Hi – I’m Mark Hales from Oxygen Accelerator. I just wanted to say we’re following all the discussions on here and it’s helpful to hear your opinions and advice based on your experiences. I just wanted to make a couple of points to clarify a few things. We intend to provide a fuller response once we’ve spent some time considering all the feedback.
First of all the loan we are talking about is a ‘soft’ loan to the businesses taking part – with no personal guarantees and will be interest free.
As part of the application process we’ll sit down with each team to understand their funding needs and will only ask for the loan to be repaid once / if this level of funding or more has been achieved, or they reach a level of profitability to support loan repayments, again we will agree this in advance but the key point here is that we will build in an agreed level of headroom with the founders.
This will not be a complicated loan agreement, we only want to have the money back to reinvest in the next round of entrepreneurs when its right for the business, i.e., there wont be any clever call options. Teams will be given full sight of this and we will encourage them to get advice before they sign up to anything.
Thanks for jumping in to explain. I appreciate it's not always easy to take part in a discussion that's mostly focused on ripping you to bits (justifiably or not). I for one look forward to see how this evolves, rather than judging everything on the basis of what it looks like on day one. Actions speak louder than words.
Thanks swombat, I welcome constructive feedback, but have been a bit taken aback by the nature of some feedback, the best way to engage Entrepreneurs and investors outside of the tech community is to work with them and provide constructive feedback, I'll keep listening
It seems you are saying "we'd like to recoup cash from our companies, if possible, without forcing them into premature dividends or exits, and without diluting our equity." Yes?
Well, that is a preferred equity instrument, eg, "This bit gets paid before the common equity gets a dividend or distribution."
Preferreds generally have a stated "interest" rate, but payments are at management discretion (accruing to principal when not made) but there is no reason that can't be zero. They can also have maturity dates for repayment. Yes, it looks a lot like a loan, and that's sort of typical for this "junior to all other obligations / senior to other equity" layer of the capital structure. (And note that there could well be legal and tax differences between preferred and debt. I don't know how it complicates the documentation you're already doing with the loan and equity pieces. IANAL.)
The important difference for you is jargon. "Preferred equity" doesn't carry a suggestion of personal liability, it's equity with a return clearly tied to the venture's success, but ahead of the common. Your founders won't know the term, but any advisor they speak with should.
Described thus, I still don't know if I like your proposition, or what others should think of it, but I'm closer to understanding just what that proposition is.
First of all the loan we are talking about is a ‘soft’ loan to the businesses taking part – with no personal guarantees and will be interest free.
As part of the application process we’ll sit down with each team to understand their funding needs and will only ask for the loan to be repaid once / if this level of funding or more has been achieved, or they reach a level of profitability to support loan repayments, again we will agree this in advance but the key point here is that we will build in an agreed level of headroom with the founders.
This will not be a complicated loan agreement, we only want to have the money back to reinvest in the next round of entrepreneurs when its right for the business, i.e., there wont be any clever call options. Teams will be given full sight of this and we will encourage them to get advice before they sign up to anything.