After a month or so in the wild, I wanted to give a quick update on indie.vc, detail the terms of our investment and clarify deadlines for applications and a set expectations for timing on investment decisions.
Since the landing page went live on January 1st we’ve had thousands of people beginning to follow the Tumblr page it’s hosted on, we’ve added hundreds of participants to the indie.vc slack channel and have received nearly 250 applications. When the product you’re offering is money, it can be challenging to determine how real product/market fit actually is, but we’ve been encouraged by the enthusiastic response.
In that same time we’ve hosted 4 meetups in NYC, Chicago, San Francisco and Portland. Each of these in person discussions has helped us to better get a sense for what’s resonating, what red flags need to be addressed and how founders are viewing what it is we’re trying to do. The audiences have be surprisingly diverse and the questions have been pointed and insightful.
From these meetups it’s clear that many founders are just interested in raising a small amount of money with the intent to raise more from traditional VCs as quickly as possible. We want to reiterate that Indie.vc is not a back up school for failed attempts at getting into other incubators, accelerators or a grander catapult to launch you into the world or traditional VC funding. This is intended to be something different. And as we’ve listened and learned from founders over the last month, something different is what many are looking for.
That said, the #1 question we get at these meetups about the terms of our investment. Tho the type of structure we’ve had in mind is not new in most other industries, they’re fairly new to tech. So we’ve had to push hard on finding a structure that is both simple to explain and flexible in its application. It feels like we’ve been able to accomplish that with what we’ve landed on.
We’ve worked with the team at Cooley to create an investment instrument that has elements of both debt and equity. Debt in that we will not be purchasing equity initially, but, unlike debt, there is no maturity date, no collateralization of assets and no recourse if it’s never paid back. The equity element will only become a factor if the participating company chooses to raise a round of financing or sell out to an acquiring company. We don’t have a clever acronym or name for this instrument yet, but I’m sure we’ll come up with something great.
This instrument gives us a lot more flexibility to work with different types of companies the Delaware C-Corps most commonly funded by VCs. It also facilitates the two elements of the indie.vc terms that were most important to us and to founders: cash distributions and contingent equity conversion.
The heart of the indie.vc model is cash distributions vs. subsequent rounds of financing which point to a future exit event. Within the indie.vc model cash distributions can be paid out to investors vs. a lump some return at the time of an exit.
Payouts will be considered a distribution once the founders salaries have increased 150%. If founders are paying themselves below market, we can work with them to determine what a market salary is for their area in order to set the baseline. Increases above amount will be considered distributions. At the time distributions begin to get made we, as investors, will share in those distributions. Initially, we will take 80% of distributions and the founders will take 20% until our initial investment has been returned 2x. Once 2x has been achieved, the schedule flips to 80% of distributions going to the founders and 20% going back to us. We will cap all distributions at 5x the initial investment. On an investment of $100k, our return would be capped at $500k.
If you never raise money or sell out, that’s where your financial obligation to us ends. We hope you’ll still want to stay a part of the indie.vc community and share with others what you’ve learned.
Only if and when you choose to raise more money from traditional investors or sell out do we become shareholders in your company.
In the event you chose to raise more money from traditional VCs, our initial investment would convert into pre-money preferred shares (assuming you’re issuing preferred shares to the new, lead investor) in your company and we’d have a pro rata right to participate in the round to preserve our pre-determined ownership level.
In the event you choose to sell out, we’d convert into common shares at the pre-determined ownership level just prior to the acquisition.
So, what is this pre-determined ownership level?
Given that this is an experiment, we thought it only fitting to push the experiment one step further by trying something new. Rather than having us specify a minimum ownership level, we’re going to let the founders determine what ownership percentage they’ll contribute.
If you make it to the final round of the application process, you’ll be given a termsheet with the equity amount intentionally left blank. You get to fill that in. Pay what you want might be a terrible idea, but we think it’s worth trying.
A simple summary of these terms can be found in the Google docs here.
Speaking of the application process. Many noted that there was no application deadline on the indie.vc landing page. That was intentional as we didn’t know how long it was going to take us to work through the terms and begin processing applications. Here are the dates we’re targeting for the process from today forward:
Application Deadline: March 15th
Second Round Video Interview: April 15th
Final Interviews and Offers: April 30th
Funding and Program kickoff will be in early May.
This is our first time doing this so these dates may be tight, or overly generous. We ask for your patience while we work through it.
Applications will be open until March 15th and you can apply here.
The Slack channel becomes more vibrant by the day so request and invite here to join in.