Types of Investments

Investment Types

SAFEConvertible NotePreferred StockLoyaltyHub Promissory NoteRevenue Loan AgreementSubscription AgreementCrowd-Selling

SAFE (Simple Agreement for Future Equity)

First developed by Y Combinator in 2013, a SAFE grants an investor the right to purchase equity at a future date when the startup sells priced stock.

SAFEs are useful because they delay the difficult task of figuring out how much a startup is worth. The number of shares you receive is determined at the next priced financing, when professional investors – typically venture capitalists – set the price for preferred stock. Then, calculated by using the Valuation Cap and sometimes the Discount Rate , your SAFE often converts into shares at a lower price than the venture capitalists paid, since you invested earlier.

The Valuation Cap is the most important term in this security. It puts a maximum price on the price you’ll pay for the stock at the later date. If you invest in a startup with a valuation cap of ₦80 million, and they later raise at a ₦200 million Pre-Money Valuation , your stock will be priced off the ₦80 million number. But, if the next investors value the company at ₦40 million, that will be your price instead (perhaps further discounted by the Discount Rate ).

Unlike a Convertible Note, a SAFE is not a loan. As such, it does not accrue interest or have a maturity date. This makes it a simpler and cheaper way to finance a startup, and it typically better aligns with the intention of most equity investors who never intended to be lenders.

LoyaltyHub Crowd-funding SAFE

Accepting funding from hundreds of direct online investors investing as little as ₦10,000 requires a SAFE with several extra protections not common in Regular fundraises with Accredited Investors . The LoyaltyHub SAFE treats Major Investors (typically defined as investing between ₦10,000 and ₦25,000) much like investing via a LoyaltyFund, but it has no voting rights for Minor Shareholders.

The LoyaltyHub SAFE:

  • Has Repurchase Rights for Minor Shareholders. Except for Major Shareholders, the company may opt to repurchase an investor’s SAFE at any time prior to conversion at the greater of the purchase amount or the Fair Market Value, as determined by an appraiser the company chooses. Startups want this because they are scared that venture capitalists may not fund their companies at a later date because they have a “messy cap table”.
  • Can be Amended by One Lead Investor. The lack of a maturity date and interest rate negates the need for common amendments of convertible note financings. However, if a particularly complex issue in a follow-on financing requires an amendment to the SAFE, founders are scared they’ll be unable to chase down thousands of signatures. The company can designate a Lead Investor Representative, and all investors agree to allow that person to unilaterally amend the SAFE. But that person may not change the Valuation Cap .
  • Grants CEO Power of Attorney for Minor Shareholders. Once the SAFE converts into equity, investors who are not Major Shareholders grant the current CEO a power of attorney to vote all shares and execute any documents on their behalf. This mitigates the potential problem of hundreds of minor shareholders slowing down further follow-on financing.

Convertible Note

A convertible note is an unsecured loan that converts to stock at some point in the future. They are one of the most popular forms of seed-stage startup investing because of their history, although the SAFE is rapidly becoming more prevalent.

Convertible notes are also useful because they delay the difficult task of figuring out how much the startup is worth. The number of shares you receive is determined at the next qualified financing, when venture capitalists set the price for preferred stock. Then, calculated by using the Valuation Cap , Discount Rate , and Interest Rate , your loan converts into shares at a lower price than the venture capitalists paid, since you invested earlier.

If the startup does not raise another round of funding, the note becomes due at the maturity date, typically in 18-24 months. Convertible notes, however, are rarely repaid in cash. Instead, the note usually converts to equity at a pre-set target price.

The discount and interest rates have a relatively minor impact on future returns. The most important term to focus on – which can greatly impact the price of your future shares – is the Valuation Cap . In US, this is usually set between $3 million to $20 million. For Nigerian based start-up, this may be set between $120,000 to $1 million and could even reach the US valuation Caps, depending on how “hot” the startup is, while SMEs may be set below 100 million.

Priced Preferred Stock

Due to the cost of fees to properly set up a stock financing. Some startups use open-sourced “priced round” documents to reduce the costs of a stock financing at the seed stage.

There are a host of terms that can be negotiated in a stock financing, but this is done by the “lead” investor, who typically invests upwards of $200,000.

As a non-lead investor investing a small amount, the most important terms to pay attention to are the Post-Money Valuation or the Pre-Money Valuation . This is effectively what the company is considered to be worth, and with it, you can calculate your percentage ownership. Comparatively, the price of the stock is relatively meaningless.

One of the most popular open-sourced priced round agreements is the Series Seed, developed by Fenwick lawyer Ted Wang.

Loans & Promissory Notes

High-growth startups or businesses almost never raise seed-stage funding with loans, as debt doesn’t offer enough of a return to account for the risk investors are taking.

However, loans or promissory notes can be more appropriate for small businesses. One benefit of investing with a loan is that the investor often receives cash every quarter or year, as the principal is repaid alongside the interest rate. The downside of debt is you have no equity stake if the company suddenly becomes much more valuable.

LoyaltyHub Promissory Note

Many businesses that would raise funds on LoyaltyHub would most likely use our template agreement which would soon be completed. The LoyaltyHub Promissory Note is good for debt fundraises that don’t require much complexity. It can be powerful for crowdfunding when combined with the Investor Reward Agreement. It may also be paid back by the company at any time.

Important terms in this note include:

  • Interest Rate. The interest rate per annum.
  • Maturity Date. How many years until the loan is fully paid back?
  • Quarterly or Annual Disbursement. Companies choose to make annual or quarterly payments.
  • Grace Period. By default, these loans are deferred until 30 days after their crowdfunding deadline date. Some businesses may defer the start of their loan at a later date, such as when their business is scheduled to open.
  • Defer Payments. By default, every company can miss one payment without being in default. This is meant to allow businesses time to recover if they have a bad year.
  • Secured. Some loans may be secured with all property of the business.
  • Personal Guarantee. Some loans may have an individual that personally guarantees payment.
  • Subordination. Some loans are subordinate to a major bank lender.

Revenue Loan Agreement

This is a promissory note that is paid back from a share of the revenues of the business.

Important terms in this note include:

  • Gross or Net Revenues. Net revenues excludes returns or shipping costs.
  • Revenue Percentage. This is the percentage of revenue that is shared.
  • Repayment Amount. Typically 1.5-3.0X, this is the maximum amount you will be paid back.
  • Quarterly or Annual Disbursement. Companies choose to make annual or quarterly payments.
  • Defer Payments. By default, every company can miss one payment without being in default.
  • Secured. Some loans may be secured with all property of the business.

Subscription Agreement

On LoyaltyHub, a subscription agreement is a contract between you and a LoyaltyFund managed by LoyaltyHub Advisors.

Most startups do not allow individuals to directly invest small amounts in their company. Instead, you are able to invest in a LoyaltyFund, which aggregates all the small-naira investments, and invests in the startup as one shareholder. The LoyaltyFund holds the underlying investment (such as a convertible note, stock, or loan).

When you invest in a Loyaltyfund via a subscription agreement, you only have an economic interest – you have no voting or information rights in the startup the fund invests in. You also can’t sell any shares in the startup. LoyaltyHub Advisors manage the fund on your behalf and decides when to sell the investment (typically, when the startup is acquired or goes IPO). Only then do you earn a return. This is a long-term investment. For instance, if you had the opportunity to invest in Facebook in 2004 with a LoyaltyFund, you would have had to wait 8 years later until they went public in 2012, to receive a return.

Crowd-Sale

On LoyaltyHub, businesses can raise funds by carrying-out a crowd-sale. This is done by businesses offering present or future inventory to buyers.

The seller or business have the right to cancel the crowd-sale if quantity of expected stock to be booked ahead for purchase are not met before the close of the crowd-selling period.

Most businesses doing crowd-sale on loyaltyhub offer delivery or pick-up option and require buyers to pay upfront. They also give buyers wholesale pricing and discount benefits.

I changed my mind! Can I cancel my purchase and get a refund?

Yes. You can change your mind and cancel your purchase while a crowd-selling round is still open up to 1 week before the offering deadline, could be less depends on the item and seller. You’ll receive a refund minus any transaction charges.

Do my funds go in an escrow account?

Yes. Your payment is placed in an escrow account hosted with First Bank of Nigeria Plc. The sellers do not receive funds raised until they have fully supplied the items to the buyers.