When you’re considering an investment, one of the most valuable tools is the overview of potential outcomes. Not only does this help contextualize value and return potential, but it also helps set reasonable expectations for conversations.
As an early stage investor ourselves, these projections will look at three potential outcomes:
Our model, the Convertible Income Share Agreement, blends an Income Share Agreement with the founder with a SAFE agreement in the company. This provides downside protection and upside equity, which enables better mobilization of capital at the earliest, riskiest stage.
Keep in mind that all investing involves a degree of risk. These projections are meant to be just that - not a guarantee of future success.
For the sake of keeping things consistent, we’re assuming an 8-year payment period in each of these outcomes.
Like all investors, this is the outcome we’re seeking. In this case, the company grows quickly and increases in value at a rapid pace, ultimately reaching an IPO or lucrative acquisition offer.
Now, we begin looking at the equity component of the agreement in more detail.
As founders pay back the original investment, they’re also clawing back their equity - up to ⅔. However, when a company does succeed, that ⅓ equity that Chisos holds becomes relevant.
Since Chisos is often investing at the earliest stages, entry valuations are attractive ($1-5mm). The goal is always a unicorn exit, but even a 8-figure exit provides an attractive return on the equity portion of our investment.
Not every company can be a hugely scalable startup like Slack. But that doesn’t mean it doesn’t add value to the economy and its community. The outcome scenario reflects those companies that are profitable, but not unicorns, like bootstrapped startups.
Since our approach blends an ISA and a SAFE agreement, there are two ways we can make a return on an investment. Over time, the founder would repay 1-2x of their investment value through the ISA. This would, in turn, be ~2x MOIC for investors.
With a venture-backed company, the successful outcome is likely an IPO or acquisition. For a bootstrapped business, the equity outcome is more uncertain; it could look like an equity buyout by the founder or a share repurchase. In this outcome, Chisos would negotiate a pathway to monetize those shares.
It’s worth noting that this outcome could also apply if a startup fails, but the founder secures a high salary afterwards. In that case, the ISA portion would still deliver a 1.5-2X return.
Onto the worst-case scenario: a startup that we’ve backed goes out of business.
In this case, the SAFE becomes worthless, but the ISA portion of the CISA agreement still stands. We work with the founder to understand and support their next career move. Are they starting another company? Are they going back to a salaried position? Since we are truly invested in the individual, we make sure to support the next phase of the person’s career. With regards to the ISA, the founder continues making monthly payments based on their income, to ultimately repay the amount of the initial investment plus some profit.
In this case, Chisos would make back 1-2x of our initial investment because we’ve backed highly ambitious and high potential individuals. From a fund investors standpoint, even if all of our portfolio companies failed, investors would still earn a return on their investment through ISA contracts.
So let’s take a quick step back: what’s the key thing to remember here?
We like to say that our portfolio is resilient; we don’t need only unicorns to survive and thrive as an investor. We can back steady, sustainable businesses to help them succeed, while still succeeding ourselves.
Plus, founders love our approach. In surveys of existing PortCo founders, we consistently receive high rankings and positive feedback. The simple fact is that early stage capital is hard to get, even when founders are willing to bet on themselves. The CISA lets them do just that.