Terms & Contracts
- How do I choose the contract and set the terms?
- What's the difference between debt and equity?
- What is a Revenue Share best for?
- Which startups should use a Wefunder SAFE?
Your investment contract is the most important part of your fundraise. If you choose the wrong contract, or have bad terms, no one will invest, and you will have wasted a lot of time. It's like trying to sell a dozen eggs for $100. People are not stupid.
We recommend using Wefunder after at least one angel investor who already knows you has invested $25,000+. This makes it far more likely you chose the right investment terms.
That said, we know in some parts of the country, there are just not many angel investors who invest in early stage companies. So we'll try to help figure out what are good terms if that's the case.
The right terms is very specific to your company, but here's some general advice for two kinds of companies that are more unlikely to have prior investors:
For an early stage technology startup that has as a reasonable chance of getting funded by venture capitalists, we recommend either a convertible note or a Wefunder SAFE. Valuation caps for early-stage technology startups with no prior investors can range from $2 million to $5 million. It's possible for the very best early-stage startup (such as a Y Combinator startup) to raise at closer to a $10 million valuation cap. However, if that's the case, then you will be in a position to have at least one prior professional investor who set the terms.
- For an early stage brick and mortar with expected cash flow, we recommend a revenue share contract. We recommend offering at least a 2X return. Then, make a spreadsheet of all your projected cash flows for the coming 6 years. We recommend choosing the percent of revenue to share that would investors a predicted 10%+ annual return.
- For an early stage technology startup that has as a reasonable chance of getting funded by venture capitalists, we recommend either a convertible note or a Wefunder SAFE. Valuation caps for early-stage technology startups with no prior investors can range from $2 million to $5 million. It's possible for the very best early-stage startup (such as a Y Combinator startup) to raise at closer to a $10 million valuation cap. However, if that's the case, then you will be in a position to have at least one prior professional investor who set the terms.
The biggest difference is the risk & reward. Debt is slightly less risky for investors, but there is also much less upside. Equity is riskier, but potentially much more lucrative.
Debt. Investors lend the company money today in exchange for more money tomorrow. Investors are not shareholders, although they do have a right to company assets if the company goes under. We have two template debt contracts: Simple Loan and Revenue Share.
Equity. Investors buy shares or units in the company in exchange for ownership. Investors earn a return if the company is acquired, goes public on the stock market, or pays dividends. We offer one template equity contract, the Wefunder SAFE. There are other ways to structure an equity deal; if the Wefunder SAFE doesn't fit your needs, your lawyer can draft a custom contract for you. Some examples include Convertible Note, Preferred Stock, and LLC Ownership Interests.
While there are exceptions, we've seen equity offerings perform better on Wefunder. About 85% of our funding volume are equity.
- Debt. Investors lend the company money today in exchange for more money tomorrow. Investors are not shareholders, although they do have a right to company assets if the company goes under. We have two template debt contracts: Simple Loan and Revenue Share.
A revenue share is best for early stage brick and mortar businesses making cash. This is a promissory note that is paid back from a share of the revenues of the business. It's typically more exciting for investors than a standard loan. Since the payments vary based on revenues, it can also be safer for a company with less predictable cash flows.
Here's how it looks on the profile:
To preview a sample, download the Revenue Loan Agreement. By default, the following terms are customizable in our template:
- Gross or Net Revenues. Net revenues exclude returns or shipping costs.
- Revenue Percentage. This is the percentage of revenue that is shared.
- Repayment Amount. Typically 1.5-3.0X, this is the maximum amount you will be paid back.
- Quarterly or Annual Disbursement. Companies choose to make annual or quarterly payments.
- Defer Payments. By default, every company can miss one payment without being in default.
- Secured. Some loans may be secured with all property of the business.
The Wefunder SAFE is designed for a technology startup raising under Regulation Crowdfunding, that intends to eventually raise venture capital.
Inspired by the Y Combinator Agreements, a SAFE (Simple Agreement for Future Equity) grants an investor the right to purchase equity at a future date.
It looks like this on the profile:
Unlike a convertible note, a SAFE is not a loan. As such, it does not accrue interest or have a maturity date. This makes things simpler and negates much of the need to amend the agreement in the future. For example, it helps startups not waste time extending maturity dates or revising interest rates, if a Series A financing takes longer than you first expect. It also better aligns with the intention of most equity investors, who never intended to be lenders.
We feel Regulation Crowdfunding requires a SAFE with several extra protections not common in Regulation D fundraises with accredited investors. The Wefunder SAFE:
- Has Repurchase Rights. The company may opt to repurchase an investor's SAFE prior to conversion at Fair Market Value if the 12(g) reporting requirements are triggered. Fair Market Value is determined by an appraiser the company chooses.
- Can be Amended by One Lead Investor. The lack of a maturity date and interest rate negates the need for common amendments of convertible note financings. However, if an extraordinary situation requires an amendment, you will not be required to chase down hundreds of signatures. The company designates a Lead Investor Representative, and all investors agree to allow that person to unilaterally amend the SAFE.
- Grants CEO Power of Attorney for Minor Shareholders. Once the SAFE converts into equity, investors who are not Major Shareholders grant the then-current CEO a power of attorney to vote all shares and execute any documents on their behalf. This mitigates the potential problem of hundreds of minor shareholders slowing down follow-on financings.
Investors Represent They Follow Investment Limits. All investors indicate if they are accredited or unaccredited. They represent they are in compliance with the investment limitations of Regulation Crowdfunding.
The following terms are customizable:
- Valuation Cap. The Valuation Cap is the most important term. It entitles investors to equity priced at the lower of the valuation cap or the pre-money valuation in the subsequent financing. Typical Valuation Caps for early-stage startups currently range from $4 million to $20 million.
- Discount Rate. The default is 0%. This term is now rarely used and not recommended unless a major investor asks for it. It gives investors a discount on the price of stock, when the pre-money valuation is less than your valuation cap. Typical discounts range from 0% to 10%.
- Governing Law. We default to Delaware, but you may change to any state.
- Major Shareholder Threshold. The default is $25,000. Accredited investors investing greater than this amount have voting rights and do not grant the CEO a power of attorney.
- Pro-Rata. By default, Major Shareholders have pro-rata rights and therefore have the opportunity to maintain their ownership share in subsequent financings. You may disable pro-rata rights for all investors.