Early Exit Deal Structure

TEN Capital’s Early Exit term sheet is a convertible note with a 3X in 3 year redemption right at “investor sole discretion”
to provide the investor an option for an early exit.

A 3X return in year three from the initial investment yields an IRR of 44%

See How the TEN Capital Early Exit Program Works

Benefits

  • Define the exit for your investment since most startups raising equity funding cannot
  • Provides the option of short-term exit or long-term equity investment
  • Give the startup the opportunity to prove itself and then choose between holding a short or long-term investment
  • Easier to implement than revenue-based funding

Features

  • Define the exit for your investment since most startups raising equity funding cannot
  • Provides the option of short-term exit or long-term equity investment
  • Give the startup the opportunity to prove itself and then choose between holding a short or long-term investment
  • Easier to implement than revenue-based funding

What exactly does 3X in 3 years mean?

The investor receives 3 times their investment 3 years from the date of investment. So $100K in yields $300K out.

Why use this structure?

I analyzed the results of several angel networks and found that 65% of the investments after three years were still in business but were no longer on the venture track. In most cases, they were growing businesses but were not going to be bought out for a significant return to the investor as the market conditions had changed, the competition had taken over, or the founder was no longer interested in keeping pace to achieve a venture exit.

The best-case scenario was the entrepreneur would sell the business for 2 to 3X after 10 years in which case the investor would get a minimum internal rate of return.

In my investing experience, three years into the investment it became clear if the company would remain on the venture path or not. This was due to competition in the market, a difficult fundraising environment, or just plain poor performance by the company.

I often saw the entrepreneur signal their departure from the venture path by taking above-market rate salaries. I called this taking the “payroll exit” in which case they no longer needed an “equity exit”. This left the investor stranded on the equity plan with no way out.

Since there is no liquid market for private company shares of this type any effort to negotiate a buyout with the startup team was met with a firm ‘no’ or an offer in the range of ten cents on the dollar.

Building your Entrepreneur Ecosystem

I have found a number of investors want to build their entrepreneur community as part of their investment thesis. Those who do will find the 3X in 3 Terms Sheet a useful tool.

To provide funds to more startups you could take the proceeds from one investment to share with the other startups.

For example, a $50 investment would yield $150K in 3 years.

You could take the $150K as follows:

  • $50K -Return to investor funds
  • $50K -Leave in the startup as equity or debt
  • Give the startup the opportunity to prove itself and then choose between holding a short or long-term investment
  • $50K -Take from the first startup to fund a second startup or leave in the first startup

This creates an evergreen fund for funding more startups. The most common lament from a startup investor is, ‘I invested my available funds and must wait till I see something return before investing more.’

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