How Do Income Share Agreements Work?
In the world of new financing approaches, Income Share Agreements (or ISAs) are unique. Since they first appeared around 2015, they’ve gained traction consistently year-over-year. An estimated $500M in ISAs was originated by 2020.
ISAs are most well-known as tools to help students finance education and job training costs without taking on traditional debt. That’s where most - but importantly, not all - of the activity is happening. (If you’re not quite sure what an ISA is, we recommend you start with this blog.)
Here, we’ll deep dive into how an ISA actually works. You’ll learn how Chisos’s unique cousin of the ISA, the Convertible Income Share Agreement or CISA, works, too.
But how do Income Share Agreements actually work?
ISAs work by offering capital or some type of value (ie. education) in exchange for future earnings. With an ISA agreement, you agree to share a percentage of your future income over a period of time. Again, income share agreements are most commonly used to fund education and career development, but they have potential for founders seeking early capital to start a business as well.
With an ISA, the percentage you pay will stay the same even as your income varies. People with a higher income will pay more than those with a lower income, but this is part of the promise of an ISA: it’ll always be affordable.
It’s important to note that most ISAs do include a salary floor; that is, if you’re earning less than a certain amount, you won’t have to make payments during that time. This feature is especially valuable to founders as they likely experience periods of time with low or no income.
This unique arrangement is also why ISAs are such a good option for the education and career development sectors. These programs are designed to train you for more advanced roles (and the accompanying higher income). An ISA gives programs and financing partners an opportunity to share in their students’ increased earnings.
There are a couple of important features of an ISA:
- With an ISA, there’s no interest rate and no debt. It’s a straightforward payback agreement.
- The recipient of funding typically agrees to pay the capital provider a percentage of their earnings over a set period of time or a set number of payments (regardless of how much money this turns out to be).
- Many ISAs do include a repayment cap; that means that even if it takes you longer to pay it back, you’ll never pay more than a certain amount. This prevents very high income earners from paying an unfair amount
- Usually, there’s a salary floor. If you’re earning less than a certain amount of money annually - typically around $30-40K - you won’t owe any payments toward the ISA during that time.
- ISAs aren’t based on your credit score - at least not entirely.
Actual terms vary across the ISA market. Ballpark, the share percentage is often 5-20% of income, over a period of 2-10 years. You can expect that the shorter your agreement term, the higher the income share percentage.
If you’re using an ISA for education, you’ll start paying it back when you land that job post-graduation. Chisos’s CISA approach is built for idea- and early stage entrepreneurs, so it works a little differently - but more on that next.
How the Convertible Income Share Agreement (CISA) Works for Entrepreneurs
Chisos designed a new funding model for idea- and early stage entrepreneurs: the Convertible Income Share Agreement.
With the CISA, we write checks of $15-50K to entrepreneurs. This “first check” is the early investment you need to build your company.
The CISA approach blends some elements from a traditional ISA with features more common in equity-based financing. In the simplest terms, the CISA has two parts:
- An income share agreement with the founder (ISA)
- An equity agreement for the founder’s business (Simple Agreement for Future Equity, or SAFE)
A CISA is designed to give founders access to capital, without having to sacrifice excessive ownership or “bet the farm.” Instead, you’ll get access to funds you can use to build your company - plus a support network of resources, peers, and mentors.
This is an inclusive, equitable approach that serves idea- and early-stage companies better than traditional funding options. When you win, we all win.
The Convertible Income Share Agreement essentially says that, in exchange for capital, you agree to:
- Share a percentage of your personal income for a set period of time, as long as you’re earning more than $40K annually. Plus, your payback amount is capped at 2x of the original check.
- Grant Chisos a small amount of equity in your business, without voting rights. You grow your business your way.
If you ever decide to go the venture capital route and you raise $3M or more, your ISA payback amount will drop to 1x.
By combining the ISA and SAFE agreements, Chisos is able to fund founders that other capital providers can’t. People like:
- Idea-stage founders who are still exploring whether their concept can work.
- Side-hustlers who are building services outside of their day job.
- Early stage entrepreneurs who don’t have access to wealthy friends and family, and aren’t a fit for VC.
- Content creators developing personal and lifestyle brands.
...and that’s just the start.
This approach is perfect for entrepreneurs because it’s more flexible than either debt- or equity-based funding options alone.
Is a CISA right for you?
As an entrepreneur, you have options. The CISA is perfect for founders who aren’t a fit for VC or bank loans, don’t have wealthy friends and family, and don’t want to (or aren’t able to) use a high-interest credit card.
If that sounds like you, the CISA could be perfect.
Take the first step and apply today.