Emergence of New Capital Providers – Exploring Alternatives to Traditional Expectations and Structures

EXECUTIVE SUMMARY

The Capital Access Lab (CAL) is a national pilot initiative that aims to find, promote, and scale innovative investment managers who are providing new kinds of capital to underserved entrepreneurs and communities in the United States.

In July 2020, the Capital Access Lab announced its investments in 5 funds investing in underserved entrepreneurs through innovative investment structures: 1863 Ventures, Anzu Partners, Capacity Capital, Collab Capital, and Indie.vc. During the selection process of these 5 funds, the Capital Access Lab identified over 100 funds focused on underserved entrepreneurs. This report analyzes the approach of a subset of 20 funds that responded to our survey.

Through our analysis, we learned that funds investing in underserved entrepreneurs through alternative investment structures are often nimble investment vehicles that operate in the very early stages of the portfolio companies’ development, really enabling these companies to raise the first essential capital to fuel their growth. They do not invest exclusively in high growth sectors like traditional VCs; our study shows that they are often sector agnostic and have a wide range of return expectations and initial criteria for the investment that are much more flexible than what we typically see in traditional venture capital.

Whereas these funds face challenges related to covering the structural and operational costs of running an investment fund with relatively low Asset Under Management, they represent a nascent and very targeted approach to serving underserved entrepreneurs. Through this report, we hope to highlight their work, support their growth, and inspire potential funders and donors to invest in them. 

BACKGROUND

The Toniic Institute, through the Impact Terms Platform, developed this report about the work of the Ewing Marion Kauffman Foundation and the Capital Access Lab on investment funds adopting alternative investment instruments.  The Capital Access Lab is designed to provide risk capital to new investment models that do not resemble traditional venture capital or lending, spurring the formation of new financing mechanisms that increase capital investment to underserved entrepreneurs who have been historically left behind due to their race, ethnicity, gender, socioeconomic class, and/or geographic location.

The objective of this report is to review the lessons learned from the Capital Access Lab’s work and to share innovative ways investors can invest in entrepreneurs who are underserved by venture capital and traditional lending structures. Our goal is to describe emerging approaches to investments, liquidity, and risk/return profiles that can be more inclusive for entrepreneurs. 

The Capital Access Lab (CAL), formed in 2019, is a national pilot initiative that aims to find, promote, and scale innovative investment managers who are providing new kinds of capital to underserved entrepreneurs and communities in the United States.  The Capital Access Lab was created to help address this capital gap by creating a new vehicle to invest in alternative capital funds survive those entrepreneurs  That same year, the Lab’s lead investor and sponsor, the Kauffman Foundation, released a report, titled “Access to Capital for Entrepreneurs: Removing Barriers”, which observed that a surprisingly high percentage of entrepreneurs – more than 83% – do not access bank loans or venture capital. 

To source prospective funds, the Capital Access Lab created an online application process through which funds or proposed funds could apply for consideration for funding.  The CAL did not widely publicize the announcement of this opportunity and instead relied primarily on word of mouth and limited media. When the fund application was announced, responses far exceeded their expectation.  CAL had expected 20 to 40 funds to apply in the first year but ended up receiving close to 150 applications.  Of those, over 100 fit the requirements for application.  “One of the most positive signals to us – [was that] the submissions were mostly first-time fund managers and aspiring investors wanting to bring capital to their community” said John Tyler, Kauffman Foundation General Counsel. The CAL team was also encouraged and surprised by the diversity of the applicants.  Roughly 55% of applicants were women and 50% persons of color.  The large and diverse application pool reveals a significant demand for and interest in alternative capital structures.

The CAL had expected that many of the applicants would be larger funds that saw alternative capital structures as an additional opportunity. (Traditionally it is difficult for funds smaller than $10 million in assets to generate enough fees to cover their overhead.) Unexpectedly, the applicant pool included many smaller funds that would have traditionally been considered too small to rely only on traditional management fees, but instead many funds were a part of related organizations that could support the overhead.  These related organizations included nonprofit business accelerators, Community Development Financial Institutions (CDFIs), and other organizations that wanted to bring investment capital to their communities. For example, 1863 Ventures, one of the funds that received investment, already had an active business development program and wanted to start an investment fund as a means of furthering its mission.  

During their due diligence process, the Capital Access Lab identified over 100 funds focused on underserved entrepreneurs, eventually selecting five: 1863 Ventures, Anzu Partners, Capacity Capital, Collab Capital, and Indie.vc. 

The Capital Access Lab includes as one of its initiatives, the Capital Access Lab Fund which is a donor advised fund housed at Impact Assets. That fund was capitalized by the Kaufman Foundation. The Capital Access Lab Fund, and a separate funding source from Rockefeller foundation, have invested in the five funds that were selected by The Capital Access Lab. 

To ensure the preservation of a recognized charitable purpose under Section 501(c)(3), the Kauffman Foundation developed a charitability term sheet which it has made publicly available as an example of how a foundation structured a particular investment to further its charitable mission and ensure accountability thereto.

Although CAL could not invest in all the funds, they recognized there was a lot to learn and share about their innovative investment structures. This report analyses the approach of a subset of 20 funds who responded to our survey.  

RESEARCH – RESULTS AND ANALYSIS

Toniic and the Impact Terms Platform conducted research for this study using a combination of interviews with the principals and a formal survey.  The survey participants consist of funds that had applied to the Capital Access Lab during their initial funding period. Twenty funds participated in the survey. The data below highlights some key takeaways from our review.

FUND CHARACTERISTICS

TARGET FUND SIZE

Fifty percent of survey respondents reported a target fund size of less than $10 million.  

This target size is consistent with the population of over 100 applicants who applied for funding from CAL – as 50% of those applicants also reported a target size under $10 million. If these funds were to use the traditional VC fee structure that means that they would expect to receive under $200,000 per year in management fees to cover management costs. These low fees are generally considered below the viable amount required by a fund management team without external middle and back office support.

INVESTMENT STAGE

Ninety five percent of participants report that they will invest in seed or pre-seed stage companies. Of those participants, 55% said they would also invest in Series A investments, leaving 45% who only target seed or pre seed stage investing. Only one fund participant would not invest in seed or pre seed stage companies targeting only post seed investments. 

TARGET INVESTMENT SIZE

Consistent with the small average target fund size and largely seed stage investing, 65% of the participants expect to invest less than $300,000 per investment. Only 10% of respondents would invest more than $500,000.

TARGET SECTORS

45% of the respondents have indicated that they are sector agnostic, and 25% of the respondents (among the open-ended responses) included Food and Agriculture as one of their funds’ focus areas.

While traditional VC funds often target high growth sectors such as IT, Health Care, Financials, Telecommunication, the survey respondents did not indicate a strong tendency towards these sectors.  

FINANCIAL INSTRUMENTS USED

The following section analyses the financial instruments used by these funds to invest in underserved entrepreneurs. The classification process of these alternative investment structures is a challenging process  because there is not an agreed-upon vocabulary for many of the emerging investment structures, nor agreement about whether they should be broadly classified as equity or debt.  For example, respondents may have differing opinions about if the Demand Dividend Structure should be debt or equity, so we asked about that structure as both debt and equity then combined them when appropriate to our analysis.

COMMON FEATURES OF ALTERNATIVE INVESTMENT STRUCTURES BASED ON CONTINGENT PAYMENTS

To structure these investments, investors typically start with a target IRR, make a range of estimates of the company’s future performance, and then structure the other terms and features of the investments, including the repayment terms such as the percent of revenues and return multiple cap to achieve that target IRR.

The survey asked a series of questions about the details of the alternative investing structures used by that participant.  The questions were designed to get further details around what we anticipated would be the most common structures used: a variation of contingent payment structures.  Seventy-five percent of the respondents reported using some form of alternative investment structure based on contingent payments (revenue-based debt, redeemable equity, or Demand Dividends).  

These structures are flexible and can be designed to include a variety of features. The core feature of these structures is that they are contingent on something like the amount and timing of the portfolio companies’ revenues.  Therefore, the return to the investor will vary based on the features of the investment and the financial performance of the company. 

Basis of calculation

Of the 75% participants that stated they will or do use a form of contingent payment structure – 40% said they would invest using gross cash receipts as a basis of calculation, and 47% reported they would invest using net cash receipts.  Thirteen percent reported they would use either gross or net cash receipts. Demand Dividend structures did not seem to affect this ratio, even though Demand Dividends typically use net cash receipts as a basis of calculation.

Return Expectations

Respondents reported a wide range of target IRR for their investments ranging from 2% to 35% and averaging 15%. We did not specify if we were asking for the target IRR for the fund or individual investment, but we believe that most participants were answering at the fund level.

Minimum annual revenue required for investment

Respondents reported a wide range of minimum required revenues for the investees ranging from under $50,000 per year to over $5 million per year.  The median required revenues was $300,000-$400,000 per year.

Minimum annual revenue growth rate

Respondents reported a median required forecast annual revenue growth of 20-30% with only 16% requiring revenue growth of more than 40%.  This differs significantly from the kind of minimum revenue growth requirements you would see from traditional VC.

Half of those who are making revenue based (or similar) finance structures are investing in seed or pre-seed, and will invest into forecast revenue growth below 30%.  These characteristics are not common in traditional venture capital so this demonstrates the growth of new sources of capital, that are willing to invest with non-traditional approaches.

Minimum gross margin of target companies

Considering the role that revenues play in the calculation of repayment, we also asked about the minimum required gross margin in order to repay the investment. Respondents reported a minimum median target gross margin of 30-40%. At Impact Terms, our  expectation was that lower reported minimum revenue growth rate targets would result in higher the margin requirements.  We had this expectation because for an investor to receive a target return of X% on an investment in a lower growth company, that company typically must be able to support a higher percentage of cash flow paid to the investor which requires higher gross margins.

The opposite was the case, as it turned out. The funds that were willing to take the lowest forecast revenue growth in seed stage companies were also willing to take the lowest gross margins. Like the wide range in target IRR, this demonstrates that there is a much wider range of return expectations and minimum requirements than we see in traditional venture capital.  One possible explanation is that the funds accepting lower gross margins for lower revenue growth companies are doing so as part of a strategy to provide the appropriate capital to the entrepreneurs.  That is, the entrepreneurs they are targeting may simply not have higher revenue growth and margins so the funds used alternative investment structures with return features that the companies could afford.

Percentage of revenue used to repay the investment

Thirty-three percent of respondents indicated that their average percentage of revenues used to repay the investment is 5%, and overall 66.6% indicated an average percentage of revenues lower than 10%. This is typically repaid by the portfolio companies monthly or quarterly out of minimum targeted gross margins of 30-40%.

Forms response chart. Question title: How much is the typical percentage of revenues used?. Number of responses: 12 responses.
Average return multiple cap

Thirteen participants use an average return cap – meaning the average cash-on-cash multiple of the invested capital to be returned to the investor over the life of the investment.  The industry average return cap is generally between 2x and 3x the initial invested amount. As an example – a cap of 3x on a $100,000 investment would mean the investment is complete when a total of $300,000 has been repaid.  This is a common structuring feature of alternative investments that are based on revenue, cash flows or similar contingent payments.  The total IRR of that investment would depend on the time it takes for repayment as well as the cap, so a 3x cap investment that takes 10 years to pay out would have a lower IRR than a 3x cap investment that takes 5 years to pay out.

REVIEW AND CONCLUSIONS

It is clear both from the large number of applicants for Capital Access Lab funding and from the follow up research we conducted that there is a significant and underserved ecosystem of small funds that are leveraging alternative investment structures to invest in companies focused on underserved populations.  Many of the funds are sector agnostic and not many are targeting traditional venture sectors like IT, Health Care, Financials, Telecommunications.  It is also evident from the wide range of return expectations and the combination of investment structuring features that the funds are willing to invest beyond what we would expect from traditional VCs and that therefore that the funds in the survey can  serve entrepreneurs who fall outside of traditional VC requirements.  

These funds are nimble investment vehicles that operate in the very early stages, potentially being the first professional investors supporting companies in their infancy, effectively de-risking and capitalizing early-stage entrepreneurs.

They also have a wide range of return expectations, including repayment multiples, and initial criteria for the investment that are much more flexible than what we typically see in traditional venture capital.  It has long been a complaint that sources of capital are too fixated on structures designed only for companies with explosive growth, so it is encouraging that this research shows an emergence of new capital providers exploring alternatives to traditional expectations and structures.

Out of the 100 funds that applied to the Capital Access Lab, and more specifically out of the 20 survey respondents, we have observed that about 50% of the funds have a target raise of less than $10 million and 75% of less than $30 million; that 95% invest in seed stage, and about ~50% in pre-seed and Series A; and that 65% target an initial investment of less than $300,000 per investment.   

Toniic, the global action community for impact investing, has also identified the emergence of relatively small and nimble funds (less than 15M in target AUM) leveraging alternative investment structures to address the needs of underserved populations across different investment themes. These includes funds providing loans to farmers to be repaid through a revenue share agreement in order to allow time to the farmers to switch to organic and regenerative agriculture practices and align their cash flows from higher quality produce with the loan repayment, funds providing capital to minority owned businesses in geographies out of the radar of major venture capitalists to facilitate exits, but also funds providing loans to underserved students that can repay their loans only when they start generating income from actual employment. 

While this did not apply to the five funds selected for investment by the Capital Access Lab, these smaller funds are much smaller than typical venture capital fund and CDFI, so small in fact that many are unlikely to cover their operating costs as a fund, and instead use the fund as an addition to existing community service programs.  These funds primarily target seed stage companies and are using a wide range of alternative investment structures.  

In order to support these experimental but smaller funds, it is clearly important to find ways to lower their operating costs.  As noted in this review, important costs like legal, including the added costs associated with using new investing and organization structures, insurance and fund administration are high for these funds.  It can even be difficult to find fund administration services that will support alternative investment structures.  Companies like AngelList are starting to provide some of these services at lower cost but they are still expensive for small funds and they do not offer services to most alternative investment structures. Investors and foundations who wish to support these funds might consider funding start-ups that help provide these services at lower cost to smaller funds.

Agnes Dasewicz, Lead, Capital Access Lab observed that, alternatively, it would be worth evaluating if investments coming from foundations could, when legally allowed, be accompanied by separate resources and donations to cover some administrative expenses and technical assistance.  This is fairly common practice with large international funds who often have sidecar vehicles for technical assistance, and we agree that sidecar grants would help further the ability of small funds to continue to innovate.  

Case study: convertible revenue loan for green cleaning product

A Latin American company produces and distributes green household cleaning products. Investors have funded the company with a convertible loan that is repaid monthly through a percentage of revenues as opposed to fixed interest payments, allowing the company more flexibility for growth than with traditional debt.

The company had limited sales and marginal EBITDA, which made valuation challenging, so the investor designed a tailored senior convertible loan that would be paid back through an escalating percentage of sales.

Target IRR: 20-25%

Type of investment: Senior convertible loan to a non-US-based enterprise

Investor: An impact investment fund focused on supporting the early growth of social and environmental companies in Latin America. It invests in a wide range of sectors, such as education, sustainable consumer products, health, housing, organics and clean energy. It seeks to tailor its transaction structures to the needs of each portfolio company.

Company: A producer and distributor of 100% non-toxic and biodegradable household cleaning products. Company is generating revenues and is cash flow positive.

Key innovations

Revenue-based loan: The company’s total loan obligation is fixed, and repayments are determined as a share of revenue, escalating over time until the entire obligation is repaid.

Conversion option for investors, at investor discretion: The loan may convert into equity at a pre-determined multiple of trailing revenue or EBITDA, at the discretion of investors.

Key terms

Investment amount: The investment was broken down into two tranches: (1) US$300k immediately, and (2) US$150k after 12 months, contingent on reaching predefined operating and financial milestones.

Repayment timeline: The target term is 5 years, with an 18-month grace period for both principal and interest.

Revenue share rate and repayment cap: After the grace period, the company pays an initial 3% to a maximum of 9% of revenues (escalating over 3.5 years) until the investor receives a total of 2.3x its original investment.

Conversion option: Convertibility provision allows the investor to convert into equity at its own discretion and at a valuation equal to the higher of 1x TTM sales or 5x TTM EBITDA. At the time of conversion, the investor can only convert the balance of the total obligation still owed calculated at 2.3x the total loan provided, less any loan repayments made up to that date. Conversion is only allowed after an initial 18-month lock up period.

Governance: The investor assumes one Board seat and has veto right over a number of pre-defined “Major Decisions”, including new share issuance, new debt issuance, CAPEX and budget decisions.

Special considerations

Tax considerations: The local tax regime does not have any special treatment for flexible debt schedules, so not a concern for the issuer in this case. For a U.S. lender, “original issue discount” tax implications could be significant given the grace period, variable nature of payments, and lack of”original issue discount” reporting by the company.

More detailed deal rationale and context:

  1. Company has to be close to profitable or already profitable, so that it can service debt at a % of revenue after about 12-18 months.
  2. Margins need to be strong, if investors are to take up to 9% of revenues by year 5.
  3. Company should not have significant prior debt.
  4. Company should not expect to have a large need for additional equity/debt requirements during the term of the investment.
  5. Structure appealed to investor over equity because it would allow the company to grow and thrive over the longer term without needing to be acquired in the short to medium term to provide a liquidity event, for two reasons: (1) It was not obvious that the company would appeal to a strategic buyer within the life of the fund, and (2) The investor was concerned that sale to a strategic buyer could compromise its mission.
  6. The structure also appealed to the company because the founders liked its equity-like alignment of incentives (the faster the company grows, the higher the IRR for the investor), however they got to retain more ownership than they would have under an equity deal and the investor’s returns are capped.
  7. Local business environment: local founders are often comfortable with the idea of building a company for the long-term, with potential generational succession plan. Therefore, the idea that they wouldn’t be acquired in the next 5-7 years was not off-putting.

Case study: Performance Aligned Stock: Tax efficient investor returns from revenue pool

Target IRR: Varies but generally between equity and debt returns

Investment type: Performance Aligned Stock

History:  Ron Boehm is an experienced social investor whose investments include a pool of social investments.  He was seeking an investment model that would provide him the ability to get timely returns without the need for the social entrepreneur to exit by sale or other traditional exit, which are less common in social enterprise.   He viewed debt as too inflexible and inappropriate for many of his potential investments, especially the early stage investments.

Mr Boehm began exploring investment models using returns that were contingent based on the timing of revenues.  These models assigned a percentage of revenues to investor returns. While there were a variety of existing versions of these models, under US tax law they created negative tax considerations as the investments would be subject to 26 CFR 1.1275-4 – Contingent Payment Debt Instruments, and thus require the Noncontingent Bond Method (“NBM”) of accounting.  The NBM accounting method when applied to early stage companies made it likely that investors would have to pay income taxes before they received income from the company as the accounting method requires the investor to recognize yet unrealized income similar to Original Issue Discount bonds.

Mr Boehm and investor Andy Lower joined efforts with John Berger, a social entrepreneur with a background in investment structuring, to create a structure that would allow contingent revenue based payments without  triggering 26 CFR 1.1275-4. They engaged the law firm of Womble Bond Dickinson to implement the new structure.

Key Innovation

Mixture of Redeemable Preferred Stock and Preferred Dividends.   

The returns to the investor using the  Performance Aligned Stock structure are derived from a percentage of company revenues that are allocated to a mix of prefered dividends and redemptions.   When a company issues Performance Aligned shares the company is committing to used a fixed percentage of its revenues to return capital to the investor via a pre-set ratio of dividends and share redemptions.

At the end of each quarter the company

  1. Calculates the Dividend and Redemption Pool (D&R Pool) – typically 2-8% of cash basis revenue.
  2. Uses the Dividend Portion of the D&R Pool to pay a dividend to all remaining shareholders
  3. Uses the Redemption Portion of the Return Pool to redeem shares.

The Dividend and Redemption Portions are pre-set ratios.  Combined they return a set maximum dollar return to the investors by the time all the securities are redeemed.  For example, if the investors are to receive a 300% return by the time all the shares are redeemed, they would set the Dividend Portion at ⅔ and the Redemption Portion at ⅓.   (Note: IRR will be less than the Target Cash Return due to time value of money)

Target Total Cash Return is mathematically related to the redemption ratio.  The REDEMPTION Portion = 100% / Target Total Cash Return%. The Dividend Portion = 1 – (REDEMPTION Portion)

Target Total Cash ReturnREDEMPTIONDividend
150%67%33%
200%50%50%
300%33%67%

The terms should be structured so that for the agreed revenue projections the investor will have all of their shares redeemed within 5-8 years, meeting the investor’s target IRR.

The investor is still taking an equity-like risk because in the event the company revenues grow slower than forecast, the investor’s IRR declines due to the slower pace of redemptions.  However, the investors can convert their unredeemed preferred shares to common shares at any time.

ACCOUNTING/TAX TREATMENT

Investors who purchase Performance Aligned shares issued by a corporation should be able to treat each redemption as a combination of a return of basis and a dividend.  If the issuer has retained earnings greater than the redemption, then par value of the stock is treated as return of basis and the premium is treated as a dividend. If the issuer does not have sufficient retained earnings (which could happen in the early years in some startups) then the par value and redemption premium are both treated as a return of basis.  

Even though the security is a preferred stock, the issuer may need to follow FASB 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”.  This rule requires the issuer to record the security as a liability on their balance sheet.

SAMPLE TERM SHEET

Performance Aligned Stock Term Sheet

Deep Thoughts about Revenue-Based Finance Structures

By Brian Mikulencak, Tax Alchemist

11/16/2017

About a year ago, I perceived a general shift in the impact investing community’s appetite for revenue-based financing structures (“RBFs”), from the “curious interest” that predominated in prior years to an increase in the number of investors that modeled, negotiated, and deployed RBFs for the first time. Nevertheless, many investors continue to approach RBFs with cautious reluctance, but may benefit from a couple of thoughts that I’ve had about the past year.

Revenue-based finance structures are still pretty new.

 Perhaps this is a disclaimer, but most parties in early-stage financing deals still turn to the instruments developed and honed in Silicon Valley: convertible notes, preferred stock, “SAFEs,” etc. As a small percentage of deals, RBFs still lack a significant track record and don’t provide a high level of convergence around particular deal terms. This continues to fuel skepticism and provides inertia against trying new deal structures, such as RBFs.

However, many RBF investors and entrepreneurs are increasingly sharing their experiences (including via impactterms.org), and parties have more sources to make the jump from “strong curiosity” to actual implementation.

Revenue-based financing structures can increase transactions costs (particularly in the short-term). 

RBFs can impose higher transaction costs, particularly legal fees, than their traditional early-stage finance counterparts, largely because parties generally have less experience with negotiating and drafting RBFs and less precedent documents available. However, there’s another important reason:

In traditional early-stage finance, investors almost always acquire a perpetual equity stake, whether by purchasing common stock, preferred stock (that converts into common stock), or convertible notes or SAFEs (that convert into preferred stock, that converts into common stock). In other words, traditional early-stage finance employs several different, well-developed roads that lead to the same place: a perpetual equity stake dependent on someone else to determine the investors’ return. That someone else? The large, strategic buyer that purchases the company or the investment bank that facilitates the company’s IPO.

By contrast, RBF investors must work with the company to determine a repayment schedule that dovetails with the unique features of the company and its business. (This requires that the parties trust each other and understand each other’s business and expectations.) However, once structured, RBFs don’t require another party or transaction to determine the investors’ return. In other words, within the entire finance ecosystem, it’s possible that RBFs result in lower overall transaction costs, once accounting for work avoided, and not merely work deferred.

Financial returns and a little help from the tax laws

While RBFs generally schedule repayment terms, they don’t often fix the investors’ actual internal rate of return (“IRR”), due to the repayment flexibility that results from computing repayments by reference to company revenues. Nevertheless, most RBF investors can target a comfortable range of IRRs based on reasonable expectations of the company’s performance, and safeguard against the possibility of zero-return by providing for revenue-based payments shortly after funding, though often after an initial grace period. (By contrast, most early-stage investment structures don’t provide any protection against the very real possibility of a complete loss of investment.) In one deal, however, we structured to mitigate the risk of lowered IRR in the event company revenues lagged significantly behind expectations, using the tax rules.

The investor targeted complete repayment in about 5 years and trusted the company would be able to make complete repayment. However, the investor had some concern that the company’s revenue estimates were a little too rosy and the IRR would be lowered as a result of repayments stretching into the 7- to 10-year range. Indeed, the investor’s IRR would be much lower on a pre-tax basis, but this provided an opportunity to take advantage of certain tax preferences for long-term corporate stockholders.

The parties agreed to structure the RBF as redeemable stock and to characterize the post-year-5 payments as a redemption of the investor’s stock interest. This may provide the investor a basis to treat those later repayments as purchases of “qualified small business stock,” completely excludable from taxable income. While the investor would have preferred to be repaid prior to year 5, this “consolation” could actually increase the post-tax IRR in the event of deferred payment – at no cost to the company.

Of course, this particular transaction was customized for the parties and the company’s business, but provides an example of creative deal structuring by an investor willing to take that step from “curious interest” to actual implementation.