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averydev/Equity Line of Capital - ELOC.md

Last active April 30, 2019 17:56
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Equity Line of Capital - ELOC.md

Goals

  1. Incentivize capital efficiency by funded companies
  2. Ongoing connection between dilution and capital needs
  3. Give startups the flexibility they need, knowing that capital is available
  4. Keep as much capital activated as possible
  5. Allow investor liquid capital to be "working" for the investor all the time
  6. Better alignment of companies' incentives with providing value

Basic Structure

A company secures the commitement from an investor of 1M, at a 10M valuation, and they expect that to result in a year of runway. They won't spend that investment on the first day, but will ramp up hiring etc. over a period of time. Funds are placed in an account. As the company needs the funds, they are transfered to the company. The debited portion of the funds are converted to equity at the pre-designated valuation. Appreciation or interest within the ELOC account would go to the investors. Additional investors could contribute to the account at other valuations, but conversion occurs FIFO.

Details & Potential Deal Terms

  1. All conversions from account occur at the valuation initially set at time of the investment
  2. Funds unused by X date can revert to investor
  3. Additional fundraising has to go through ELOC
  4. Appreciation within account is distributed proportionally to investors
  5. If partially funding ELOC, top-up must happen within x period of time or consequences for investor.
  6. Funds are 1-way. Company can't re-deposit funds to regain equity. Investor can't withdraw
  7. Certain events might trigger an immediate conversion of current ELOC participants
  8. Certain events might allow for investor an option to withdraw funds without converting, i.e. a new investor will contribute, but existing ELOC contributor would rather have liquidity than equity.
  9. When raising next round, unspent funds roll over at cap, discount, or are withdrawable (per deal terms).

Optional

Only a portion of funds are placed in the ELOC by the investor with a defined minimum. The account is topped-up by the investor. This allows the investor to avoid liquidating assets that would otherwise sit.

If an investor was going to invest 12M across 12 companies in a year distributed monthly evently, and the untransfered funds were gaining at 4%, they would have gained $260k in interest.

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