Before we get into the benefits of investing through services, let’s look at the current norms of early stage venture capital investing.
Venture’s best early stage investing tools are YC’s SAFE templates—a philosophy of investing that unlocked capital in early stage VC by abstracting away from the problem of how to value an invaluable early stage company and assign ownership to an investor.
However in many ways as the SAFE Note solved this problem, it created a host of others. There is a lot to appreciate in the SAFE style of financing a company–it’s generally agreed to be fair to both sides and the very name of the instrument creates confidence in it. But as an industry, how can we be proud of the oft-lauded figure that only 1 in 10 companies make it from SAFE to exit? While the SAFE Note made it easier to raise and invest, it did nothing to improve outcomes. In light of these issues, there is an opportunity to create a more efficient and successful system for fundraising by leveraging stakeholder interests in a way that aligns everyone's interests with those of the startups.
Compared to the old way of raising SAFE-style convertible debt from angel investors, and then founders allocating that capital as best they can to various expenses, financing startups through a nuanced sweat equity model has a number of benefits for all parties.
Changing venture’s focus from raising to cash to aligning the right team around a project will have a number of beneficial secondary effects:
Our role is to reduce the friction in sweat equity deals so that the industry may more readily access these benefits.
The SWEAT (Simple Work for Equity Agreement & Terms) Note expands on the innovation of the SAFE Note by creating a structure for service providers to share in the investment and upside at the point of fundraising. Although work for equity is not a new idea, there has been no framework to streamline and govern the process of these deals under generally accepted terms. This lack of structure has handicapped the wide stream adoption of this type of investment vehicle.
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