328: Negotiating Bootstrapper Funding with Tyler Tringas
Download MP3Yeah. Let's let's speak freely and then we can edit after the fact. I
Arvid:think that's let's speak freely is a is a great start to a conversation between people who
Tyler:like each other. You know what I mean.
Arvid:Yeah. Welcome to the Bootstrap Founder podcast. Today, I will share a behind the scenes conversation with Tyler Tringas that happened mere days before I signed the documents to receive Bootstrapper compatible funding for my business PodScan from Tyler's Calm Company Fund. I had many questions before I was ready to commit to an investor and we decided to record the whole thing. These chats usually happen behind closed doors, but today, you get to listen in and learn.
Arvid:Enjoy.
Tyler:Yeah. So, you know, for if folks don't have context here, you know, so I run Calm Company Fund. We, are investing in what we call Calm Companies. Right? Some some folks might call it, like, funding for bootstrappers.
Tyler:So we're always looking for businesses where, you know, that can be like sort of capital efficient and scalable and, looking for entrepreneurs that are trying to build these kinds of businesses that kind of grow at a sustainable pace and are just, like, really good straightforward businesses that are maybe not a fit for, traditional venture capital but still would want, you know, some capital, some resources, community, all the good stuff you get with an investor partner. And, you know, I had been following your build in public, work on on PodScan. Of course, you and I have known each other for for a long time. So, you know, you were definitely on my radar and I said, hey, you know, I I I saw the work you were doing on PodScan. I said, you know, I can't remember exactly how I phrased it, but it was just sort of like, you know, I know it's really early days.
Tyler:You really I think we're, like, maybe less than 2 months after launching it live. You had couple of $100 of MRR. But I said, hey. You know, I think this could be a fit. And I started a a a thread for us to just discuss that back and forth, and I think we pretty quickly realized that, there's probably something here.
Tyler:And, I think I actually wrote like a little investment memo. Yeah. Our usual so I always do it for for all the things we invest in, but I shared it with you. And so then I sent you a term sheet with, some of the terms that, you know and this is kind of the way I usually do it. I'll usually take the lead and say, hey.
Tyler:We want to invest. Here are some terms that would work for us, and, you know, that's the start of a conversation. Right? You could say, hey. You know, I have questions about this, or, you know, we make some trade offs between the 2, that sort of thing.
Tyler:But that's where we are now. So we said, hey. Well, if we're gonna we're gonna talk through some of the terms, let's go ahead and record it, and maybe it'll be useful to other people to hear us talk about it.
Arvid:Yeah. Well, thanks for the summary. That is exactly how it happened. And I I I I really appreciate the way you kinda approach this from an investor perspective. Right?
Arvid:You you you always we always were in contact before. I mean, literally, we're recording this in the studio on Riverside for a podcast that we used to have together. Right?
Tyler:So
Arvid:Yeah. There there is a a trail, both a paper trail and an audio trail of us having this relationship. And he just came out of it and and said, hey. This is cool. This is interesting to me.
Arvid:Here is why I wanna invest because I see that there's a a necessity for more funding to get this, you know, this one core feature of the expansion of the backlog of podcast transcripts, get this done more quickly, more easily. So that's where that money could go, and it immediately resonated with me because I'm a bootstrapper too. And bootstrapper compatible funding is almost an oxymoron in internally. Right? Because bootstrappers wanna do everything with their own money and never ever do the VC thing.
Arvid:Right? So there's a a lot of hesitation when it comes to taking anything, but the conf fund does it really well in just giving them enough money to to get to the next step without then entangling them in this, you know, VC unaligned interest system that the the investors want one of their many, many things to work, but not all of them, but you're just one of those. Right? So
Tyler:Yeah.
Arvid:I really like like the way you even approached me in this was very compatible with what I wanted to do with the business, which is keep it under my control, keep it growing, keep it, as a as a bootstrapped business. And one one of the quest and let let's just jump right into the questions because I have all the documents here with me. One of which, for anybody who watches, has also seen the approval of my dog, Bina. Or disapproval. No.
Arvid:I think I think that that is a I think she bit on the signature page. So, technically, I think this was a
Tyler:signature. Okay. Got
Arvid:it. What I really like, this is, like, 4 pieces of paper, double sided, double printed. So this is not too much in terms of material for anybody who's also trying to run a business to read through. Totally. Like, it took me one one bath tub session worth of time to go through this, and I have barely anything that I I even have questions on.
Arvid:You made it really simple. Yeah. It is like a a a side letter. It is a kind of a cover, like, a a cover letter where that just explains the terms and then the actual the SAFE. Right?
Arvid:The SAFE agreement, which is an acronym that I still have to occasionally think about. What is it like? Simple agreement.
Tyler:Simple agreement for future equity. Yeah.
Arvid:Yeah. Anything that starts with simple is a good idea. Right? So I I like I like that to to begin with. So the cover letter introduces the terms to safe is the actual more legalese kind of agreement, and then the the side letter points out what other things beyond this future equity moment that the liquidity event that may or may not happen, what that means for the relationship.
Arvid:So that is really cool. It's very simple. One question that I had, and I'm just gonna dive right in. Actually, you know what I should say? Before you get into your
Tyler:question, actually, because I think there are some peep this is maybe important. Sure. So, you know, folks have been following ComFund for a while now. They probably have heard of, we created one of the very first things we did 5 years ago when we launched this was we said, hey. You know, the existing tools for investing in startups are are completely 100% it's around the idea that you're gonna raise pre seed, seed, series a, series b, series c, etcetera, etcetera.
Tyler:And so when we were talking about, you know, investing in, for example, companies like you or all the companies we invested in, we said these tools are not, like, a really good fit for what we're trying to help these companies do. So we created this, investment agreement from scratch, and we call it the shared earnings agreement or seal. And, and it just like better, you know, aligned us with those kinds of outcomes. A very salient component of it was the idea of profit sharing with, you know, founders. Typical VC structures, they don't want you to take profit out of the business.
Tyler:They want you to reinvest heavily, you know, every dollar into growth, so they don't even really contemplate the idea of profit share. We incorporated that in, etcetera. And we created this totally new structure and it works really well in terms of how it aligned incentives, but one of the things we learned after 5 years of doing this is that when you create, like, a totally new structure that isn't like anything else, it causes a lot of friction. Right? So, you know, people for example, if you were to just go take this to a local startup lawyer, they would be like, shared earnings agreement.
Tyler:What the heck is that? I don't even know where to begin. Blah blah blah blah, you know. Or if you had other co investors, you had other angel investors that wanted to invest, you say, oh, it's a shared earnings agreement. They're all like, what is that?
Tyler:I don't know. And so there was a decent amount of friction from having a kind of custom agreement that wasn't anything like something else. So relatively recently, we did a big refresh. We basically said, okay, a safe, which is like the Invent to buy Y Combinator, one of the most widely used tools for start up investing, early stage investing, angel investing, We can actually take that and modify it using the best things that we learned from a seal, but also kind of anchoring it to the case law experience, you know, basic understanding that everybody else has. And the idea there is then to kinda like bring those things that work really well but also make it a little bit more like what other people are used to.
Tyler:So the agreement that you have in your hand is basically a safe, with a few modifications to it and then a side letter, which is just an addendum to the safe that also goes away in the event that the safe converts to equity. So that's just like some context there for people who are wondering, like, what about the seal? Like, we will still use it from time to time, but we are trying to default to this for the reasons that it's just more like what other people can wrap their heads around, and so it takes less time to explain.
Arvid:Do do you also think that, and then this kinda came up as I read it because you have this kind of no redlining notice in there. Right? You don't want people to come with their lawyers and modify the whole thing and the word here and the word there. It kind of feels like this is more like a standard term that you just wanna apply for ease of just managing the complexity of this contract with other people.
Tyler:Right? Totally. And and you even have other benefits of using a more widely available thing like, you know, if the IRS makes a tax ruling about safes because there's literally 100 of thousands of them out there, if not millions. Right? You know, so and they'll say, okay, we think safes are x, y and z.
Tyler:Well, they might that might not apply to seals. Right? But if you have a safe that's slightly modified, that's gonna sort of also fall under that umbrella. There's just a lot of benefits to doing something that is perceived as like standard with some modifications versus something that's kind of like wholesale, you know, cut from a new cloth, that, you know, is one of the big learnings of the last 5 years for us. Yeah.
Arvid:That's cool. I like this. And I I like the fact that you still keep keep your options open, right, to to be flexible if in case you need it. I mean, in my situation, it feels like a pretty default situation. Right?
Arvid:Business needs some cash influx to do thing better and has one founder, is one business, is one company. Like, it could probably not be much simpler than this. Yeah. So I'm I'm I'm glad to to have this to be one of the, I guess, first to to be able to, you know, work through these documents with you and stuff. Yeah.
Arvid:And and that's the thing. Like, I was I was looking through this, and I was even looking for things to ask you about, you know, like actively actively finding, like, things that are interesting, but most of the things that I I didn't understand immediately were just terms. Right? It's like the difference between standard preferred stock and safe preferred stock.
Tyler:Sure.
Arvid:That is just something that do you know that different difference? Because I certainly, did not immediately understand this when I looked into this because, you know, like, the the way businesses are set up, can vary quite significantly in complexity. Is this is this just legal lease or is there an an actual difference between these 2?
Tyler:The safe preferred stock is just the quantity that would be converting from the safe, basically, is all it's saying. Yeah. It's not a separate category. It's referencing the fact that, you know, if it converts to preferred stock so for context, one of the things that the SAFE inherits from the standard startup model is this idea that it's in a promissory note for future equity and there's a trigger that turns it into equity, which is like raising around. Right?
Tyler:So going and raising a series a or a seed round or something like that. When that happens, then the safe converts into equity. Usually, that new round is gonna be done as preferred equity. So your series a is gonna be preferred equity. And so then the SAFE is gonna sort of convert into SAFE preferred equity.
Tyler:Right? So and it's just going to convert. So it's just a way to reference the equity that came from the SAFE and is now going into preferred equity.
Arvid:Yeah. That makes sense. Yeah. It's it's that's that's what I like about the safe as in general. It's kind of a it's almost a time traveling document in in a way.
Arvid:Right? It describes a future state of the business that may or may not happen, and that's all. It doesn't change anything about what happens to the business right now, which is really compatible. And compatibility is one of the themes to that I wanted to talk to you about in in regards to this because I always talk about alignment being the the thing that keeps bootstrappers from raising VC. Right?
Arvid:Or from raising any any venture stuff because the interests and the incentives for an investor that has 100 if not thousands of companies to invest in and want to find their moonshot then, you know, the unicorn is wildly different from the individual that runs one of these businesses. So in in looking at the safe as being one of 2 documents here, I I did wonder what what is the Calm Company Fund's ideal outcome of of a relationship between the fund and the business they invest in? Because, like, on one hand, you have we wanna keep it calm. We kinda keep it bootstrapped and profitable and growth oriented. Right?
Arvid:This is kind of the what the bootstrapper wants, the lifestyle business that just keeps going and and keeps doing better. And then you have this equity conversion thing where there there is a there's a shift that where it turns more into a VC paradigm. So what what's your ideal what's the happy path for the Comm Fund in a relationship with a business?
Tyler:So, I mean, I I kind of have a non answer to that, which is just that we don't wanna have a strong preference about one of those paths. Right? So like I just, you know, reshared on Twitter a couple of the founders we invested in that, you know, we invested in as solo entrepreneurs, like, Damon Chen and the the Type Fleet founders, Fabrizio and Francesco, Riley Chase. These guys who were solo founders doing a few k in MRR, and now they're doing 1,000,000 in revenue, and they're still really, really small. You know, maybe you would call some of them might be solo founders or 1 or 2 contractors or, you know, very small teams.
Tyler:And, you know, we also have companies we've invested in that have, gone on to raise a seed round and raise a series a and, you know, they're sort of going more of a sort of venture scale trajectory, and I'm not unhappy about either of those outcomes Of course. Or many of the other ones in between. I want to sort of be aligned with entrepreneurs because I think the the misalignment is less about, like, entrepreneurs want one thing and investors want another, although that does happen. But I think the real misalignment is that entrepreneurs want optionality, and investors kind of want you when there's misalignment, investors are usually trying to force you to give up your optionality. Right?
Tyler:They're saying, you know, we wanna structure this company in such a way that you really have to go all the way to IPO or bust
Arvid:Yeah.
Tyler:Because your equity is gonna be vesting, you're beholden to a board, you're gonna be, you know, earning money every month, so you have to raise more capital, all that sort of stuff. Whereas, you at a certain point might say, our business does 20,000,000 a year in revenue, like, I kinda like to sell it or make it profitable or whatever, you know, and they wanna kind of, like, remove that optionality from you. So what I've kinda tried to do with the document, and that's why it kind of contemplates all these, like, radically different paths, is to make any of those outcomes, like, okay. You know, if you wanna just keep it a solo business and you wanna do a 2,000,000 ARR solopreneur business and you wanna take giant dividends out of it every single year and not hire anybody, awesome. Like, we wanna we wanna basically just participate in that alongside you, you know.
Tyler:If you decide you do wanna go raise venture capital, we don't want what we structured to block that. So that's why it, like, converts to preferred equity and has all these, like, standard VC sounding terms. It's, like, basically trying to keep all those pathways open and aligned, right, is kind of the the ideal objective there. And, you know, one of the things we've learned from the past 5 years and what this new document represent us represents is kind of even more smoothing out of, like, areas where, you know, there would be misalignment, you know, between options that an entrepreneur might wanna take and and us, basically. So we don't have a preferred path, really, like, genuinely.
Tyler:I mean, I think, like, we want to get a good return on our investment, but how that comes back to us, we actually are, like, trying to be quite flexible about it.
Arvid:I love that. It's not it's not a happy path. It's a happy traveler that you care about.
Tyler:Oh, wow. That was really good, Artie.
Arvid:Yeah. It's I had my morning coffee. That's all I did. Yeah. But yeah.
Arvid:But that's that's how I feel. It like, you're making this not about you. You're making this about me. Yeah. As as a person to get investment from the fund, that that is really nice.
Arvid:I mean, it's a very comfy way of, of building this relationship when it's very clear that you just want the business to succeed. You don't want the business to succeed your way. You wanna see it anyway, and that and that is kinda cool. Yeah. But which is why, again, I have so few questions about this because it's very clear that this is, in in many ways, exactly aligned with where I wanna go.
Arvid:The the one thing that stood out to me is in the site letter, that's number 4 of that site letter, site projects. You you talk about site projects. And probably, particularly because you work so much with bootstrappers, indie hackers, people who have a lot different things going on, and you needed to kind of phrase it in a way or just make make absolutely clear that you're investing in the the founders of that business. You're not just investing in that one thing that they are doing at this moment, you're invested in the division of what they could be doing. So could you explain to me how this part of the site letter came to be your, perspective on-site project and what what you see as a as a fair alignment there in terms of what founders should be able to do and not to do once they get investment from the Confluence.
Tyler:Yeah. Totally. And I will say this is, like, probably the area of the entire, you know, new version of the document that I have the most flexibility and am excited to, like, discuss and flex and tweak and, you know, maybe edit on a case by case basis because it is a tricky thing. So just to to say what we're talking about, it's in the side letter right now at section 4, although I guess that could change. And it basically just says that the company agrees that any new product or business that is created, acquired, or substantially started within the period of 12 months from the date, you know, basically the date of investment, that is a substantially similar business or business model to the current business or business model of the company or founded or operated by substantially the same founders and team of the company shall be wholly owned by the company.
Tyler:And the idea there is that, you know, in this case, it's like, okay, If, Arvid or PodScan Inc, you know, acquires another, you know, SaaS business or spins up a, you know, side project or another SaaS business, or, you know, gets into a services component that is, you know, consulting related to, you know, podcast analytics or things like that, you know, or, you know, you basically just, like, team up with one other person and you start something totally new. You know, basically, that there's a window in which whatever we've invested in would also be invested in that thing. And that's, like, that is one, like, fundamental, irresolvable tension between investors and founders. Right? Like, obviously, investors would love it if you invested one time in an entrepreneur and you just got upside in everything they ever built for the rest of their life, you know.
Tyler:And founders naturally want to raise capital, and they want that capital to only be buying an interest in the kind of narrowest thing possible. Right? You know, the thing they're currently pitching. It's normally not a problem, I would say, in, like, venture world because, you know, raising a venture scale startup tends to be pretty all consuming. Right?
Tyler:You know, you you've raised a ton of money. You've built a huge team. You're working 100 hour weeks on this one company. You probably don't even have the time or energy for a side project, and the odds that that thing would sort of surpass your thing that you've just raised $10,000,000 for are pretty low. Right?
Tyler:So it's kind of not really addressed in traditional financing documents. It is sort of addressed in, like, more like old school documents where the the answer here would basically be, we're investing in your company as a VC, and the documents are gonna say that you're an employee of this company and all intellectual property that you produce as while you're an employee belongs to the company. Yeah. Right? That's like the kind of old school of thing, which says, like, anything you make while you're an employee, which is very scary.
Tyler:And that's kind of fallen away, but now it's kind of unresolved in startup investing right now. Like, you see, like, some side projects happening and it's a little bit kind of, like, reliant on trust. So the problem is we invest in these bootstrappers who are prolific and so they're spinning upside projects and they're acquiring stuff and they have 3 companies going simultaneously and all this kind of stuff and then, you know, if we only have an upside in one, that can be a real bummer, especially if all that happens while our investment is sort of, you know, financing them. Right? You know, if they quit their job and they have, you know, 1 k MRR, like, if you right now, right, you raise some money from us, PodScan is not paying your bills right now.
Tyler:Certainly not. You know? And so if you raise some money from us and that lets you go full time on whatever you're doing, And then you kind of turn and say, oh, there's this great idea over here, and that ends up being a much bigger thing than PodScan. That's a real bummer for us because you're kind of using our money to, you know, have that focus. So the idea here is just to sort of put some kind of parameters around, hey.
Tyler:During this time period, anything that's similar ish, you know, should also kinda be included in the same investment. So that's the starting point for it. So okay. So what are what are your thoughts, questions, etcetera, about it?
Arvid:I just wanted to really hear where where this came from. The moment you mentioned these, it's it's almost, what is it called, like, a non compete situation, right, that you used to as an employee. First of you you have the the noncompete that you can never ever work, for or talk about your work after you you quit or something. And then you everything you do at work, like the IP, the wholly owned IP of everything you do, that used to be a big problem for me too as a software, entrepreneur or not as just as a software developer being gainfully employed.
Tyler:Yeah.
Arvid:And it might everything even my feedback panda, the thing that I I sold in 2019, that kinda happened in a in a mostly legally questionable situation. Like, I asked my boss, can I do stuff? Sure. But the contract said, you know, the contract said something else. So it was a a the verbal legal agreement over a written legal agreement, and it was a a gray zone.
Arvid:I quit eventually to make sure that there is no such thing, but it is a it's a problematic situation to be in as an employee. And I I think for for a fund in particular that deploys a lot of money on on wishful thinking and trusting that people can and will do the thing that they set out to do, I think it's perfectly fair. So Yeah. It's it's, the the side project thing. I would be surprised if you hadn't thought about this knowing that, you work so much with founders who are, like you said, prolific and all over the place.
Arvid:You know, the the kind of scrolling around in all kinds of different fields. Yeah. What what my my personal question here was, I I was just imagining if if I didn't have my media business already. Right? If I didn't have my podcast and my newsletter and my being in the field of podcasting, but not necessarily doing the same thing that the PodScan is doing, Would that qualify?
Arvid:I I think it's a leading question. Right? I I think it probably like my personal brand thing does not necessarily qualify as something that PodScan is doing. But how how would you think about this? Like, would that really just be a case by case?
Arvid:You you go through this, you have a conversation with the founder, then you determine what is their side project or what is the side project that kinda is adjacent to the business.
Tyler:Yeah. So first, like, you know, the the literal language of it, you know, is like preexisting stuff is excluded by default, right, because it's created, acquired or started within the period starting after the investment agreement. Right? So if something was created, acquired or started, you know, prior to that, then it's by definition not relevant. So then the question would be, what if, you know, you had started PodScan, we invested in it, and then you started this kind of media business on the side that was very interrelated with it?
Tyler:So by default, the the literal language of the contract, you know, I mean, there's some squishy terms in there. Right? You know, what is actually substantially similar? What is, you know, etcetera? But I think, like, it probably would be included by default.
Tyler:If you started it within that 12 month period and it started to become a meaningful business on its own, then by default, you know, basically what it would say is we'd say, okay, you know, you can't spin that up as a separate entity and have that be, you know, something that has its own profit and loss and that you own a 100% of and that investors have no upside in or exposure to. So that would be the default way it would work. And my kind of position on that would be, I think that's still fair, you know, if if basically, like, our capital is still helping you you know, stay focused on it, it's giving you the bandwidth to not have to do a side job. Instead, you get to do this other time, which is this media business, and it starts to generate revenue, I think it would be fair to be included as as part of the company, you know, by default. That being said, all this stuff can be a conversation.
Tyler:Right? You know, so if at the time we're investing right now, you're like, look, I have this I've been planning this huge media business. I've got a backlog of podcasts ready to go, I've got the newsletter ready to launch, like, you know, I'm about to launch this and I would really like for this to be specifically carved out from the investment agreement, like we could talk about. Mhmm. Right?
Tyler:You know, and then similarly, if you started something along the way and by default it is included in the contract, but you're like, look, you know, I wanna hire a bunch of people for this. I wanna turn this in. I wanna hire a CEO for this business and make it its own thing, I'm not gonna do all that if it's gotta be a part of the company. I mean, I would sort of probably make my case to say I think it should be, but we could talk about it, you know, and then we can make exclusions to it. But, yeah, I think if it was started within the 12 months, you know, and it was a real business that was started by you, then, I would make the case that it should be owned by the company that we invested in, you know, should go to the same profit and loss.
Tyler:And if it gets sold, you know, investors should have a their their small stake in it, you know.
Arvid:Yep. I think that's fair. Like, again, like, you're you're funding, a potentially life altering, if not life changing, reprioritization that the founder can go through. Right? Like, that that to me makes perfect sense.
Arvid:Like, if I can do, I can stop working full time for somebody else to work on my own stuff. And then one of the things that I do and that's kind of the second part of the clause. Right? It's, like, founded or operated by substantially the same founders and team as the company. Yeah.
Tyler:It's
Arvid:kind of if you're a solopreneur, that means you. Like, anything you do, really. Right? Like, if if that change in your lifestyle now facilitates all these other things, then it's only fair to compensate you for it because you're you're the enabler, right, in the best sense. Yeah.
Arvid:So that that's that's kinda what I wanted to see. I wanted to see with this question, not like what it means. I I get that. I I can understand what it says, but I wanted to see, like, where your perspective comes from. And I think you explained this really clearly.
Arvid:Like, you fund not just a specific niche thing even though that is what is, you know, what what is the the idea behind it. You fund the founder and everything around it. Yeah. It's nice to see. And what I what I like about it is that there is a a time limit to this period.
Arvid:Right. That's, that's not a question. I'm I'm just saying this is great. Like, that that is 12 months is is isn't 12 months also or was it 18 months where you you have the capacity to to flip the safe?
Tyler:Yeah. Exactly. Yeah. So yeah. And maybe those should just be the same.
Tyler:I mean, they're kind of arbitrary numbers to be totally honest. It's more just based off of what feels fair and then, you know, just like now we have a lot of data points. Right? So a safe is a convertible instrument. Right?
Tyler:At some point, the idea is that it's going to convert into something. And one of the things we found is that if a business is just kind of sitting there with the safe, it may make sense to convert it into actual equity. So one of the things I like about it so for example, like, you're in in Canada. Right? And there's a lot of complexity to literally issuing stock in a business, especially when you have things like cross border and and, you know, you all of a sudden, you have to go and get software like Carta or something like that.
Tyler:And it's just a lot of stuff to take on when you're, like, my business does $500 in MRR, you know, I just wanna get back to work. I don't wanna do all this crap right now. So the magic of the SAFE is it kind of punts that work down the road and says, look, if it ever makes sense to you know, the business is more valuable, we're gonna issue all these shares, we'll do it then. But at a certain point, sometimes you have instances where it's like, we should probably just, like, convert this stuff to shares. And so we add this is one of the things we added recently is this option to convert.
Tyler:So I think after 18 months, if the safe is still just, like, sitting around unconverted, we might decide, hey, we would like to go ahead and convert into just common equity, in in the business. And, that's a it's a trade off for us because technically, like, the shared earnings components would would go away. We would just be sitting there owning equity, but there are certain things like for tax purposes and stuff like that that it might make sense for us to do that. And so we kind of gave ourselves the option to say, after 18 months, if it's still sitting around unconverted, you know, we'll give you notice, but we can sort of say, hey, we'd like to go ahead and convert into equity now. You know, please let's go ahead and do that part of the process.
Tyler:And it's not like you have to do it tomorrow, but, you know, it's a it's a it's a sort of right that we would have to to actually get on the cap table and and own shares in the company, which is more about just it's more of a hassle to do that right up front.
Arvid:Yeah. Oh, sure. Yeah. Particularly because setting setting up a business, like, using, like, Firstbase, which is also a com a company funded business that I've used now to open 2 American, businesses. Permanent link, my first one is one of them, and, now PodScan is also one of them.
Arvid:They make it very easy to just set up, like, a default, whatever, 10,000,000 shares or something. Right? You just put it in there and then you have it and it's done. Yeah. So that's a couple clicks.
Arvid:It's all in the documents they do for you, and you don't have to think about it much. Like, if now I had to think about who gets what and how and then do, like, a shareholders meeting, which is just me. Yeah. And then I have to do the minutes. Like, that's already way too much work.
Arvid:I would rather not. So, yeah, to have to have that be an option for future successful me, that's great. Like, I I would rather have that problem, that happy problem later. I just wondered, like, that's that's why I asked kind of the initial question about what would be the happy path for you because you just said this, and and I find this interesting. When you convert, you don't get the shared earnings anymore.
Arvid:So there there should be like a fiduciary reason, I guess, for the fund for you to convert being better in the long term than keeping the the shared earnings. Right?
Tyler:Yeah. To be transparent about this. Right? So if in the sort of, like, very profitable solopreneur instance, we would probably just keep it as is. Right?
Tyler:So, you know, if you're running this business and you're, you know, not really planning on selling it and you're just taking out really nice dividends forever, we'd probably just keep it as is. We say, great. We'd love to continue having, you know, our our sliver of of the shared earnings that you're paying yourself, until whatever happens happens. If the business maybe is on more of a growth trajectory but isn't raising additional capital, that's probably where we'd probably like to convert to equity. So if you're not that profitable, you're reinvesting a lot into growth, you're growing really well, probably you're gonna sell the business, you know, in, let's say, 5 to 7 years.
Tyler:That's where it becomes more sensible for us to just own shares, and there's, like, tax reasons for that and stuff like that where we just say, hey, it looks like the outcome here is, you know, 5 to 7 years from now, you're gonna sell to private equity. We'd rather just own stock rather than kind of, this unconverted safe. And so that's when we we would say, hey. We we'd like to convert to stocks. It's it's more aligned with a particular path, basically.
Tyler:Interesting.
Arvid:I'm just trying to figure this out because, I mean, tax reasons, the complexity of this, it that this is a it's a very, very dense phrase for something very complicated. Right? Yeah. So I I just wondered, like, wouldn't it make more sense for you to just keep getting those, shared earnings for as long as possible and then convert at the last minute?
Tyler:The main reason yeah. Okay. It's a very specific question here. So the main reason is in the US, if you have a c corp, there is a very, very generous tax break called QSBS, which is, I'm not a tax advisor. Nobody run with this but, you know, Google this, etcetera.
Tyler:But if you own stock in a c corp and you own that stock for at least 5 years and then you sell it, you basically can get a significant amount of the gains essentially tax free. You don't pay capital gains tax. If you own that that stock for for at least 5 years and then you sell it, you pay, like, I think it's, like, no capital gains up to $10,000,000 of proceeds. So it's really, really generous tax break, and right now it is, I would say, ambiguous as to whether or not the clock starts when you sign a SAFE or whether the clock starts when you convert to equity. So if we had a company in our portfolio that we were certain was on this, like, growth path, we're like, okay, in 5 to 7 years, they are for sure going to be selling to private equity.
Tyler:We think most of the gains we're gonna get from this are gonna be the proceeds of a sale versus shared earnings or dividends. Then the prudent thing for us to do would be to go ahead and convert to stock in the c corp because right now, it's it's ambiguous. So, you know, I think some people make the case that it starts the second you invest and some people make the case that it only starts when you convert to equity. So if we knew that path was happening, we would just go ahead and do that, just to be on the safe side. It's, like, pretty much the main thing behind that entire term.
Arvid:That that makes makes immediate sense to me. Thank you for explaining it like this. I was not aware of that. But because, again, I'm I'm a German living in Canada and now operating a a US business. Like, there's so much complexity to this just even from this constellation.
Arvid:Right. But, yeah, obviously, if if those 10,000,000 in particular and everything beyond that probably is treated slightly differently as well. So I I can I can see this being a very solid reason to be careful and to to do the early conversion?
Tyler:Yeah.
Arvid:Yeah. That's cool. Other than that, I have nothing. Yeah. And, oh, yeah, there was there was something called the most favorite nation clause.
Tyler:Mhmm.
Arvid:That that was, an interesting for me as well. I only wrote, like, example question mark in there because I would like to know what this actually means. Like, it it says here, a most trepidation clause simply means that if you offer new investors better terms to invest in a company, then Confund has the option to retroactively change our investment, the terms of the investment to match those new terms. As early investors, we think this is only fair that we expect it to be a rare occurrence.
Tyler:What? Yeah.
Arvid:What does it mean?
Tyler:This is something that comes out of sort of just the state of the art of early stage financing, which, you know, you I do have to give like Y Combinator, in particular and I think, you know, they tend to be the ones that are leading the way on this sort of thing or at least they come up with stuff and then everybody else decides it's good, I guess. But, their standard terms now include this most favored nation clause, in at least part of their investment agreement. And basically, it is just a way to say, we're trying to be your very first most favorable investor, or we're just trying to be your very first investor and the market might change. And if you come along and you raise more money later, at better terms than we got, then essentially, we can go back and rewrite our terms to match those terms. Right?
Tyler:So the idea would be maybe, like, we invest at a certain valuation and then you decide later to invest at an even better for investors valuation. Essentially, our valuation just like goes back in time and matches the new one. And that's just becoming sort of standard. In particular, the origin of it, I think, has to do with I've been talking a bit about this about, like, how, like, valuation right now is, like, very difficult to do, you know, and especially, like, people like, founders' expectations kind of is, like, this lagging indicator. The market is kind of corrected and it's all getting very complicated.
Tyler:And so the most favored nation basically just lets us say, like, if we agree on an evaluation or whatever other terms right now that makes sense and then it turns out the market wants a lower valuation further down the road, we're kinda not gonna get screwed by getting a worse deal even though we were your first investors. Basically, we get at least as good of a deal as the next investors that come along, and that mostly just, like, is a way to, make everybody feel comfortable with what they're doing right now. To say, look, if this turns out to have been a bad decision, like, we'll all just kinda retroactively change it, is kind of the way to think about it. But, I mean, it is favorable for investors in theory, but I think it's, like, pretty fair. It's kind of the steel man against it would say, you know, like, this is a market transaction.
Tyler:You are buying a piece of my company at a given price. You know, this is not the way that, you know, stock prices work in the stock market. Right? You know, if you go and buy a 100 shares of Apple and then the price goes down the next day, the New York Stock Exchange doesn't say, like, oh, Tyler, don't worry. You screwed up.
Tyler:Like, your shares are gonna be worth the same as they are now. You know? So that's, like, the good counterargument against it is just like not a lot of stuff works this way, but I think the very, very first check into an early stage company is such an ambiguous illiquid market that I think giving this term and basically saying like, if we really like screw up the price here, we're just gonna update it, does help just sort of get get stuff done, to be honest, is kind of my goal there.
Arvid:Yeah. It also requires the actual event of somebody else investing, which Exactly. Is also kind of a a happy moment most most of the time, I would hope. Right?
Tyler:Yeah. You have to yeah. The founder has to decide then, you know, like nothing is forced on the founder. The founder has to accept an offer from new investors at those terms, you know, and then they know also when they make that acceptance that also ComFund's investment is going to retroactively change and they have to decide, given all that, I think this is the right course of business, you know, so let's do it. And and also I will say because maybe, like, a lot of founders are not used to this kind of stuff, the terms are there to set the default assuming there isn't mutual agreement, but anything can be amended by mutual agreement at basically any time.
Tyler:So, for example, let's say most favored nation, we signed a deal with the most favored nation. Company is a different spot, you know, 12 months down the road, they, like, desperately need more investment. They have to have it. Otherwise, the company is gonna go out of business. An investor makes them an offer that's at some terms, and they're like, we have to take this investment or we're gonna crash and burn.
Tyler:But the most favored nation cause is, like, gonna, in some complicated, unforeseen way, be so onerous that we we can't take this investment and also have the most favored nation be triggered. We need you, Tyler, to waive your most favored nation. I can look at that and say, I believe you. Okay. Here we go.
Tyler:I waive it. You know, take the new investment. We're waiving our most favored nation. Let's all move forward. Like, that's always an option, but the terms just set the default where if I look at it and say, like, no.
Tyler:Like, you know, I think, I don't believe you. I think you can take those, you know, the new investment or, you know, I think I can help you find a better investment or, you know, whatever. But this happens a lot, you know, where we even done this ourselves where somebody comes along and says, hey, what's I think I'll let me see if I can generalize an example here. So a company had an asset, a a product that was an asset that if they they were gonna sell it, they had a buyer that want to buy one of the products that they owned. And, technically, the way our terms were written, that sale of an asset would be income to the company, which would have triggered a massive shared earnings payment, you know, a a a big chunk of that.
Tyler:And between that and taxes, etcetera, they were like, look. We wanna sell this, but, like, we like, it's not gonna be a good deal for us if we have to pay a ton of shared earnings and we also have to pay taxes and we have blah blah blah. You know? So, like, can we work something out? And I said, yeah.
Tyler:Okay. Like, what we'll do is we'll say you can sell the asset, you keep all the money on in the balance sheet of the company, and we'll waive any shared earnings on that. And then you'll only pay shared earnings if you take that money out as founder compensation. So you can kinda keep that money in the in the company. And we just worked that out.
Tyler:They just came to me and said, hey. Like, the terms kinda don't work for this situation. Can we figure it out? And we just did it, you know. So that's important, I think, for people to know that, and for you to know that if something kind of, like, weird arises and it's in no one's benefit the way the terms are working, we can always work it out.
Arvid:Yeah. And I I would trust you to work it out in a mutually beneficial way. Because kinda you know, a lot of of the the funding that you do feels like it's it's also reputational in many ways. Right? Like, you the the founders that are invested in the fund, they wanna maintain their reputation.
Arvid:Obviously, the fund wants to maintain their reputation in our community. I mean, it's it's it's very easy to ruin your reputation in our community. Right? There are several PE actors over the last couple of years that have done this very effectively, like ruined their own reputation. So it it feels like that there's a lot there's more than just money
Tyler:on the line here.
Arvid:I I appreciate that, as somebody who's who's gonna hopefully soon, sign that contract because still waiting for the the actual business, documents to to make their way from Delaware to wherever my mailbox is now.
Tyler:Oh, they don't send you them digitally?
Arvid:Delaware sends them over somewhere, and then they get digitized, and then I get them. Yep. It's it's it's still, you know, it still stamps and signatures and stuff.
Tyler:Yeah. Yeah.
Arvid:Yeah. So one last thing. Just one last question that I have. And I think you already answered it in in our private communication up till now, but you you were talking about, like, slivers or and and shared earnings and that the percentage of the, yeah, the the the money that would be paid out to the fund if there is no converted safe just yet. So, like, the the kind of the shared revenue, shared liquidity, or, you know, whatever it might be.
Arvid:How do you come to determine this number? It's maybe maybe the question really is how do you value, like, what's the valuation that you come up with because that kinda is the relationship.
Tyler:Right? Like, how did you get there? In general, I I I try not to mention specific numbers, and and here's why. It's because I've seen this happen before, like, when individual deal numbers get out there, folks immediately sort of you you end up comparing incomplete information to complete information, which is to say, well, I know what I think I know about Arvid and his business and blah blah blah and he got this valuation. And the problem is people show up with, like, evaluation expectation and then you end up having to say, like, well, here's what you didn't know about Arvid's business, but also I'm not allowed tell you that because it's confidential and blah, blah, blah.
Tyler:So we just try to like say, you know, we just try to take on a case by case basis. But to answer your question, how do we come up with the valuation? It is very much more art than science, right? Because, you know, you are familiar with how businesses are valued when they're being sold, right? And if you take those metrics and you apply them to your current business, you're like, the business is worth plus or minus nothing.
Tyler:Yeah. Right? Like, if you tried to sell it tomorrow, you would be, like, very lucky to get, like, a low five figure number that would basically represent the opportunity cost of hiring a developer to build a a version of the product. You know what I mean? Like, it's like, so how can you go and raise, like, you know, low 6 figure number on a business that is worth a low 5 figure number.
Tyler:Right? It's it's much more about, like, basically, how do we see these types of businesses playing out? And we have a I have a I would say, like, some example models of how I want the whole portfolio to perform, and I'm kind of working backwards from more or less, like, I think about well, here's what I literally do. I say, I would like a lot of our the distribution of outcomes to have a lot of 5 to 7 x our money returns. Right?
Tyler:So I think a lot about what does the business need to look like for me and my investors to get 5 to 7 times what we invested into it. And I kinda want to understand that that is a reasonable model. Right? And then, like, okay, what kind of outcomes in terms of profit share, in terms of selling it, in terms of the growth trajectory, etcetera. And if I sort of see, like, them centering around this 5 to 7 x with plenty of upside, plenty of way that we could get way more than that, and also some successful outcomes that could be, like, a bit less than that.
Tyler:But, you know, I wanna I want that to be reasonable. And if the valuation combined with all those different trajectories is unreasonable, right, if I say we're investing at a $30,000,000 valuation and I see, like, you know, the clustering of outcomes around something that's worth, you know, 5 to 15. That makes no sense. Right? I need to say if I'm investing in a $30,000,000 valuation, I need to understand how this business is gonna be worth a $150,000,000 someday at a minimum.
Tyler:And if I can't do that, I can't invest at 30,000,000. Right? So I have to kinda keep working that back down to say, okay, I can see a reasonable number of of ways that we could sort of have 5 to 7 x. And the reason for 5 to 7 x is we want lots of successes that would be in that range. Some of the business in our portfolio will fail.
Tyler:And as a whole, we're kind of shooting for returning at least 3 times all the funds money back to our investors, you know. So we need we need to kind of make up for the ones that might fail, you know, with some margin for error and hopefully with a bit more upside and that's kind of what I use to determine what I think the right valuation will be. But it's so sensitive to, like, the traction, the track record of the founder, the particular market, the competitors, the ability to, you know, acquire customers and all that sort of stuff that it it candidly, you know, that's the mental model, but it's, like, way more art than science.
Arvid:Yes. It's magic. It's it's magic. It's incantation and a lot of, like, scented candles. Right?
Arvid:It's guessing.
Tyler:It's what it is. Let's be honest.
Arvid:Guesstimation. Right? I always like that phrase. It's somewhere between knowledge and imagination. Well, thank you for for sharing it.
Arvid:And and still in in very specific terms. Right? I I know it's it's unspecific and unique to to each in a situation because you said it. Founder is different, theme is different, industry is different, approach is different, opportunity is different. Right?
Arvid:It's it's, the right time, the right thing. Right? All of these things are highly interconnected. But, yeah, it makes it makes sense to me now seeing where the goal is. If the 5 to 7 x is the goal, then that explains why we are at the number that you came to as the valuation and the the the amount of the, of funding, and then obviously the percentage between them is is what would happen as a as a consequence of that.
Arvid:So cool. There's a motivational component for me as a founder to seeing you evaluating it at the number that it's at. Yeah. Because if if your expectation then is to see me 5 or 6 7 exit, cool. I can I can see that business being that valuable?
Arvid:I I can see whatever consequence that may have for me and for the industry and all that. So, yeah, that's that's it. I think we we already hit an hour of conversation around, like, 3 or 4 little questions that we have here. So Yeah. Yeah.
Arvid:Do you have anything that you would like to ask me in this in this this kind of conversation?
Tyler:At this phase, I don't think so. I mean, I guess I'd actually be curious to hear your thoughts on this going back to the very first question, the side projects thing, because let's take it out of the context of you and me for a second. Maybe just you give me your thoughts on, you know, devil's advocate against this or, things that maybe I'm not thinking about, in terms of side projects because you obviously see so many entrepreneurs who are building with a lot of side projects and stuff. Like, you know, the way that I've kinda structured this, where do you think, like, do you think it could be better? Do you think, like, I'm missing something, on that front?
Arvid:Yeah. I'll I'll I'll give you my my raw, unfiltered German opinion on this. Yeah. So side projects to me are derisking my entrepreneurial journey, like, from from my own personal project perspective. Right?
Arvid:My media business is one arm of my life. My investments is another one. The whole reason why we sold Feedback Panda is to derisk our financial situation back in the day. We probably could have kept running it, but ever since then, I've tried to multi prong my approach to everything. Right?
Arvid:Media business podcast, like even within my media business, I have the podcast, the newsletter, my my Twitter presence, and, all the other little things just to even derisk that business internally.
Tyler:Yeah.
Arvid:And it's one of many that I run. Right? I have permanent link. That's something that is almost profitable. And, obviously, a PodScan is is a thing, and I you know, the the many projects that I have are for me a way to derisk my financial life.
Arvid:So when I then hear that anything that I might start at that point in the next 12 months might be considered, it's not even yours, it's still mine, but it's it's mine with a twist. It's mine with a caveat. That makes me, potentially reduce my efforts in other projects, which is probably aligned in a way that I get to focus more on PodScan to make sure that within these 12 months, it's my main dish. Right? And everything besides that is whatever prior things may be there, they they're gonna be kept running, but there's nothing new that I start along the way.
Arvid:Which for an entrepreneur is potentially a limitation. I'm not saying that it is. In my case, I don't really care. I I do pot scan. I will grow it because that is a really promising thing for me to do right now.
Arvid:Yeah. And I will be over the next couple of years. But if I already had the idea for something else that's gonna launch in a month from now or 2 months or half a year, or there's a partnership with somebody out there that I wanna do. That there's complexity in this too. Right?
Arvid:Because if I go into a one on one partnership with somebody else and we like, if we were to that that would be super complicated now. If you and I were to do something in the Comm Fund, like, we would start the course again. Right? The the the the whole the Comm MBA. Now what would that be?
Arvid:Is this a PodScan thing because it has, like, podcast components? Is it a Comm thing? Is it some weird, like, chimera baby between them? There is some complexity to this which would keep me from even attempting it. So that that and and that might be aligned, it might also not.
Arvid:I don't know because it's future talk. But, my perspective is I'm probably gonna stay away from these things just to make sure that I don't impede my own capacity
Tyler:Yeah.
Arvid:And I don't make it more complicated than it would need to be. Does that make sense?
Tyler:Yeah. Okay. That makes sense. Yeah. That's helpful.
Arvid:And I guess it doesn't materially change our relationship. Right? I don't think from my perspective here, I would not make that thought change what number 4 side project is currently doing. Right? I wouldn't change that even knowing that it would impact how I think about things.
Arvid:I think for our relationship between the fund and and PodScan, and with with yours and mine personally, I would rather have clear terms stated what is gonna happen over the next 12 months, than having some nebulous maybe, maybe, maybe situation that would make it more complicated along the way. Okay. Yeah. It's like a prenup. Yeah.
Arvid:That's kind of what to say.
Tyler:I guess it's fair. Yeah. Yeah. And and that's my goal, to be honest. It's just, like, I think, you know, to be to be honest, like, the origin of this is that we had almost every permutation you could think of happen within our portfolio in the sense of things that worked out really well, things that worked out where we're a little bit like, oh, like, wait, we kind of thought we would have had upside in that because it's, like, very similar, but now it's a separate company and we don't really have any way to to make it not be, to things that became complicated that we had to easily work out, you know, by mutual agreement, to people who started a new thing and then pivoted to that new thing and we, you know, have upside in it and stuff like that.
Tyler:So we we kind of had every permutation work out. So it wasn't like a persistent source of problems, but it was a persistent source of just, like, ambiguity. And so the idea here is just to at least say, well, here's the default way it's gonna work, and then we'll operate from that versus, like, operating from, oh, we didn't talk about this. But, but, yeah, that's good feedback, I guess. Yeah.
Tyler:My hope with all this stuff is that it gets out of the way of whatever the entrepreneur thinks is the best thing to do. So, like, the inverse of this might be if an entrepreneur really wanted to completely pivot their company but maybe felt like beholden to the fact that they had sold some equity to investors, especially if it's maybe not even just us, it's like other angels and stuff. So this is a whole group of people that they've said, well, this is the thing I'm gonna do, and then it really looks like there's another thing over here that's way better. I think my hope would be that they would just say, well, I'm just gonna go all in on this thing because, you know, my investors just come right along with me by default. So they wouldn't put up a a, you know, any sort of a fuss at me pursuing this other thing because they invested in that too.
Tyler:They invested in me. They invested in whatever I build for this 12 month period and so I'm gonna go after that. That's the best thing for me to do and so, but that makes sense. Yeah. I mean, I think it's just something we're gonna have to be very clear about explaining quite a bit.
Tyler:So I'm glad we got to do this conversation in public. Yes.
Arvid:Yeah. Looking forward to and maybe picking up these kind of conversations over time a little bit more because now they also have a a slightly different flavor here on the podcast.
Tyler:Yeah. We should we should catch up more often. I like that idea.
Arvid:Yeah. We should certainly catch up. Well, thank you so much for catching up with me today.
Tyler:Yeah.
Arvid:It was awesome. Thank you.
Tyler:Yeah, man. Good stuff.
Arvid:And that's it for today. I wanna briefly thank my sponsor acquire.com. The more time I spend working on PodScan, the more I realized just how valuable my own time is. I could work on thousands of different projects, but I chose this one. And one day, we talked about that just now, I might be ready to sell the business because I'm choosing to spend my time somewhere else.
Arvid:And at that point, I need support from people who will make sure that I sell this business for a fair and life changing price to the right buyer without having to work even more on or in the business. Capitalizing on the value of my time today, I think that's a pretty smart move and it will be for you as well. Acquire.com is free to list. They've helped hundreds of founders already. So go to try.
Arvid:Acquire.com/arvid and see for yourself if this is the right option for you right now or at some point in the future. It's always good to be prepared. Thank you for listening to the Bootstrap founder today. You can find me on Twitter at avitkahl, arvidkahl and you'll find my books on my tour of course tattoo. If you wanna support me and this show, please subscribe to my YouTube channel, get the podcast in your player of choice and leave a rating and the review by going to rate this podcast.com/founder.
Arvid:It makes a massive difference if you show up there because then the podcast will show up in other people's feeds and any of this will really help the show. Thank you so much for listening. Have a wonderful day and bye bye.
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