Our typical term sheet enables you to choose the path that’s best for *your* company: pursue traditional VC accelerated growth without profitability, or become a profitable company organically and buy us out. We use a hybrid between a convertible note and a revenue-share structure:
| Company | [Company name] Inc., a [State] corporation |
| Purchase Amount | $____ |
| Purchase Date | __________, 2020 |
| Percentage | _____%, subject to redemption as provided below |
| Conversion Trigger | $__,000,000 round of preferred |
| Redemption Start Date | ____ months after Purchase Date |
| Redemption Amount | _____% of the Company’s gross revenue, as defined by GAAP |
- Purchase Amount: Total amount invested in the round. We prefer to be the lead investor.
- Purchase Date: Anticipated date of funding investment.
- Percentage: The ownership % we convert into if a company chooses to raise a round or sell. We use a simple fixed % as it avoids much of the confusion and signaling associated with valuations or valuation caps. If a company raises, we convert our % ownership into preferred equity prior to the pending round and receive pro rata rights to maintain that % in that round.
- Conversion Trigger: The amount of follow-on financing that, if raised, triggers our conversion to equity. Such triggers typically range from as low as $500K to as high as $5M.
- Redemption Start Date: The date founders begin repurchasing our equity option with a percentage of gross revenue. These dates typically range from 12 to 35 months after the date of our investment.
- Redemption Amount: Percentage of gross monthly revenue founders allocate to redeem our ownership position; ranges from 3-7%
In the event that a company raises or sells, our terms function identically to a standard convertible note, with our then-current % ownership converted 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 %.
If a company foregoes further fundraising, they will begin to repurchase our ownership position, using a fixed percentage of gross revenue. Each redemption, therefore, reduces our ownership in the company and correspondingly increases the founders’ ownership. This allows the founders to repurchase up to 90% of our position via scheduled redemption payment, a single lump sum payment, or a combination of both — until they have redeemed 3X the Purchase Amount.
Here’s a summary of how our model compares with traditional VC:
| Factor | Traditional early-stage VC | Our Model |
| Autonomy and optionality | Initially high, but you almost always lose control over time. Typically locks you into taking more VC and growing your company according to VC needs | High |
| Time requirement | Typically 1-3 months of due diligence | Planned typically 2-4 weeks |
| Processing/ Legal costs | Legal costs typically $25K-$50K | Planned several thousand dollars |
| Cost of capital | Cost of VC funding to a unicorn CEO can easily be the equivalent of paying well over 100% annual interest | Low double digits |
| Typical business | Unprofitable business requiring ongoing VC subsidy | Business with clear roadmap to profitability |
| Ability to terminate | Expensive, difficult, and time-consuming | Easy, pre-negotiated option to buy us out |
| Financial management obligations | Low | Material, as you may have ongoing monthly payment obligations |
Our model is based on an open-source template from Fenwick & West and Indie.vc. To learn more about this model, see our overview series from Techcrunch: Revenue-Based Investing: A new option for founders who care about control.
