Designing a new funding structure for bootstrappers
earnestcapital.co
earnestcapital.co
1. You're asking a "bootstrapper" to reimburse up to $5K in attorney fees (in addition to their own fees), while regular Delaware C-Corp startups can incorporate and raise pre-seed or seed up to a several millions without involving lawyers at all. Much more capital efficient.
2. > if we invest $100k with a 4x, or $400k Return Cap. The company pays back $100k, so there’s $300k left to pay, then decides to raise a round. We base our conversion on the $300k remaining to be paid, not the $100k we invested.
While this might be fair, it looks like double-dipping, especially if you have a low cap. There should be an option to repay it from the new investment without conversion.
2. Yes, currently the way we have structured it if the company decides to raise a round of financing and as part of that they want to pay the entire Return Cap to us in full, that is fine.
I would imagine someone would want to have their own lawyer look over everything anyway for this stuff before signing anything, but anything you can do to reduce cost is good. It's so minor and a necessity at the start, but has the huge chance to set off the relationship and optics on a bad start.
It's like you are giving free consulting resources (your money though instead of time) for the chance to close a deal you want as the investor, keep the client happy and make it as lubricated a process as possible. Eat it so that it doesn't turn into something that feels like an early scam attempt that'll ruin the future of the relationship.
It seems fair to say if I take $100k I pay you back say 4x that, no other strings attached. We both get value out of it. Who wouldn't want to 4x their money with some careful investment? Seems like it could be more reliable then regular startup investing, albeit slower and less exciting, but at the same time, you get to actually enjoy helping people like you instead of trying to help them but also trying to fuck them because it's your job.
I'd assume they're not going to give these "loans" to high risk "hey I have a cool idea" businesses, but more to businesses where it's clear that investing $x adds $x * 3 revenue. Meaning the risk you're taking is likely not extremely high, more on the same level to private equity.
Those are massive returns for the investors. The only people willing to take money under these terms are really desperate.
There should be some companies somewhat in the middle of the two extremes you've laid out. Companies that are reaching product market fit but still have a high level of uncertainty.
Note, I'm not saying this structure will necessarily see huge demand. But I also don't believe the terms are completely out of reason.
I'm in their target market myself, so here's my two cents.
It's fair to offer some additional remuneration for a VC taking extra risk with ideas with smaller potentials, but this sounds a little draconian. It sounds a little like they're covering their bases (which is great!) but also putting themselves in a place where they might have to go after people's salaries, which is going to create a lot of resentment. It feels almost like an attempt to take something more risky, but try to do some legal finagling to push even more risk onto the founder just so that they can bring it down to regular VC-level risk for themselves.
It feels like almost by definition most all of the 'good' investment that they want to pursue will be able to make themselves eligible for normal VC funding by either no or little work, and the additional complexity and unknowns incurred by this untested agreement is more expensive than what a good company would accept. Because for much less work than that, they can go the traditional route. Since they're bootstrapping, they don't have the urgency of 'I have to find money in x weeks or the company goes bust' either.
The genius of the VC model is that the investors get paid by the market when the company goes public or is acquired, and during that process the incentives of the founders and investors are aligned (they both want higher numbers.)
Disagree. Part of the term is that both parties will agree to a minimum salary that is not subject to dividends. So if you and the investor would have to agree in advance that founder salary will be $100k.
This clause protects them in the case, the founder decides to unilaterally pay themselves a $500k salary, but go back to the VC and say, "sorry, we had no profit this year. no dividend for you"
"If there’s a hard stop on the investment, then Earnest and its team will no longer be invested in the success of the company."
This is shortsighted thinking. The stronger the companies are in your Alumni network, the stronger your Alumni network is- so if you are seeking to continue investing long term, it is always in your interest to build companies in your Alumni network, even if there isn't a direct cash return for doing so. The publicity benefit alone is well worth it (We were an early investor in XYZ!)
From a lay persons view it seems like handing out small buisness loans to internet companies has a higher chance of profit and less risk profile than other types of buisness.
To start a restaurant for example you need furniture, cooks, wait staff, need space, suppliers, etc. You can start up a SASS with a couple of computers, an AWS account, and a WeWork subscription. There is zero marginal cost, I would bet productivity per employee is very high compared to other industries, what am I missing?
If you can prove it works then it's generally not hard to raise the money.
Among other factors complicating the math: you know how easy it is to start a SaaS company? It is similarly easy to credibly claim you are starting a SaaS company. (It is rather harder to credibly claim you are opening a pizza parlor; you need to have e.g. a location under contract.)
If you offer $100k to anyone credibly claiming to open a SaaS company, and charge reasonable business loan rates... fraud is going to be pretty annoying.
Business failure is going to be pretty annoying, too! What happens when 6 months in the company is making nothing and Google offers the founder Google-appropriate amounts of money to get a real job? Answer: you lose all your money.
(VCs have a saying about this which is reasonably well calibrated: Don't take venture risk for debt returns. Bank of America is very much not in the business of taking venture risk in their SMB lending segment.)
In the UK almost all bank lending is related to the housing market (I read a stat where it’s ~ 95%).
Basically, the banks are extremely risk adverse and only care about rent seeking.
Even if you’re in business and doing well, it’s difficult to get a loan.
You'll have better luck with local banks that work with startups. We worked with Cambridge Trust in Massachusetts to get a line of credit and it was a pretty painless process. Working with local banks definitely involves forming a personal relationship though, so there's a little time investment. Without external funding, you'll also find even the local banks will require a personal guarantee.
There's a huge gap between VC funding and loans from big banks, so I'm excited to see people tackling this problem.
In a cooperative case, the founders would be investing their time beyond draw under the same terms as a cash investor would. If/when the venture makes profits, the investment of time/money can be paid back though a percentage of revenue. Anyway, you may want to solicit feedback from members of the Platform Cooperative movement (https://platform.coop/). They are actively searching for those who might have a compatible, patient capital funding mechanism.
Positive cash flow is the best source of capital, IMHO. If you can't manage that, or you need extra capital to grow the business, what about turning to banks as a source of capital?
After my company (not a tech startup) hit the 5-year mark in the state corporations database, I started getting offers from banks, PayPal, and even Amazon, two or three times per week.
They don't want equity. They don't want a seat on the board. They don't want to tell me how to run my business. They just want the interest and a relationship that might lead to more business down the road.
In its post, this statement stood out:
All of the terms or figures are subject to change. Any specific figures would change significantly depending on the stage of the business, founding team and current levels of traction.
Phrases like "terms subject to change" + subjective, easily discounted appraisals of things like "team" and "traction" are the types of venture BS that many bootstrappers want to get away from.
Moreover, the post says they "primarily" want to extract dividends from the companies they invest in. What happens when those dividends dry up, or the company needs to make a choice between paying out dividends and using that money for some other important purpose? Salaries get docked?