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Comment by tylertringas | Hacker News Reader

All the exact terms are negotiable. We make a spreadsheet available for any founder to run these numbers before doing a deal. Hyper committed to transparency and educating founders to make sure they know what they're getting into.

I will readily admit that if founders intend to raise multiple rounds of follow on equity (VC style) we will not be the most competitive form of capital for them.

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That sounds good. So long as founders are aware of all the implications, then there's nothing wrong with any particular arrangement. I would be careful about a structure potentially disincentivizing growing a business faster, though. One really simple consideration that requires no tweaks on the current agreement I think is just setting a higher valuation cap, that's still around where if one was to raise additional capital due to rapid growth, they would expect to raise at. For example, on a company worth $3 million perhaps the cap should be more like $8 million. Alternatively, change the terms so that the equity basis cannot be greater than the invested amount at the valuation, which I think is the intuition most founders would have, while still providing substantial upside and downside protection to investors—who get both a loan-like repayment multiple, and in the event of a rapidly growing startup, a normal seed-valuation-based level of equity. Having the downside protection of the return-cap re-payment, as well as an equity conversion of potentially multiple times a normal seed valuations on the upside, seems to be inherently bad terms to me. Of course, if it's the only capital you can get, and you'll die without the capital, it's better than nothing. But, there's a lot of offerings out there, as well as the option to not raise, so I'd be concerned as a limited partner that the only entrepreneurs willing to accept such terms were self selected in an unfavorable way, and thus despite the aggressive terms would quite likely still receive poor returns as an investor.

There's also seems like there may be a bit of contradiction of messaging here. The messaging is like, "Take this capital, grow a business at your own pace and pay us back a multiple of what we give you as you can.", yet in the case that a company is doing very well and growing fast, and can utilize more capital or sell, instead of having normal equity terms on invested capital, the agreement turns around and says, "Oh, and by the way, we own a huge multiple of the investment as equity now." This seems highly inconsistent to me, as if you're really expecting the majority of your returns to come from these 3-5x return caps being paid off from earnings, why would you have a provision to take such an aggressive equity stake in the companies that end up doing particularly well and go on to raise or sell? Like, it seems to me such terms suggests you expect to make the majority of your returns from equity, which is not what's being communicated. I could also be over-estimating your interest in startups that may ever go on to raise more capital or sell, but I think there's so much uncertainty in starting a company, that it's not really reasonable for a founder to know if at some point in the next few years that the best thing for the business might be to raise or sell, as it depends on the state of the company and the market. This agreement as currently drafted, without proper high-cap or other considerations mentioned above, could too easily disrupt future optimizing for the best outcome for a business.

Just wanted to thank you for doing a deep dive into this with all your comments. This certainly changes equation and potential payout of their perhaps oversimplified messaging of simply getting 3-5x returns, but not knowing that the founder is in a gridlock situation if it makes sense for them to raise more money. I can understand how if a business required more money just to sustain business and keep it alive, then converting to equity makes more sense for additional perceived risk that more money was required to sustain, however it's odd that that mechanism would also then more act as a penalty for the more successful businesses - and definitely is turn off.

3-5x return cap sounded super refreshing - and almost like a dream come true, however assuming they're good judge of characters and select well, then I could see them pulling off a very successful investment protocol. I may still contact them to see what their intentions are and what expectations/agreement may be possible.

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