Shared Success Agreements: A New Founder Funding Category
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Shared Success Agreements are a new funding model that is more favorable to founders than equity or debt arrangements.
As Evan Armstrong articulated so compellingly last fall in his article "Venture Capital is Ripe for Disruption," the current models of startup funding leave too many founders, too much talent, and too many potential investors on the sidelines.
I believe Shared Success Agreements (SSA) can change that. SSAs are:
- A new founder-friendly funding alternative to equity, debt, or a SAFE.
- Support founders by investing time and/or money in them for a share of future revenue.
- Built for founders, talent, and funders.
How Shared Success Agreements Work:
> Founders share upside but preserve optionality and equity.
Founders own the business and don’t have to give up any equity. This allows the founder to maintain complete ownership. Payments to Talent and Funders are only made when revenue occurs.
> Talent discounts their services for a share of future revenue
Talent provides services to the founder: marketing, accounting, legal, development, etc. As the founder generates revenue, talent receives payments at a multiple of normal fees.
> Funders create cash flows and don’t need to be accredited
Funders give money to the founder. As the founder generates revenue, funders receive payments based on a multiple of the original investment.
Shared Success is for everyone
Shared Success Agreements are the ideal model when you want to truly align incentives between parties. Everyone shares in the risk and upside.
For a Founder, you don’t have to worry about giving up ownership or paying back debt.
For Talent, you’re playing an active role in helping the founder’s business thrive by providing services the company desperately needs.
For Funders, you’re able to capture returns on a much shorter time horizon and use SSA’s as an easy way to start a relationship with the Founder. You also don’t need to be accredited!
With Shared Success Agreements you don’t have the complexity of equity or debt arrangements. You don’t have ownership complexities, CAP tables, complex valuations, incentive misalignment, long time horizons on getting paid back, complex paperwork, and more.
- Let’s say you need $10k* of software development.
- A developer is willing to contribute 50% ($5k) via a Shared Success Agreement.
- You pay $5k cash and agree to a 3x multiple on the remaining $5k to compensate for the risk, $15k.
- The developer earns 10% of your revenue until the 3x ($15k) is paid in full, at which point you've generated $150k in revenue.
- You both win!
At Cloudburst, we’ve been using Shared Success Agreements for five years. It’s been a wonderful tool for us to land new business and partner with founders around software development.
Other companies are using it too. Some use it to negotiate with contractors, others use it to win new business, and still others use it to raise capital.
How others have used Shared Success:
Braden Ericson, from reporting.dev:
“We had a developer we wanted to work with but didn't have the budget at the time. We had worked with him in the past, so we were familiar with his skill set. It would be too expensive to figure out how to give him equity as part of his compensation, and he was in Germany which would make it more difficult.
I suggested the Shared Success agreement as a way we could work together since it would be contractual, we would get a discount on his services, and our developer would get the upside of "equity-like" compensation where he gets a piece of revenue.
We already had revenue coming in so we negotiated a 2x multiplier at 12% of revenue.”
Aaron Sandstrom, from Threaded Solutions:
“I used a form of the Shared Success Agreement with one of my first clients as I was starting my agency. I had a limited track record as a new company and my client was just launching his business. We modeled a wide range of scenarios and found a mutually agreeable split between cash and deferred revenue share compensation. He obtained essential help launching and growing his business while conserving cash by paying a below market cash rate. I started a collaboration with a great business owner at a reasonable cash rate with some upside if I helped him achieve his goals.
We're still working together 3 years later! His business grew substantially and we're using a traditional consulting retainer now, but the revenue share from our Shared Success Agreement will continue for a few years to come. While the Shared Success structure isn't right for all situations, in this case it was an effective way to start a long-term partnership that has been both enjoyable and successful.”
Start Using SSAs
At Shared Success Agreement, we're on a mission to strengthen entrepreneurship and help create 10,000 Shared Success agreements.
We’re also thinking of putting together a Shared Success fund! If you have interest in investing, or being invested in, through this fund sign up here!
We love chatting about Shared Success so feel free to reach out anytime.