Hard Coding Optionality
Welcome back to INTRO to Finance. I'm Jason, and this week we’re doing something a little different. With Indie.vc’s next application window this weekend, we’re having our first guest post!
Bryce Roberts, Managing Director of Indie.vc, is sharing the thinking that went into creating the Indie.vc terms and how they’re different from traditional venture terms.
Not a week goes by that we haven’t questioned our decision to introduce a new set of terms into the funding landscape. They raise eyebrows. They cause founders and investors to pause. They introduce a learning curve we’ve already climbed with standard convertible notes and preferred rounds.
But intent and the ground rules for a relationship that lives well beyond a single round of funding are embedded in those existing structures. They hard code a status quo that the startup world has come to accept whole-cloth. They put founders on a path that we’re actively seeking to help them gain control over.
Hard Coding Our Values
Yes, it would’ve been easier to just stick to the status quo. But doing so would simply perpetuate it. We couldn’t just talk about rethinking founders’ and investors’ toxic relationships to funding. We had to hard code our values of optionality and incentivize an early revenue/profit mindset that the status quo actively seeks to have them avoid.
We know fundraising can feel distracting, frustrating, and complicated. We’ve taken great care to ensure nothing in our investment documents would prevent founders from being able to raise another round of funding without raising any unwanted red flags.
That said, we’ve also taken great care to cultivate a community of founders who have a laser focus on raising their revenue and profits – not their next round of funding. This allows the founders we work with to use the most effective pitch deck anyone can share when talking to new investors.
We’ve worked with Fenwick & West, creators of the Series Seed docs, to develop a simple, standard investment instrument that functions nearly identically to a convertible note. We’ve made our investment documents available for free on Github.
An Overview
The documents provide a high-level summary of the terms to be negotiated.
Purchase Price
The total amount invested in the round. Indie.vc prefers to be the lead investor and can write checks ranging from $100k to $1M. We can syndicate investments with other firms, or angels if the founders want to raise more – or if they want others to have skin in the game with them.
Purchase Date
The anticipated date we will fund our investment.
Percentage
The ownership % investors convert into if a company chooses to raise a follow-on round of funding or sell. We use a simple fixed % to express this ownership, as it avoids much of the confusion and signaling associated with valuations or valuation caps. If a company raises, investors convert the % into preferred equity prior to the pending round. They receive pro-rata rights to maintain that % in the subsequent round. The same is true in the case of a sale.
Conversion Trigger
The amount of follow-on financing that must be raised to trigger a conversion to equity. These conversion triggers generally range from $500,000 raised up to $5M before the conversion to equity is triggered.
Redemption Start Date
The date founders will begin repurchasing our equity option with a % of their gross revenue. These start dates can range widely given the intent of the founders and investors. Some might choose to set the start date to begin immediately, while others may set it far into the future. We recommend a date range of anywhere from 12 to 36 months post-investment.
Redemption Amount
The % of gross monthly revenue founders will allocate for redeeming our ownership %. This generally ranges from 3% to 7%.
In the event that a company raises or sells, our terms function identically to a standard convertible note, with the remaining % ownership converting 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 %.
In the event that a company chooses to forego further fundraising, they’ll begin repurchasing our ownership with a fixed % of their gross revenue (see: Redemption Amount) on the Redemption Start Date. Each redemption reduces investors’ ownership and increases the ownership of the founders. This allows founders to repurchase up to 90% of our ownership % via scheduled redemption payments until they redeem a predefined multiple of the Purchase Amount.
v5 — 10/10
We think the contrast of locking into the conventional VC path vs. the “antifragile” ideals we’ve embedded within the Indie.vc terms is simple, stark, and compelling. We’d like to see them become the obvious choice for ambitious early-stage founders looking to preserve equity and optionality for their businesses.
Seem like a fit for your business? Our 24-hour v5 application window is this Saturday. You can start your application now and set it to auto-submit on 10/10.
Bonus — If you already have an INTRO profile, you can sign in with INTRO and 80% of your application will be done already.
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