Impact Terms Project - Presentation of Revenue Based Financing Structures

1. TX dba: Campbell Tans Henry & Mikulencak
Bruce Campbell | Chief Happiness Officer
bruce@bluedotlaw.com
Brian Mikulencak | Tax Alchemist
brian@bluedotlaw.com
+1 303.402.9284
www.BlueDotLaw.com
dba Campbell Tans Henry & Mikulencak (in Texas)

2. Impact Terms Project
(www.ImpactTerms.org)
<BETA VERSION>

3. Impact
Terms
Project

5. Measured overall impact
performance
(e.g. agreed-upon metrics, third-
party standards, certification)
Impact Terms
Minimum standards
Third-party audit

6. Why not use “straight” equity?
Liquidity Terms – Why the need for
special financing terms?
Traditional equity
financings assume an IPO
or company sale
In that sense, this
structure is “too lenient”
not requiring investor
repayment prior to one of
those events
$$$ from sale to public
(IPO) or buyer
*
*Earnings Before Interest, Taxes, Depreciation, and Amortization

7. Why not use debt?
Liquidity Terms – Why the need for
special financing terms?
Traditional debt
requires fixed,
regular payments
Non-payment could
trigger a default
Debt payments
EBITDA

8. Liquidity Terms – Preliminary Conclusion
EBITDA
Debt payments
Revenue-Based Financing (RBF)
Investor repayments are
tied to company
revenues and may be
either:
 Variable payment
debt; or
 Redeemable equity

9. Liquidity Terms – Variable Payment Debt
Similarities to “straight debt”:
* Cap on investor return
* Founders retain control
* Transactions costs lower
than equity
* More investor downside
protection
* Higher tax rate than equity
Differences:
 More flexible payments
 More complicated to
negotiate/document
 Typically triggers
complicated tax reporting
rules for “phantom income”

10. Liquidity Terms – Redeemable Equity
Similarities to “straight equity”:
 Can provide uncapped
investor return
 May reduce founder control
 Transactions costs higher than
debt
 Less investor downside
protection
 Lower tax rate than debt
(maybe zero!) and may avoid
“phantom income” tax rules
Differences:
 Structured redemption
repayments (on flexible
payment schedule)

11. Liquidity Terms – Example

12. Revenue-based financing
could, if structured as equity:
* Qualify for exclusions from
taxable income, in a gain
scenario; or
* Qualify for “ordinary loss”
treatment, in a loss scenario
Redeemable Equity: Tax Preferences

13. What if equity is redeemed at a gain?
Under the qualified small business
stock (QSBS) regime:
 Investors can exclude 100% of gain (or
$10 million of gain / year, if lower)
from taxable income.
 Many requirements must be met to
constitute QSBS, but most stock
issued by early-stage US corporations
qualify.
Redeemable Equity: Tax Preferences

14. Redeemable Equity: Tax Preferences

15. Redeemable Equity: Tax Preferences
Timeline:
1993
enactment of
original QSBS
rules
1997
reductions in capital
gains rates
rendered QSBS
rules largely
ineffective
2009
QSBS rules
expanded in
response to real-
estate financial
crisis
2010
100%
exclusion
enacted
2015
Congress makes 100%
exclusion permanent
(with heavy SV
lobbying); first 100%-
excluded sales occur
Today
(2016)
first tax
returns filed
with full
exclusion
Investors might pay zero
tax on gain? Are you sure?

16. What if equity is sold/cancelled at a loss?
Redeemable Equity: Tax Preferences
Under the small business stock (SBS)
regime:
 Investors can treat up to $100k of losses /
year as ordinary losses. This provides dual
benefits of avoiding $3k / year cap and
offsetting higher-taxed wage income.
 SBS regime has separate requirements
and the company must be smaller, but
many early-stage US corporations still
qualify.

17. Redeemable Equity: Tax Preferences

18. Liquidity Terms – Investor Perspective
Jarred Maxwell
Co-founder / Partner
Austin Foodshed Investors
Jarred leads AFI’s venture relations, guiding them through the fundraising
process, providing business analysis and assisting as they prepare to present
to potential investors.
Jarred has been the Local Leader for Slow Money Austin since 2011. He is
dedicated to healthy food, local economic vitality, support of small-scale
businesses, re-invigoration of small towns and small family farms and ranches.
Jarred is an active angel investor in more than a dozen local socially
responsible companies and helped found the Sustainable Texas Investment
Club in 2010 to provide a mechanism for non-accredited investors to put some
of their investment dollars into local food companies.
In 2010 Jarred founded The Happy Land Company, which specializes in the
acquisition, restoration and preservation of rural land, including large
property acquisition and assemblage, range land restoration, and land trust
filing. Prior to this, Jarred was a land broker and partner with the Luedecke
Group of Austin for six years. He started his career as an engineer at Dell.
Jarred is a lifelong Texan and a rancher, managing over 400 acres of family
ranch outside Lampasas in northern Burnet County. He has a BS from UT, and
lives in Central Austin with his wife Sommer and their young son.

19. TX dba: Campbell Tans Henry & Mikulencak
Bruce Campbell | Chief Happiness Officer
bruce@bluedotlaw.com
Brian Mikulencak | Tax Alchemist
brian@bluedotlaw.com
+1 303.402.9284
www.BlueDotLaw.com
dba Campbell Tans Henry & Mikulencak (in Texas)