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Structure

S.O.P.’s default 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 S.O.P. 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 S.O.P. Ventures 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 out S.O.P.
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.