tylertringas

My two cents: It's a great idea if you find the perfect person but is very hard to go out and do. The compensation you need to provide to bring on someone to run the entire business, in terms of salary + ownership is often ends up with pretty similar economics to just selling. Also very tricky waters to navigate long-term if you both retain a majority ownership of the business but cede all day to day operations and strategy to somebody else. Likely to end up either with some conflict or the hired CEO gets tired of doing 100% of the work in a business they only have a minority stake in. Definitely not impossible and has the potential to work out to better economics than a sale if all goes perfectly. (I'm the post author btw)

This is an overview of the new tools and forms of capital enabling founders to build and fund businesses while still maintaining as much flexibility and optionality as possible.

This might be useful: https://earnestcapital.com/shared-earnings-agreement/

My framework is to just look at your metrics and ascribe certain metrics to the right areas of focus, if one metric is lagging/worse than the others, focus there. Not enough free trial signups? Switch focus to marketing. Good trial volume but % conversion to paid is too low, time for some product/onboarding work. Churn creeping up? Allocate more time to bigger product work, bug fixing. Customer support tickets too high? Bug fixes + documentation.

And invert it too. Even if you personally are annoyed at how bad your current state of help docs are, if support tickets and churn are low, save it for later

We are in the same ballpark but don't do revenue-based financing (ie getting repaid via taking a % of revenue). We are typically investing earlier in startups where it doesn't make sense to take money off the topline yet. (More on our model: https://earnestcapital.com/shared-earnings-agreement/).

Timia and Lighter Capital offer revenue-based debt for companies that are I believe at least at $25k-50k MRR. Clearbanc will offer RBF specifically for your paid marketing (ie FB ads) budget but doesn't fund other parts of your business.

That is a tool for calculating the % of a sale that would go to Earnest depending on which year you sell the business in. It is set at year 6 in the default setting for the tool. Earnest's % of a sale goes down as Shared Earnings payments are paid back to us. In the base case setting in that model, the Return Cap is not fully paid back by year 6 so our stake at that point in time is 9.5%. If you change that 6 to year 10 our stake is reduced to 5%.

Just to reiterate all of these terms are negotiable at the time of investment too.

This thread is about Tinyseed so I won't hijack it with a defense of calling Earnest predatory (folks can read the terms, decide for themselves https://earnestcapital.com/shared-earnings-agreement-digging...).

Uncritically believing that investing in software companies can only ever be a "hits driven business" is the reason why there is such a giant gap in the market that Tinyseed, Earnest, Indie VC, and lots more coming will fill.

The big disadvantage of trying to shoe horn every business into being a unicorn is that you cause a lot more founders to fail by forcing them to try to grow fast enough to raise the next round or flame out trying.

Cool. Hit me up. Let's see if we can work together to help founders. Excited to see lots of new models and help founders find the right fit.

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.

It's not debt. No interest rate, no repayment schedule, no recourse.

Hey Glenn. I don't think there's anything wrong with VC per se, but it's no longer a fit for most software businesses (why the best firms are moving to crypto, robotics, AI, etc). We have an outdated association with software company needs capital = VC. https://tylertringas.com/a-new-default-funding-for-tech-comp...

It's a fund. Our basic bet is that way fewer companies will fail than a traditional seed VC portfolio (tons of reasons but not forcing them to hit growth targets that they need to show to raise the next round is one). A portfolio of this kind of businesses should be in the top quartile of venture funds (not actually that hard of you look at the numbers) with lower concentration of risk and faster liquidity.

Pre-orders are an awesome way to bootstrap a business.

Cheers. I love this topic.

I think it means we're on to something if we have folks in this thread arguing from boths sides that we're so founder friendly we'll never turn a profit AND that our terms are "predatory" and worse than a bank loan :)

The secret is there's a huge opportunity in between and tons of amazing founders and businesses we're excited to back.

It's relatively easy to write terms that (a) allow something like this to adversely affect us if done on good faith over the normal course of business and (b) prevent founders from doing this maliciously to engineer more equity in the event of a sale. Our final deal docs go into this.

It's not set at 9.5%. Not sure where that number is coming from. Check out https://earnestcapital.com/shared-earnings-agreement-digging...

Hiding? https://earnestcapital.com/shared-earnings-agreement-digging...

The residual stake is a factor of the investment amount, the Valuation Cap (negotiated at time of investment) and the terms of a sale. Note by "stake" we just mean an option to participate in a sale. You can run the business profitably forever without paying us a penny. There is a screencast here going over every term and a spreadsheet anybody can use to run the numbers. Not hiding anything :) https://earnestcapital.com/shared-earnings-agreement-digging...

No personal liability. We assume some of these investments will fail for us.

% of the sale would be roughly $100k / Valuation Cap (which is negotiable at time of investment).

We are mainly focused on the early stage when a business loan (ie no personal gaurantee) isn't an option. I went the route you described (racking up $50k credit card debt) to launch my SaaS business and it sucked. That said a business loan could be a great option for more mature businesses with solid cash flow (hopefully at much less than 20-30%!)

Once Return Cap is fully repaid the founder can run the business profitably forever and not pay us anything more. We do typically prefer an option for a % only if the business is sold but can do a deal (with a higher Return Cap) that excludes this easily.

10-12 per year.

There's no limit. If the business stalls at $3k MRR (ie no Founder Earnings) it can go on running forever or shut it down. We would get a % if it was ever sold.

Definitely.

We also have a residual, uncapped, % option if the founder ever sells the business. This keeps us aligned with the founders to keep helping them grow the value of the business for the long-term even after the Return Cap is paid back.

> I'm not sure how big this market segment could actually get.

Keep following along and see :)

I like Jerry's work a lot but come to a different conclusion. My basic thesis is that we're in the deployment age of the internet/web/mobile era and there is a whole new wave of a lot lower risk and a bit less reward opportunities for companies to bring the "peace dividend" of the software areas into markets that are not winner-take-all. The upside is these businesses are much more capital efficient, can scale and potentially produce much higher returns than SMBs from previous eras. The downside is they have no collateral and are thus completely unbankable for traditional small business lending. We need a new default form of capital for entrepreneurs and we are trying to build it: https://tylertringas.com/a-new-default-funding-for-tech-comp...

Good question! Small team for now. Me: https://twitter.com/tylertringas Head of Platform: https://twitter.com/bentossell Amazing group of mentors: https://earnestcapital.com/earnest-mentorship/

Don't think we have the legal infrastructure to invest in Indian companies right now, but definitely could invest in a company that used Stripe Atlas to form a US entity: https://stripe.com/atlas

> Are you planning to tune that over time?

Yes, very much consider this our next product. Will build, measure, learn, iterate as we go.

> I used a portfolio loan to buy a business to run as a side project

It's a useful comparison but not apples to apples. There are a lot more capital options to fund an operating business (ie SBA loans, IRA loans) than starting a new one. We are focused on the latter.

Our financial model might be a good fit for acquiring co's but it's not our strategy. Happy to help if anybody else wants to give it a shot.