken great care to ensure that nothing in our investment documents would prevent founders from being able to raise another round of funding without raising any unwanted red flags.
That said, we’ve also taken great care to cultivate a community of founders who have a laser focus on raising their revenue and profits, not their next round of funding. This allows the founders we work with to use the most effective pitch deck anyone can share when talking to new investors.
We’ve worked with Fenwick & West, creators of the Series Seed docs, to develop a simple, standard investment instrument that functions nearly identically to a convertible note. We’ve made our v3 investment documents available for free on Github.
The documents provide a high-level summary of the terms to be negotiated.
Purchase Price: This is the total amount invested in the round. Indie.vc prefers to be the lead investor and can write checks ranging from $100k to $1M. We can syndicate investments with other firms or angels if the founders want to raise more, or if they want others to have skin in the game with them.
Purchase Date: This is the anticipated date we will fund our investment.
Percentage: This is the ownership % investors convert into if a company chooses to raise a follow-on round of funding or sell. We use a simple fixed % to express this ownership as it avoids much of the confusion and signaling associated with valuations or valuation caps. If a company raises, investors convert the % into preferred equity prior to the pending round and receive pro rata rights to maintain that % in the subsequent round. The same is true in the case of a sale.
Conversion Trigger: This is the amount of follow-on financing that must be raised to trigger a conversion to equity. These conversion triggers generally range from $500,000 raised up to $5M before the conversion to equity is triggered.
Redemption Start Date: This is the date founders will begin repurchasing our equity option with a % of their gross revenue. These start dates can range widely given the intent of the founders and investors. Some might chose to set the start date to begin immediately while others may set it far out into the future. We recommend a date range of anywhere between 12 to 36 months, post-investment.
Redemption Amount: This is the % of gross monthly revenue founders will allocate for redeeming our ownership %. This generally ranges from 3% to 7%.
In the event that a company raises or sells, our terms function identical to a standard convertible note, with the remaining % ownership converting to equity or cash/stock (in the event of an acquisition). This conversion happens on a pre-money basis and retains a pro-rata right in the pending round to maintain our ownership %.
In the event that a company chooses to forego further fundraising, on the Redemption Start Date, they will begin to repurchase our ownership with a fixed % of their gross revenue (see: Redemption Amount). Each redemption reduces investors ownership and increases the ownership of the founders. This allows founders to repurchase up to 90% of our ownership % via scheduled redemption payments until they redeem a pre-defined multiple of the Purchase Amount (Indie.vc chooses a 3x multiple, but other investors using these docs may negotiate higher or lower multiples to suit their return hurdles).
At the time of our investment, we set a 10% equity option for a $750,000 investment with a Redemption Start Date 36 mo. from the close and a 5% Redemption Amount.
36 mo. after the investment closes we reach the Redemption Start Date and the company hasn’t raised a qualifying round of funding or been acquired. The company is doing $200,000 MRR.
Their first redemption amount would be $10,000 (5% of $200,000) and our equity option would drop from 10% to 9.96% and would continue to shrink with each subsequent repurchase.
We’ve created a spreadsheet to help founders understand the interplay of the variables outlined above and run their own scenarios here.
Below, we’ve used Capshare data to contrast the cap table impact of the traditional VC funding path (Seed, Series A and B) vs. the Indie.vc path (assumes Indie.vc is the seed funding, “Series A” is funded via profitable revenue growth, then a Series B- of course, the numbers look even better if no Series B is raised!).
We’ve also provided a downloadable version for founders to run their own scenarios against.
We think the contrast of locking into the conventional VC path vs. the “anti-fragile” ideals we’ve embedded within the v3 terms is simple, stark and compelling. We would like to see them become the obvious choice for ambitious early-stage founders looking to preserve equity and optionality for their businesses.
As always, don’t hesitate to reach out to firstname.lastname@example.org with any questions or clarifications and don’t forget that applications for our v3 batch close on March 1st!