We’ve encountered and worked with different ways of going about designing “limited” returns, the choice of which depends on the stage and risk profile of the company, the preferences and needs of the company, its entrepreneurs and investors and the chosen financial instruments. There is no clear “standard” process of how to go about limited returns and the market is still collecting experiences as to which processes work best for which investor type, company stage and risk profile.
The following are some of the many ways we have seen limitations defined in the past – new and more creative forms are, of course, always possible. The examples are grouped by whether the limitation is based on a cap, duration, or influence. Please note that while some examples might look technically similar, we want to highlight the creative space you have when designing limitations.
The fixed, variable and open approaches above can also be combined to give investors some security whilst leaving flexibility for the development of the company, e.g. having a variable approach until milestone X is reached or up to a certain point in time and afterwards changing to a fixed approach.
So, to summarize: Returns in steward-ownership-aligned financing are “limited” either by amount (using a fixed or variable cap), duration (limits investment returns at some point), or by influence (there is no option for investors to influence payouts from the company).
Send chapter summary to yourself or a co-worker!