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by virgilp
2138 days ago
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But why would an investor agree to that? It's more risk with less upside: - if the company does well enough that its share price rises, it's only normal to buy back your share (why wouldn't it? they just raised better-valued round! Not buying you out is just leaving money on the table) - if the company doesn't do well, there's no reason for it to pay the markup, they'll simply continue to burn the money. So you risk the entire sum, but stand to gain significantly only from the non-repurchasable portion of it. I could _maybe_ see it working for a time-based interest rate (if the rate was high enough), but not for the fixed markup. Unless we're talking about a really hot startup that the investors are dying to buy into and would accept pretty much any terms. |
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This lets you achieve high resolution financing based on the amount of cash you have in the bank immediately before the next financing/acquisition/IPO. If you raised $10M but only spent $6M before raising the next round, you may use the remaining $4M in the bank to perform the repurchase. But you can't use the new Series B money for the repurchase. If you consumed $9M then you only have $1M remaining for the repurchase and will eat more dilution.
Effectively, your dilution becomes a function of how capital efficient you've been. Investors may agree to it because it might encourage people to build profitable companies: it encourages companies toward capital efficiency as they search for product-market fit, while giving companies enough runway to weather hard times.
For founders, this means your net dilution is now a stronger function of how well you operate over time (and a weaker function of how well you fundraise). That may be a good optimization for the startup ecosystem.
I agree with you 100% that "you risk the entire sum" but limit the upside. There are more knobs but it may be possible to set them in a way that investors agree to. Imagine my 2M shares @ $5 Series A. Suppose 1M are repurchasable at $6 (a 20% markup) plus 10%/yr interest rate. At t=0-, the investor has $10M and the company has $0. At t=0+, the company has $10M in the bank and investor has 2M shares. At t=1yr, suppose the company has spent $2M getting launched ($8M remaining) and hits some great milestone (i.e. becomes profitable, raises a new round, or gets acquired), and it exercises the repurchase option. After repurchase, the company has 8-6.6 = $1.4M remaining in the bank, and the investor has $6.6M cash plus 1M shares. The investor's effective purchase price of their remaining 1M shares is $3.40/share, thanks to the $1.6M in profits from the repurchase discount and interest.