
Designing a new funding structure for bootstrappers - dsr12
https://earnestcapital.co/funding-for-bootstrappers/
======
nivertech
I like it, except these two points:

1\. You're asking a "bootstrapper" to reimburse up to $5K in attorney fees (in
addition to their own fees), while regular Delaware C-Corp startups can
incorporate and raise pre-seed or seed up to a several millions without
involving lawyers at all. Much more capital efficient.

2\. > _if we invest $100k with a 4x, or $400k Return Cap. The company pays
back $100k, so there’s $300k left to pay, then decides to raise a round. We
base our conversion on the $300k remaining to be paid, not the $100k we
invested._

While this might be fair, it looks like double-dipping, especially if you have
a low cap. There should be an option to repay it from the new investment
without conversion.

~~~
tylertringas
1\. Good point. This is just some boilerplate from fundraising docs that
basically means the legal costs of closing the deal are paid out of the
investment money (not the founder's pocket). But could be clearer / we could
drop it. Legal costs will be minimal.

2\. Yes, currently the way we have structured it if the company decides to
raise a round of financing and as part of that they want to pay the entire
Return Cap to us in full, that is fine.

~~~
CosmicShadow
I hate dealing with unexpected legal costs, especially when cash-strapped, as
I had to when raising angel cash. Maybe I was naive, but sometimes people
don't know how much it costs just to raise money (something that seems really
standard) and that if you can't pay it, you can't close the deal. However
taking it out of the funds given is a bit more fair at least, but make sure
people are aware of it so they don't feel cheated.

I would imagine someone would want to have their own lawyer look over
everything anyway for this stuff before signing anything, but anything you can
do to reduce cost is good. It's so minor and a necessity at the start, but has
the huge chance to set off the relationship and optics on a bad start.

It's like you are giving free consulting resources (your money though instead
of time) for the chance to close a deal you want as the investor, keep the
client happy and make it as lubricated a process as possible. Eat it so that
it doesn't turn into something that feels like an early scam attempt that'll
ruin the future of the relationship.

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CosmicShadow
Sounds interesting enough, as a bootstrapper who previously raised funds and
hated the experience, I like this idea, but I guess the devil is in the
details. I don't give a shit about the VC conversion stuff and as another
commenter has said, this could just be a sly way to slip into regular style
deals with all that upside, but at the same time, if I just need money to
focus and I know how much and when I have to pay out, it's just basically a
specialty loan, which seems intriguing. Not sure what happens if your business
fails in this case however, I assume it'd be treated like a regular investment
and they can't go after you personally as in a real loan, so the onus is on
the investor to make sure they do their homework.

It seems fair to say if I take $100k I pay you back say 4x that, no other
strings attached. We both get value out of it. Who wouldn't want to 4x their
money with some careful investment? Seems like it could be more reliable then
regular startup investing, albeit slower and less exciting, but at the same
time, you get to actually enjoy helping people like you instead of trying to
help them but also trying to fuck them because it's your job.

~~~
charlesdm
Everyone would want to 4x their money with some careful investment. However,
who is willing to give up 4x that amount on a proper working business with
some traction?

I'd assume they're not going to give these "loans" to high risk "hey I have a
cool idea" businesses, but more to businesses where it's clear that investing
$x adds $x * 3 revenue. Meaning the risk you're taking is likely not extremely
high, more on the same level to private equity.

Those are massive returns for the investors. The only people willing to take
money under these terms are really desperate.

~~~
weliketocode
Your point is valid but somewhat exaggerated.

There should be some companies somewhat in the middle of the two extremes
you've laid out. Companies that are reaching product market fit but still have
a high level of uncertainty.

Note, I'm not saying this structure will necessarily see huge demand. But I
also don't believe the terms are completely out of reason.

~~~
tylertringas
Exactly. Like all forms of investment, it's not for every founder, every
business at every stage. Our canonical example is a technical founder who has
a full-time job or full-time consulting, built a product on the side with ~$3k
MRR, a great potential a company and is faced with (1) go full-time now and
eat through lots of savings to get it off the ground or (2) work on it nights
and weekend for 18 months. Our proposition here is to provide capital and
resources to compress 18 months of nights & weekends into 6 months of full-
time work to get the company off the ground.

------
rolleiflex
It seems the summary is that they will require them to be paid back through
business profits as a result of it not aiming for VC-level returns. They also
close the loophole of not showing much business profits on paper by defining
profit as founder earnings. If your earnings from the company crosses a
certain threshold, the investors tax your personal salary to get its return.
What they are undecided on is whether they want to keep this forever, or until
they actually get their capital + profit margin repaid.

I'm in their target market myself, so here's my two cents.

It's fair to offer some additional remuneration for a VC taking extra risk
with ideas with smaller potentials, but this sounds a little draconian. It
sounds a little like they're covering their bases (which is great!) but also
putting themselves in a place where they might have to go after people's
salaries, which is going to create a lot of resentment. It feels almost like
an attempt to take something more risky, but try to do some legal finagling to
push even more risk onto the founder just so that they can bring it down to
regular VC-level risk for themselves.

It feels like almost by definition most all of the 'good' investment that they
want to pursue will be able to make themselves eligible for normal VC funding
by either no or little work, and the additional complexity and unknowns
incurred by this untested agreement is more expensive than what a good company
would accept. Because for much less work than that, they can go the
traditional route. Since they're bootstrapping, they don't have the urgency of
'I have to find money in x weeks or the company goes bust' either.

~~~
DevX101
> but also putting themselves in a place where they might have to go after
> people's salaries,

Disagree. Part of the term is that both parties will agree to a minimum salary
that is not subject to dividends. So if you and the investor would have to
agree in advance that founder salary will be $100k.

This clause protects them in the case, the founder decides to unilaterally pay
themselves a $500k salary, but go back to the VC and say, "sorry, we had no
profit this year. no dividend for you"

~~~
tylertringas
Exactly. In this structure, founder can pay themselves whatever salary they
want but any amount above an agreed cap is added into Founder Earnings and
subject to dividend sharing.

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ensignavenger
I really like this idea. A thought:

"If there’s a hard stop on the investment, then Earnest and its team will no
longer be invested in the success of the company."

This is shortsighted thinking. The stronger the companies are in your Alumni
network, the stronger your Alumni network is- so if you are seeking to
continue investing long term, it is always in your interest to build companies
in your Alumni network, even if there isn't a direct cash return for doing so.
The publicity benefit alone is well worth it (We were an early investor in
XYZ!)

~~~
tylertringas
Fair point.

------
40acres
I'm not particularly interested in starting a start up so I've never looked
this up, but are conventional small buisness loans impossible to get for an
internet based buisness?

From a lay persons view it seems like handing out small buisness loans to
internet companies has a higher chance of profit and less risk profile than
other types of buisness.

To start a restaurant for example you need furniture, cooks, wait staff, need
space, suppliers, etc. You can start up a SASS with a couple of computers, an
AWS account, and a WeWork subscription. There is zero marginal cost, I would
bet productivity per employee is very high compared to other industries, what
am I missing?

~~~
randomsearch
Banks won’t lend to startups in the UK, unless secured by assets just like a
personal loan.

In the UK almost all bank lending is related to the housing market (I read a
stat where it’s ~ 95%).

Basically, the banks are extremely risk adverse and only care about rent
seeking.

Even if you’re in business and doing well, it’s difficult to get a loan.

~~~
dnh44
In the UK it's pretty easy to get a business overdraft. Although those will
come with a personal guarantee from the director(s), they don't need to be
secured by any assets.

~~~
randomsearch
Sure, but I wasn't talking about overdrafts.

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clarkevans
Your funding mechanism seems compatible with cooperatives, which have no
equity (but do have founders). For example, Stocksy
([https://www.stocksy.com/](https://www.stocksy.com/)) is a producer
cooperative with members who are artists who make photos. The founders aren't
the cooperative members, they were technologists who wanted to make a
cooperative platform for artists to make stock photos.

In a cooperative case, the founders would be investing their time beyond draw
under the same terms as a cash investor would. If/when the venture makes
profits, the investment of time/money can be paid back though a percentage of
revenue. Anyway, you may want to solicit feedback from members of the Platform
Cooperative movement ([https://platform.coop/](https://platform.coop/)). They
are actively searching for those who might have a compatible, patient capital
funding mechanism.

------
ilamont
_There is no source of capital that is aligned with founders who want to build
a healthy, sustainable, profitable business._

Positive cash flow is the best source of capital, IMHO. If you can't manage
that, or you need extra capital to grow the business, what about turning to
banks as a source of capital?

After my company (not a tech startup) hit the 5-year mark in the state
corporations database, I started getting offers from banks, PayPal, and even
Amazon, two or three times per week.

They don't want equity. They don't want a seat on the board. They don't want
to tell me how to run my business. They just want the interest and a
relationship that might lead to more business down the road.

~~~
jaxn
And personal guarantees and a lein on your house.

~~~
ilamont
There are always strings attached when money changes hands, whether it's a
bank or an alternative funding vehicle such as Earnest Capital.

In its post, this statement stood out:

 _All of the terms or figures are subject to change. Any specific figures
would change significantly depending on the stage of the business, founding
team and current levels of traction._

Phrases like "terms subject to change" \+ subjective, easily discounted
appraisals of things like "team" and "traction" are the types of venture BS
that many bootstrappers want to get away from.

Moreover, the post says they "primarily" want to extract dividends from the
companies they invest in. What happens when those dividends dry up, or the
company needs to make a choice between paying out dividends and using that
money for some other important purpose? Salaries get docked?

~~~
tylertringas
Our structure is 100% aligned with the founder. If they founder(s) take
profits, we get a share of that. If it makes more sense to reinvest profits or
if there currently aren't profits, we don't get paid and we do our best to
help the founders in any way we can. We definitely would not be trying to go
after salaries to increase profits (nor would we even have any mechanism to do
so... no board seat or equity control).

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rajacombinator
Always good to see more capital structures and options for both founders and
investors. I think this case could really benefit from some concrete examples
(numbers) of deal terms, and also scenarios in which bootstrappers would want
to accept this kind of capital. The YC->VC model is well understood, but it’s
not clear when and why bootstrappers would want to raise money under these
terms. (I note he’s interested in hearing from a 500MRR company in the
comments, is this the target market?)

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auganov
The big problem is at these numbers they'll still need to do a lot of vetting.
And in the current revenue-loving funding climate people who'll seem good
enough to them can probably get a better deal elsewhere (regardless of what
happens down the road). Adverse selection is going to be a big problem.

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gnicholas
Would the amount to be repaid be at all contingent on when it is repaid? Or is
it a fixed multiple, no matter when it's repaid?

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eximius
Important missing information for me: what is a reasonable founder salary cap?

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segmondy
Rubbish, bootstrapping is about taking no funds in exchange for equity. You
fund yourself with no obligations to anyone but yourself. The moment they
started talking about equity in the business they lost me.

