9/8/25
(dolla dolla bills yallllll)
When founders are raising capital, an important consideration is the risk / reward that they're "selling" to investors.
With equity, the financial outcome for investors is typically based on an exit. An outcome in the distant future that will hopefully return a sizeable multiple to the investor. But a huge exit with a huge outcome for investors is rare. Even in the event of an exit, the upside for investors is frequently modest or non existent. In my (humble) opinion, the balance of risk / reward is off. Investors are taking on massive risk, with an unknown, opaque, distant, and low likelihood reward. All or nothing is a bad bet.
I believe founders should structure financing with liquidity to investors. Creatively structuring a raise that offers investors a pathway for principle to be returned (via profit or revenues). Selling the "long term exit", but hedging on the short term return of capital.
Designing capital in the spirit of "you're betting on the long term upside, but I want to make sure you get your principle back".
My guess is that is going to be an easier sell. And help you close more checks, bigger checks, and make the fundraising process more enjoyable.
A few specific examples of founders who have raised capital more easily, using alternative structures.
Equity + Profit Share
Painterland Sisters
After finding themselves stalled on their fundraise, Painterland Sisters layered a long term profit sharing mechanism into their equity raise. A clear outline of future revenue + profit projections, with a schedule for investors to see their principle back in ~5 years, with a 2-3x in ~10 years. Investors still had access to the long term upside of an exit, but a more defined and concrete pathway for financial upside using profit distributions. This injected momentum into their fundraise, allowing them to go from "stuck" at $200k to raising over $2M.
Amplified Ale Works
Amplified Ale Works built a profit sharing mechanism into their investment contract. Offering investors a 50% profit share until they received their principle back + 35%. Amplified designed profit share through a shorter term lens with a higher distribution of profits for a quicker return of capital back to investors. This was the inflection point in unlocking bigger checks ($25k+) from their personal networks, which activated broader momentum from their customers and extended community.
Revenue Share + Equity
Mark's Snacks
Mark knew that a standalone SAFE would be unattractive to his network. As a pre-product, pre-revenue CPG startup, he knew that an alternative structure was his best bet in orchestrating a $200k pre-seed round. In addition to the long term upside with equity, he offered investors a 2x return based on 5% of revenues. The sell was the revenue share, the kicker was the equity. He was able to raise the pre-seed capital in ~2 months and credits the short term returns of the revenue share for that success.
Geoship
In the process of raising tens of millions from institutional, angel, and retail investors, Geoship indexed on diversified options for different types of investors. For those in it for the sizeable long term upside -- equity was the choice. For those in it for a more modest upside, with a shorter time horizon (projected 3x in 5 years) -- revenue share was the choice. To date, they've raised ~$10M, with a split between equity and revenue share.
Revenue Share
Please and Thank You
Brooke was not interested in offering "ownership" into her company. A homegrown bakery in Louisville, this business was not designed for a massive exit. As an alternative to equity, she offered a Revenue Share for investors, with a 2x return paid back on 2% of quarterly revenues.
Pitmoss + Maazah
Offering equity to institutional / angel investors ($25k+ checks). And utilizing Wefunder in parallel as a diversified option that keeps the cap table clean and expand the range of potential investors.
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My Soapbox
For some businesses the pure equity play makes sense. Those with venture scale and power law potential (read this if you don't know what that means). But the vast majority of businesses are not venture scale or power law businesses. And those businesses should not be raising capital in the same way a "Y Combinator Startup Raising from VC" company is approaching financing.
So many businesses defer to equity because "that's what this one angel told me to do". But how it works for a venture scale power law company, is not how it works for everyone else. The "system" is broken because the "VC Halo Effect" becomes the source of truth -- but in practice, it's a losing structure, approach, and framework for the vast majority of businesses in the US.
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Musings from September 2023
You're a founder preparing for a serious capital raise. You will have some friendly investments come in from people that believe in you, love you, and want you to succeed. The terms have less relevance, because they're going to invest in you, regardless of the end result. They hope their bet pays off - but that's not why they are investing. You likely won't be able to raise purely from this very friendly pool of capital. It will likely be a portion of what your ideally looking to raise.
The reality is that you're going to have to tap into new networks. And talk to more serious investors. Angel investors, local investor networks, and rich people you know personally. These investors are evaluating your company from a different lens.
Their filter for whether to invest will be strongly influenced by financial upside. It's something you have to figure out how to sell. Because if looks like a donation, you won't get those checks. You need to provide a story that incorporates financial upside in order to get more serious investors to write bigger checks.
Raising on pure equity, essentially means that the only opportunity for financial upside is if you have a big exit. An unlikely outcome, and a risky bet. Pure equity is an all or nothing proposition in most cases. And in most cases it will be nothing.
The following options shift the outcome from all or nothing to all or something.
And something is better than nothing.
So I encourage you to sweeten the bet. The following are four options that could help you close more and bigger checks.
If you've made it this far, check out my Revenue Share "Manifesto" where I talk about my insights talking with VCs and desire to help more founders raise capital through Revenue Share.