Breaking Down Our Terms- 2024 Edition

So it’s been a while since we’ve last updated this document. Not much has changed from a CFEA terms standpoint, but starting with the next fund we will be adding a pure equity option as well. We also will be adding some more examples and explanations to make things clearer to founders, but do let us know if you have any questions about our style of investing.

What types of businesses and founders are suitable?

• We look for early-stage companies that may or may not fit the “grow at all costs” venture capital funding model, or do not fit the “5-year predictable growth with hard asset collateral” model that is usually required for a traditional bank business loan. 

• We're happy to fund almost any type of business, but prefer not to invest in highly capital-intensive models. 

• Given the extremely early nature of a CFEA investment, underwriting the entrepreneur as an individual is just as important (if not more) as underwriting the business opportunity. 

• We think UpsideDown investment terms balance founder-friendly and investor-friendly terms, but others are sure to disagree. 

  • If 4%, non-recourse bank debt is an option for your business or idea, then UpsideDown is likely not the right funding option for you. 

  • On the flip side, if £50,000 in 25% APR credit card debt is your only option, we might be a better solution. 

• Every entrepreneur has a different situation, and our CFEA is one tool that is available.

CFEA

Essentially, there are 2 parts - one similar to debt and one similar to convertible equity.

Future Earnings Agreement (loan-like):

• Once the investee takes funding from UpsideDown, they start repaying their Future Earnings Agreement at the rate of minimum 10% if their monthly pre-tax Founder Earnings (money taken from the business account to the personal account) is higher than £2500 a month. 

• There is a salary floor, where the entrepreneur pays back £0 during periods of time where they are not earning above £30,000.

• The income is verified by Stepex. By taking funding from UpsideDown the founder agrees to be transparent to Stepex about their monthly earnings for as long as the debt remains outstanding (in part or in full). 

• The debt is considered repaid when the founder has paid back 1.5x the amount of funding taken from UpsideDown within 5 years. 

  • Example: If UpsideDown gives a £50,000 CFEA, £75,000 is due in 0-5 years.

• In case this does not happen, the debt is considered repaid after the founder has paid back 2x the amount of funding taken from UpsideDown after 5-10 years.

  • Example: If UpsideDown gives a £50,000 CFEA, £100,000 is due after 5-10 years.

Deferment:

• A founder may defer FEA repayments for up to a total of 60 months (5 years), during which time a founder does not have to pay FEA obligations even if his/her income exceeds £2.5K pre-tax. 

• The founder must begin repayments when the deferment period is complete.

SAFE (convertible equity):

• The equity side of the investment supersedes the FEA of the investment once the founder raises a Qualifying Round.

• A Qualifying Round is the first qualifying round of equity fundraising that raises at least £700,000.

• A founder (or together with a VC) can buy out/pay off the FEA early if the fundraise is going exceptionally well or high profits are coming earlier than expected. 

• As of the date that shares from the Qualifying Round are issued to investors, the investee's debt repayment obligations go to £0, however, they do not get back any amount of debt repaid prior to the Qualifying Round.

• At the Qualifying Round, the initial investment made into the company less the amount repaid in FEA will convert at a 20% discount to the valuation at that round. The Qualifying Round Valuation is the post-money valuation at that specific Qualifying Round and is calculated by multiplying the price per share by the total number of shares issued by the company. 

  • Example: if the Company’s post money valuation is £2,000,000 and other investors put in £50,000, then, investors will have 2.5% equity in the Company. But if UpsideDown’s £50,000 CFEA was to convert at that round, our equity stake would be 3.125% with the discount applied.

  • If the founder had already paid off £30,000 of the FEA prior to conversion, then only £20,000 would convert.

• If the Qualifying Round Valuation is greater than £5,000,000, UpsideDown will convert at a valuation of no more than £5,000,000, without any discount. 

  • Example: If the Company values itself at £10M at the qualifying round, then UpsideDown’s FEA would convert at a valuation of £5M. Negotiable.

Follow on:

• Since we have Participation rights, we reserve the right to buy more equity at a 20% discount off the current valuation (but without a valuation cap) for each of our companies.

• We plan to reserve up to £200,000 per company for follow-on, but not all companies will receive a follow on investment from us. This will be evaluated on a case by case basis.

Pure SAFE Note

• We plan to make opportunistic investments with pure equity for founders and businesses headed down a substantial exit track (>£50M+)

• We plan to invest £100,000 per company in this category, which means that we’ll always follow (never lead) and come in at the same terms as other investors

• We will still follow a theme of capital efficiency in software and consumer goods.