Also in this series:
We’ve recently been getting quite a lot of cold inbound from a lot of founders that don’t fit our thesis/geography, so we thought it would be a great idea to boil down what type of founder we are a good fit for. By communicating this here, you will be able to find out if you even pass the first set of parameters, saving you time and energy to find investors that better suit you.
You are a founder at the idea stage
We’re actively looking to fund more startups at this stage. A bit too early for your traditional pre-seed angel, but with some signs of user interest. These are the folks with talent in bunches, but without wealthy friends and family to give them that first bit of money to pay for a myriad of SaaS services or even a part-time contractor to help them with some things.
The CFEA aligns incentives for everyone at this stage. A founder probably doesn’t know if his/her startup idea will either become a stable, revenue-generating business or something that could exit for 20x. An LP would probably feel a bit uncomfortable doing a pure-equity cheque at such an early stage with an enormous potential failure rate of the business. With this unique model, a founder can choose what type of business he/she would want to build and an LP would get returns either way. Meanwhile, with the FEA being to the founder, if a founder fails the business before raising a qualifying round, he/she has to pay that off with his/her full time job if it’s earning more than 2500+ in a given month (if not, he/she doesn’t pay). This should give potential LPs much more comfort in investing at this stage.
You are working on a non-venture scale business
Working on an organic soap business that is revenue generating but doesn’t have venture upside? Happy with making around 6-7 figures a year as your ceiling? We’ll fund you too. Using our CFEA will allow you to fund your activities, and assuming you don’t raise more than 700K in a given round, not give up equity.
In this scenario, the income share part would be more applicable. If you are earning more than 2500+ in a given month from your personal income, then you would pay 10% of that (so 250+) until you either pay us 1.5x what we gave you in 5 years or 2.0x what we gave you in 10 years. If you are earning below 2500 in a given month, you just don’t pay. These terms are much better than what you’d get from a bank loan, because a bank loan forces you to pay no matter what (with interest) whereas the CFEA only has you pay when you are doing well.
You are working on a venture-scalable pre-seed startup raising less than 500K
Traditionally, where we end up getting most of our applicants. Most people in this category are raising a smaller pre-seed round (less than 500K) and are either looking for first-cheque investors to create signal or help fill the rest of the round. We’re happy to serve in this scenario as well, and in fact for all of our portfolio companies so far we’ve come in this stage.
This becomes a clean fit on a cap table. The equity doesn’t kick in until a 700K+ qualifying fundraise occurs (and then, it’s just a simple ASA. The initial 10-20K converts at a 20% discount to the lead investor’s valuation at a 5M valuation cap. The follow-on cheque of 50-100K is just a simple 20% discount to the lead investor’s valuation). The FEA is to the founder, as listed earlier, and cancels at the qualifying round. FYI- most investors we’ve talked to don’t have a problem with this arrangement (I know because I do some investor ecosystem building in my spare time).
You are HQ’d in the UK (unless you have a way for us to invest equity into you in the EU)
The FEA works all across the EU, as long as you are a citizen/permanent resident.
Unfortunately, because of the way legals are setup, we can only guarantee investment into UK HQ’d companies since the UK uses a version of the YC SAFE called a SeedFAST (also known as an ASA). We are looking for ways to be able to legally and easily activate the equity side of things in different companies HQ’d in different EU countries, but allegedly “SAFE” notes aren’t really a thing (outside of Ireland/Estonia?) and places like Germany require multiple notaries on a CLN. So if you have a document that allows us to get equity (and we can modify it slightly by saying that the conversion amount is the original amount invested less the amount paid for the Horizan VC Course”), that’d be a great start.