Future Equity Campaigns


#1

What is an investor buying? - A Future Equity Agreement gives the investor rights to equity in the future.

How could an investor make money? - A Future Equity Agreement is not a debt instrument and does not make interest payments or have a maturity date, but is similar to a convertible note in that it will typically have a discount rate and valuation cap. The Future Equity Agreement will convert the investor’s original investment into equity at a point in the future when the company raises capital and sets a valuation. Apart from not paying interest, any potential profit will be realized by the investor from the time of conversion in the same way as with a convertible note.

What are the risks? - Future Equity is meant to be a simpler form of investment for both the company and the investors. It is not stock, and investors do not own part of the company until the Future Equity Agreement converts into equity in a future financing round, but the risk of losing the investment is the same as with any equity investment a startup company; the company needs to survive for an investor to have a chance at a return. If the company is able to successfully raise capital by offering equity in the future and the investor’s investment in the Future Equity Agreement is converted into equity, the risks become the same as those described for equity investments. The company will need to raise additional capital through equity, be acquired, or go public like a typical tech company for an investor to earn a return.

Why issue this? - This is a new form of offering, pioneered by Y-Combinator as a method for startups to raise capital without the need for complicated deal structures. These companies usually young and pre-revenue. By including a valuation cap, and/or a discount provision in the contract, the company can delay the calculation of a valuation (like with a convertible note) until a future round of equity financing. Interest payments are not included in a Future Equity Agreement the way they are in a convertible note. Future Equity is most appropriate for tech companies and high growth industries where it is traditionally easy to raise investment money from venture capitalists through equity.