In what manner will the investment be repaid?

• Gradually (regular repayments adding up to the total redemption sum): e.g. a fixed or variable amount of money is paid out to the investor each year until the total investment sum plus determined investment return is paid back.
• At certain points in time/ milestones: e.g. one payment is made once the company reaches revenues of amount X, the second payment is made once the company reaches profitability, the third payment is made once the company reaches profits of amount X.
• As bullet payment (lump sum payment made for the entirety of an outstanding amount): e.g. the investment sum is paid back in full after a predetermined period, or once the company can pay the full amount.
• As a mixture of the above: e.g. 50% of the expected sum is paid back gradually, 25% after X years and 25% per cent as a bullet payment.

Note that while regular payments ensure earlier liquidity for investors, if they start too early on, they might put too much strain on your business and lead to too much liquidity flowing out of the company too early. On the other side, bullet payments (paying the investment plus upside for investors back at one go) are often less attractive for investors as they bring higher risk and later payments. It also requires very good planning on your side as to how and when you will be able to amass the sum. In the past, we have also seen scenarios where regular payments were made up to a certain point in time/ certain milestones and afterwards the residual claim was due in one or several instalments. (So don’t feel limited by the options in the workshop template – you’ll come across it in Milestone 2 when you start mapping out your financing needs.)

If gradual payments are made, what determines how high they are?

• Fixed amounts: Similar to the repayment structure in bank loans, a sum X or a percentage X of the initial investment can be predetermined, which is paid out regularly until the investment cap is reached.
  e.g. every year, a sum X is due to be paid to the investors until the investment cap is reached.

• Variable amounts: The regular payments are based on a percentage X of a specific variable of the company, like profits, revenues or other financial indicators, which are paid out until the investment cap is reached.

  • Profits: If profits are used as a variable, this means that companies that are not profitable don’t pay back anything at the beginning. This is good for the company that still needs liquidity to continue its development but might mean that some investors won’t be interested in the investment as they don’t foresee sufficient returns in the near future. However, relying on profits poses more risk for the investor, since the company could increase expenses in a given year to reduce profits and delay payments to the investor.
    e.g. every year, a percentage X of the profits is paid to investors. This percentage can also be adapted over time. 

  • Revenue: Using revenue-based financing has become more and more attractive for many companies, particularly if they are not just profitable yet but are already generating revenues. Since revenues are a direct and harder-to-manipulate figure in the income statement, it’s considered safer for investors. At the same time, using revenues to pay back investors can also result in liquidity necessary for the further development of the company to flow to investors too early, so if this is a danger, a honeymoon period (see below) might make sense.
    e.g. every year, a percentage X of the revenues is paid to investors. This percentage can also be adapted over time. 

• Flexible payments: In some cases, whether repayments are made and at which height is up to the steward-owners and their judgment of the current performance and development of the company. In these cases, investors often want other forms of securities like put-options (right to redemption) that ensure that at some point in time they will receive compensation for their investment.
  e.g. if the steward-owners deem it sensible for the company to pay out a sum X to their investors, they have the flexibility to do so. This can for example be combined with a right for the investors to trigger a full or partial repayment to set incentives for the steward-owners to regularly pay out something to investors.

In practice, investors often bring an expected time frame to the table – shaped by their fund structures or liquidity needs. While these conditions are naturally part of the negotiation, the timeline is usually not guaranteed. Some flexibility is needed on both sides. If there’s a significant gap between the investor’s time horizon and what the company can realistically deliver, secondary rounds can offer a solution – enabling the repayment of early investors in line with their needs, without putting pressure on the company’s operations or long-term mission.

• Minimum or maximum time horizon: Is there a minimum or maximum time frame for the investment? 

• • Minimum holding period: In some cases, investors opt for minimum holding periods, meaning that the investment cannot be paid back for a certain period. This is usually the case when the investment return is dependent on the investment duration.

• • Maximum holding period: Many investors, particularly investment funds, have (internal) fixed investment periods within which the investment needs to be redeemed. Although part of the negotiation, these maximum holding periods are rarely fixed in contracts. Still, this can put pressure on the company and is not the best fit for steward-ownership-aligned financing; more flexible or even evergreen structures give more flexibility to react to changing environments and uncertain performances. 

• • Agreed time frame: In some cases, investors and entrepreneurs agree upon a rough expected repayment period or target timeframe after which the investment relationship is ended. If this is not possible due to a different development of the company than expected or changed circumstances, there is the option to agree upon an increase in investment return and/or an increase in repayments.
    e.g. if the company hasn’t paid back their investment until year X, they need to use 90% instead of 60% of their profits to pay back the investors.

 

• Grace (or honeymoon) period: Particularly for younger startups, the initial years after an investment are crucial for reinvestment in the company. This is why many steward-ownership-aligned financing structures include a grace period in which no scheduled repayments need to be made. This grace period can be fixed or dependent on certain milestones.
  e.g. for X years after the investment, no payments need to be made to the investor.
  e.g. until the company reaches a certain level of profitability, no payments need to be made to the investor.