How Cash Distributions Work

One unique aspect of the terms is the option for founders to make cash distributions to investors from profits as a return on their investment instead of selling out or taking their company public to create a liquidity event. This is not a new concept in most other industries, but it hasn’t been widely adopted in tech. 

Within the model, founders who choose not to sell out or raise money from traditional VCs have the option to make cash distributions to investors. Our terms suggest that the first 2x of our investment are paid out in a schedule of 80% to, 20% to the founders. Once 2x is hit, that math flips to 80% of cash distribution going to founders and 20% to Our cash distributions are capped at 5x our initial investment.

Despite trying to keep the model as simple as we can this has continued to raise questions and cause a bit of confusion, which is understandable given the precedent this distribution model bucks in the current VC funding model.

After answering questions related to how the distribution model works, we thought perhaps a more scalable way to address this would be to share a quick example and provide a simple spreadsheet model that would allow those considering the program to play with their own numbers and scenarios.

First an example:

Let’s say, at the time of funding, founders are paying themselves $100k salaries each. They can pay themselves up to $150k each (150% salary at time of funding or a market salary we establish with them at the time of funding if they’re paying themselves well below market).

If they chose to start taking out more cash than $150k, that would be considered a distribution and the 80/20 would kick in until 2x our investment is returned. Then it flips to 20/80 until 5x is returned. Once 5x is returned there are no further distributions.

That said, they can continue to draw their $150k salary and reinvest in the business as long as they’d like without ever paying out a distribution as well.

A few things to note. 

Unlike a traditional bank loan there is no maturity date on an investment or forcing function to command founders begin making cash distributions at a set point in time. Our intent was to stay in alignment with the founders; thus, we only get paid out as they are paying themselves out too.  

There is a scenario where founders never choose to make a cash distribution ever. There is also a scenario where founders run the company into the ground before ever making a cash distribution. Unlike bank loan which is often backed with assets or personal guarantees, these are risks we take with eyes wide open and no recourse.

In the event a company sells out or raises a traditional round of VC funding, the amount paid in cash distributions will not be backed out or pro rated against the predetermined equity amount. The equity conversion right remains in place even if the 5x cap is hit. We fully anticipate that any future funding from VCs will also require us to waive any rights we have to future cash distributions and we are prepared to do so.

Our objective in all of this is to keep the experiment as simple to explain and implement as possible. Is it perfect? Of course not. Will it take some tweaking and adjusting? Highly likely. 

These are Google Docs, not stone tablets.

If you’d like to see what these cash distributions would look like for your own company, we’ve set up a simple model, based on the above example, for you to play around with here 


Still have question? There’s a Slack channel for that. You can request an invite here.