And a breakdown of SKALA’s term-sheet
Ok, I know I’m sounding a bit obsessed with SKALA on this blog these days. But unfortunately our timelines for the program are short, and I want to convey as much as possible before you decide to go ahead with this application or not. Hey, I’m proud of the work the team is doing.
If you visit this blog often, you’d know that one of the most popular and well-accepted posts in this community is:
People have thanked me a number of times for this post, and I am much humbled by their response. What you’d have gathered from the post is that I want to make sure the founder is walking out from an investor negotiation with all arms and legs intact. And hence was born the spirit of preparing the term sheet for SKALA.
There was a short internal conversation within the team. Some one floated an idea of using a note, maybe even a SAFE. I scared a few people with my loud insistence of taking common stock equity, and then went ahead and drafted the term sheet, which is now available on the website. I am hoping that other accelerators and angels will read this, and start accepting some thing similar as a defacto standard. If not, well we’ll always have the best deal waiting for the founders. In short, we have nothing to lose from this.
Taking a few cues from my previous post, here are ways that I feel SKALA’s term sheet is one of the fairest deals you can find from an accelerator:
1. Fixed Price
You dilute 5% of your company for US $30000, no more and no less. You have complete visibility (it’s 5%, as simple as it can get) in to how much will your investor own in the next round, and you’re protected if the company ends up raising at a down round.
Why $30k? We feel its more than enough for a company to be able to hire a few team members and test their proposition out in Indonesia for at least 6 months. Our aim is to make sure the company hits some sort of product market fit which should put your company at a valuation range of US $3–5M post this round. A lot of costs will be borne by the accelerator as well, such as your desk space, Office needs, cloud credits etc. This is all extra and separate from the $30k cash, we do not take any equity for any thing apart from the cash we give you.
Why 5%? The accelerators in the market take any where between 8–20% of a company. They often even keep it flexible across companies leading to bad signalling and internal tussles amongst the founders. We feel flat 5% for all companies is a fair equity to seek that keeps us incentivised to do our best and dilutes the founders by just a small amount. Coming on board as active advisors to the company, bringing our immense network split between Block71, Salim Group, and GREE Ventures, our contribution to the company’s efforts will definitely be much more than 5% of the overall team’s effort. We also think that the 5% equity puts you at a valuation of $0.6M, giving you enough breathing space to go and raise an angel round at an attractive price for the angels in case you need a bit more time and money to test out the product.
Here is a quote from a VC friend when we discussed the SKALA equity structure:
“It’s great that Skala is thinking of limiting the ownership in the early stages. In many cases we see founders getting highly diluted by the time they reach Series A with an accelerator on the cap table owning significant amount of the company without providing much value at that stage.” — Akshay Bajaj, SIG
2. Common Stock
A true testament of us being on the same side as the founder is the fact that our shares are common stock, not preferred shares. This construct is unthinkable of in this region, but hey, we have to set the standards high. This structure means we are exactly in the same boat as the founder. We do not have preferential control or economic rights (except for a few shareholder rights as stated below). It even allows the company to dilute common stock at a different price than preferred shares, either at a lower or a higher price. We simply seek a flat price based on (1).
3. Pro-rata Right
One of the very few economic rights we seek is the ability to maintain our ownership (note: not increase!) in the company. If you compare this with the notes in my previous post, you’ll see this is a very small ask to make. We want to make sure that if your company is growing, then we can be part of that growth and continue to back you with capital in the future as and when you need it.
4. No Liquidation Preference
No kidding. No. Liquidation. Preference. That’s what you get with common stock. We simply enjoy co-sale rights, i.e. if the founders decide to sell, we sell also at the same price as the founders, just like any other employee of the company. If the founders don’t sell, we wait also. If the founders don’t make any money on the company sale, we don’t also. Simply treat us as you’d treat an employee of the company. If this is not founders first, I don’t know what is.
Now if you are an investor reading this, you might be asking, why the hell would you do this? Well there are a few reasons:
- At this stage of the company the founder needs to build and run, not spend hours negotiating their term sheet
- There is no material impact we’ll have in our returns if we start seeking for liquidation preference or any sort of preferred rights
- We don’t want or need to control the company at this stage. We want to let the companies spread their wings and try to fly, rather than hold them down with strings.
If all of this sounds fair to you, then go ahead and complete your application here:
If not, then come and talk to us, and help us improve. We are always open-ears.
Pssst. We have received over 200+ solid applications already and have started interviews. If you have applied already, look towards your inbox and expect a mail from us within a few days.