Pros and Cons of Convertible Future Earnings Agreements (CFEAs)

One week after launch! 

Can’t believe time has flown by so quickly. Through talking to lots of founders and aspiring founders, we’ve been getting a lot of questions about both the Convertible Future Earnings Agreements and how we operate as a fund (Horizan VC). Today, we’re going to start with a basic question: what’s the benefits of signing a Convertible Future Earnings Agreement with Horizan VC anyway?

Pros of Convertible Future Earnings Agreements (CFEA)

Convertible Future Earnings Agreements are flexible. If you are not earning £2500 or more per month in total income (business + full/part time job), you don’t have to pay for that particular month. This allows the founder to not worry so much during “down” months and instead have more mental headspace to focus on making pivots/strategy changes/product improvements. Bank loans, on the other hand, require you to make monthly repayments regardless of what the state of your business is. 

Convertible Future Earnings Agreements have a very high chance of some investor return. When investing using only a SAFE note, 90%+ an investor will lose all of the money he/she put into the startup because equity only cashes out in a high fundraising event/acquisition/IPO (which most startups don’t achieve). Using a CFEA enables the investor to get some kind of return because if a founder quits/goes bankrupt and has to go get a full time job, the FEA still stands. The founder either has to pay 1.5x the original amount loaned in 5 years or 2.0x in 10 years.

Because of the investor downside protection, Convertible Future Earnings Agreements can be used to invest even earlier than pre-seed. Due to the nature of our structure, we can invest in Friends and Family round startups because a lot of the financial risk is mitigated through the FEA. This is huge for the London/UK/EU startup ecosystem because there are many founders there that cannot afford to get money from their family and friends at the extremely early stages and early stage pre-seed angel investors still expect some level of traction, team, product development, and even revenue. At the same time, our vehicle can also be used to help fill out a traditional pre-seed round, usually of up to £500,000. We hope this vehicle can open some doors up to a lot more founders being given capital at the extremely early stages.

Convertible Future Earnings Agreements have venture upside through the SAFE note. If a startup raises more than £1 million through a larger round, the FEA gets cancelled and the SAFE gets activated at outstanding equity (in between 1-3.5%). This allows whoever invests in Horizan VC to also benefit if a company in our portfolio does manage to achieve large amounts of financing/IPO/get acquired. 

Convertible Future Earnings Agreements gives a founder flexibility as to what type of business he/she wants to build. The SAFE only model of investing pigeonholes founders into building one type of business: a blitzscale, exponential model of growth. Our model gives founders a choice: they can either try to build something that would grow to 10 million users, or they can build something that will grow slower and achieve stable profit month after month. Either works well with us.

Additional benefits with Horizan VC‍

Peer Selected Investment. According to Village Capital, peer selected investment is the best method of predicting the success of early stage founders. Our investment committee is made up of 100% current and former founders, so every founder will get a fair look. In addition, our unique experiences will enable us to discover talented founders that have been overlooked by angel investors/VC funds.

Founder Support. Through our collective connections and experience, we’ll be able to help idea-stage founders throughout their journey, helping them to either bootstrap profitably, raise the next growth round, or shore up their operations. We will implement regular office hours for our portfolio to come chat with us whenever needed. In addition, we’ll be able to gift our portfolio with a plethora of perks, so the money we give through our CFEA stretches further.

Cons of Convertible Future Earnings Agreements

Unlike pure SAFE notes, you have to pay back your investor cap on your CFEA. Some founders don’t like the idea of having to pay back a loan and would rather take equity-only investing. We understand; there are myriad benefits to equity-only investing, chiefly larger ticket sizes and the fact that a founder doesn’t have to pay anything back to the investor should he/she go bust. If a founder is in the position to be able to receive equity-only financing from the outset, by all means he/she should go for it! At the end of the day a founder has to decide what is the best for his/her business.

On the investor end: if a founder goes bankrupt and never earns £2500 a month on a full time job again, the FEA will never get paid off. That is why we do our income due-diligence through Stepex; our rigorous process ensures that the founders we choose to take on can all pay off their FEAs should they go bankrupt or choose to quit their business. Still, unforeseen circumstances can always happen.

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We hope that this breakdown (in a series of breakdowns) will help you all understand Future Earnings Agreements in more detail! If you have any more questions, email us at info@horizan.vc. We’ll see you in the application portal!