Startup Boards — 3X in 3 Term Sheet Walkthrough
The TEN Capital Early Exit term sheet includes a 3X redemption right, giving the investor the sole discretion over their right to 3X their investment at the three-year mark from the date of the investment.
A redemption right gives the investor or startup a right to redeem an ownership stake in the company.
The term ‘Investor Sole Discretion’ means the investor has the sole decision on taking the redemption right.
The company typically pays back in a lump sum or a series of monthly payments spread over 6 to 12 months. Since it can be a rather large cash outlay, some companies start escrowing money a year in advance.
If the company cannot pay, then a workout plan is negotiated. The terms of the redemption right give investors consent rights over the company’s cash expenditures.
There’s an interest rate set in the note for ongoing accumulation while the funds are kept in debt form.
The interest is not paid out but rather rolled into the equity amount should the investor give up the redemption right and go onto the company’s cap table.
In the event of an early exit, the interest payment continues till the debt is paid off.
The returns are treated as long-term capital gains.
Startups using this structure include tech, healthcare, and consumer product goods with at least $500K of annual revenue.
If the revenue is lower than that, the company is at risk of startup failure. If it’s above $500K, then it will most likely remain an ongoing business.
If the company declares bankruptcy, then depending on the outstanding debt the company is holding, the investor could lay claim to the assets, which in most cases include the patents.
There is also an opportunity to take over the business.
Finally, it’s a tax return write-off.
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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.