Why We’re Open Sourcing Our Convertible Income Share Agreement Term Sheet

Existing early funding options fail the vast majority of entrepreneurs. And the economy is changing rapidly; the old ways of providing capital aren’t built to serve these new entrepreneurs.

Chisos is shaking things up.

Instead of accepting a broken system, we’re creating new, innovative early stage funding options for more individuals. 

This is a new paradigm, and a new perspective on investing in people. (We’re starting with backing founders, but that’s not where this ends!)

We’re accelerating innovation. Part of that means we're making it easier for others to innovate in this space, too.

That’s why we’re open-sourcing the term sheet for our Convertible Income Share Agreement.

You can view it on GitHub or download a PDF. This CISA is a novel, innovative approach to solving problems in the capital space. It’s a product that makes a difference, and it’s a product that our founders are referring to other founder friends. 

It’s unlocking new pathways to entrepreneurship, and we don’t want to be the bottleneck. 

Quick Background on the Convertible Income Share Agreement

The CISA is a debt-equity hybrid approach to financing that allows us to invest in the earliest stages of a person’s entrepreneurial journey. But the CISA is intentionally different (more on that here), which can raise questions. This blog is designed to help answer them.

One important thing to remember: with the CISA, we’re investing directly in people.

The CISA is successful because it serves both individuals and investors. By open sourcing the term sheet, we enable all parties to better understand how the CISA works for them.

The startup landscape has its own unique (and well-documented) challenges. The CISA is a perfect fit for founders.

After all, research consistently shows that traditional funding options only serve a tiny fraction of founders. To improve access to opportunity, and support entrepreneurs on their journey, we need to rethink who gets funding, when they can access it, and how it serves them. 

The CISA challenges the status quo, improves access to entrepreneurship, and unlocks potential. Why can’t future potential be used as an asset?

Thanks for giving us a chance to show you how by highlighting a few important parts:

  • Salary Floor/“Small, Flexible Payments”: Founders only make payments when they can afford it. No salary right now? No worries - payments paused.
  • Early Repayment Benefit: If you repay 1.5x within 5 years, the obligations of your agreement are satisfied.
  • Qualified Financing: If you go on to raise $3M or more, your repayment cap is cut in half.
  • Equity Claw Back: Chisos starts with a small % of equity stake, which founders then claw back by making payments.

Now, let’s deep dive into each section of the term sheet.

Highlight 1: Basics

In the first section, we just outline that we’re investing, how much Chisos is investing, and who we’re investing in. Even here, it’s clear that Chisos is investing directly in people. 

Here's Part One of a video walkthrough from our CEO, Will Stringer:

Highlight 2: The Income Share Agreement Details

The CISA combines elements of an Income Share Agreement (ISA) with elements of SAFE Agreements. With an ISA, a person receives upfront cash from a capital provider. In exchange, they agree to “share” a fixed percentage of their future income (personal income, not business revenue). 

Three factors combine to control how much of your income you’ll “share”: the Repayment Cap, the Percentage, and the Repayment Period.

  • Repayment Cap: This is the maximum amount you’ll pay back via income sharing. This repayment cap is a range. Everyone starts at 2X, but you can lower that to 1-1.5X via early repayment or reaching qualified financing.
  • Percentage: This is the percentage of your income you agree to share. This is not an equity percentage. 
  • Repayment Period: This is the amount of time that your Income Share Agreement will be active.

Keep in mind that ISAs aren’t traditional credit-based instruments. Unlike a loan, there’s no compounding interest or fixed monthly payment. 

We’ll touch more on these later, but Chisos has built in limitations to make sure the ISA payment is a fit for your lifestyle. For example, payback is only required while your personal income is above a certain threshold. (More to come!)

To oversimplify, you’ll either reach a maximum dollar amount (repayment cap) or time amount (repayment period) to satisfy the agreement.

But this is only part of the picture. The CISA has lots of unique features built in to serve entrepreneurs better; we need to keep going to understand how they work.

Learn more about benefits of ISAs for entrepreneurs.

Highlight 3: Early Repayment and Grace Period

With a CISA, founders can make additional payments toward the CISA at any time. 

If a founder repays 75% of the Repayment Cap within 60 months, we’ll consider the ISA complete. As we’ve mentioned a few times, you have options to reduce the Repayment Cap as well. 

We also understand that founders don’t always have a salary when they’re just getting started. During any period where the founder is personally earning less than the equivalent of $40,000 annually, no ISA payments are due. If you’re earning under this threshold, your ISA repayments will be $0 until you’re earning above that threshold. It’s like a pause button.  

No personal income? That’s fine, payments are paused.

However, since this does extend the repayment period, it also negates the Repayment Cap. Said differently, if you defer payments, you’re agreeing to “make up” that time later, even if making those payments later it means that you pay a little more than the Repayment Cap.

Highlight 4: Repayment Cap Reduction

This is one of the flexible features that makes the CISA especially founder-friendly. There are two ways to reduce the overall payback obligation:

  • If you pay back 75% of the Repayment Cap within 5 years, we’ll consider the ISA repaid.
  • If you raise additional capital - what we refer to as qualified financing - the ISA repayment cap drops to 1x. This raise can happen at any time, even more than 5 years after the start of the ISA.

Here's Part Two of the video walkthrough:

Highlight 5: SAFE Details

As mentioned at the top, the CISA is a hybrid debt-equity approach that blends an Income Share Agreement with a SAFE. This part of the term sheet is explaining how the SAFE agreement works. 

If and when you raise financing, you’ll issue shares to Chisos that equal the percentage granted in your term sheet. 

We approach this as a percentage because we also include a founder-friendly feature where you can “claw back” equity granted. More on that next.

But before we move on, please know that there’s no obligation to raise additional financing when you accept the CISA. You have the freedom to grow your business, your way. We’ve designed this unique structure to support you whichever path you take, while also helping mitigate our risk as early stage investors.

Next up, the equity clawback.

Highlight 6: Founder Equity Claw Back

The SAFE Claw Back is one of the most interesting features of the CISA. When you make payments toward your ISA, you’re also clawing back a percentage of the equity you granted. 

When you pay back 50% of your repayment cap, you’ve also automatically recouped 50% of the equity percentage ownership you granted.

This clawback feature is why our SAFE uses a percentage, rather than an “Investment Value or Face Value.” With our joint ISA-SAFE approach, it’s easier and cleaner to manage the clawback as a percentage versus clawing back issued shares. 

Highlight 7: Remaining Agreement Terms

These remaining terms are to make sure lines of communication are open, clear, and confidential.

Download a PDF of the open sourced term sheet

One parting thought:

Research shows that existing funding options fail more than 80% of founders, and that almost 30% of startups ultimately fail because of lack of access to capital. We’re designing the CISA to be another option for founders at the earliest stages, in an effort to unlock entrepreneurship and democratize opportunity. 

We can’t do this without the support of the entrepreneur and investor communities. Thank you for being part of this journey. And if you have any questions, comments, or concerns, please submit them here.

We’re looking forward to having an open, transparent conversation about improving access to funding.