Over the past month we’ve had conversations with 50+ entrepreneurs exploring a potential investment from Chisos. These conversations have helped us learn what terms are important to an entrepreneur looking to raise money.
Given the unprecedented nature of a Convertible Income Share Agreement, the conversations have also helped us think through the different scenarios under which an entrepreneur may be looking to raise capital. We’ve talked with founders running successful, investor-backed businesses looking for a small slug of capital to purchase inventory or equipment. We’ve talked with bootstrapping founders looking to go full-time on their company. We’ve talked with other bootstrapping founders looking to extend their runway to show better growth and thus reduce future dilution before raising a larger round of capital. From small “lifestyle” businesses to the earliest stage startups, there is clearly a need for funding alternatives.
In this post, I try to further clarify our investment terms and lay out example funding situations to describe how a Convertible Income Share Agreement (“CISA”) would operate. If you have not already read Chisos Investment Terms Explained (Part 1), please read that first.
The core feature of our investment terms is the Income Share Agreement (“ISA”). The ISA constitutes a period of time where a founder shares/pays a percentage of their income back to the investor.
If you strip out the equity features, the base premise of a Chisos CISA is 120 months of income share payments or a 2.0x repayment cap. Depending on the speed of repayment, the repayment cap can increase or decrease. To determine how the repayment cap moves, it helps to think of two countdowns:
The first countdown is the time passed since investment — this governs the repayment cap.
The second countdown is the number of months of repayment. A month is considered a repayment month if the founder earns over $3,333 ($40,000/yr) and makes the required payment.
Positive Outcome Example
Alice earns $100,000 / year. Alice applies and qualifies for a $50,000 investment from Chisos, which includes a convertible equity claim on 5% of her new business. Alice can use this capital to pay business expenses and/or provide an income for herself while she works on her business.
Multiple outcomes can occur:
Negative Outcome Example
Alice earns $100,000 / year. Alice applies and qualifies for a $50,000 investment from Chisos, which includes a convertible equity claim on 5% of her business. Alice can use this capital to pay business expenses and/or provide an income for herself while she works on her business.
The downside outcome:
We’ve built a simple spreadsheet tool to get a better sense of the ISA and equity conversion mechanics. Access the spreadsheet here and save down a copy to toggle the model inputs.
Please reach out with any questions. We are always happy to explore new financing scenarios.