Historically, SeedInvest has raised capital for startups leveraging convertible notes or traditional preferred equity. In these raises, investors receive a return on their investment at the time of a liquidity event: when the startup is either acquired or has an initial public offering (IPO). For startups in verticals where M&A activity is high such as enterprise software or consumer hardware, there is a clear and viable path towards a company exit and a liquidity event for investors.
For many companies however, a liquidity event is highly unlikely. Many startups and small businesses, such as restaurants, require initial investment but will never grow to a size where an IPO or acquisition would be feasible. To better serve the broader startup and small business founder community, SeedInvest is introducing Profit Sharing Units for strong startups and SMBs where an exit is not the company’s ultimate goal.
Game Changing Access to Capital for Startup and SMB Founders
For restaurateurs and other startup and small business founders not targeting a liquidity event for their companies, this represents an unprecedented shift in access to capital. Unlike “traditional” startups which have been able to access capital via angel syndicates and VC investors, no such groups exist for founders falling outside the narrow investment theses of these investors. For these founders, the only source of outside investment has been friends and family, bank loans, or credit card debt. Now, these founders can raise capital by inviting their communities and the greater SeedInvest network to become profit sharing participants in their new ventures. Via the SeedInvest platform and SeedInvest Shareholder Services, these founders will now be able to raise capital, manage their investors, and distribute investors’ returns in a seamless manner.
Accelerated ROI and Further Diversification for Investors
For most startup investments, investors must wait for at least 4-7 years before a liquidity event (if any) before they see a return on their investment. While these illiquid, long-term investments have several advantages and are an important component of a well-rounded portfolio, many investors in the SeedInvest community have expressed interest in further diversifying their portfolio with investments which begin delivering returns on a shorter timeframe. Investors investing in companies raising under a profit-sharing agreement can further diversify their startup investment portfolio by investing in a security with a focus on distributions, potentially realizing returns as soon as the company they have invested in begins generating profits.
Investors who invest in companies offering Profit Sharing Units will receive preferred equity. Compared to standard preferred equity deals on SeedInvest however, these shares will outline a payback to investors taken from a portion of the company’s profit in proportion to each investors ownership percentage. Typically, investors and management will split ownership of the company. Investors will then be paid back 100% of net profits until they have recouped their initial investment. Once the investment amount has been repaid, investors will then receive a share of the company’s net profits in proportion to their ownership stake for the lifetime of the company. Oftentimes, a management fee will be deducted from gross revenue before net profit is calculated.
The model linked here details a hypothetical payback for investors, with several variables, such as revenue and net income margins, which can be altered for a number of potential scenarios for a Profit Sharing Unit.
SeedInvest was founded to help expand entrepreneurs’ access to capital and help every-day investors access the startup asset class. Now with the introduction of Profit Sharing Units, SeedInvest will broaden the number of founders we can help succeed while increasing the number of investment opportunities for our growing network of investors.
This post was written by Nico Leeper on April 23, 2018
Announcing Profit Sharing Units