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Breaking Down the CFEA Terms
In greater detail.
Recently, we’ve gotten a lot of questions on the details of how the terms work. So we’re going to try to break this down for everyone.
Essentially, there are 2 parts - one similar to debt and one similar to convertible equity.
Future Earnings Agreement (loan-like):
Once the investee takes funding from Horizan, they start repaying their Future Earnings Agreement at the rate of minimum 10% if their monthly pre-tax Founder Earnings (money taken from the business account to the personal account) is higher than £2500 a month.
The income is verified by Stepex. By taking funding from Horizan the founder agrees to be transparent about their monthly earnings for as long as the debt remains outstanding (in part or in full).
The debt is considered repaid when the founder has paid back 1.5 times the amount of funding taken from Horizan within 5 years. Example: If Horizan gives a £10,000 CFEA, £15,000 is due in 5 years.
In case this does not happen, the debt is considered repaid after the founder has paid back 2 times the amount of funding taken from Horizan after 5 years. Example: If Horizan gives a £10,000 CFEA, £20,000 is due after 10 years.
SAFE (convertible equity):
The equity side of the investment supersedes the FEA of the investment once the founder raises a Qualifying Round.
A Qualifying Round is the first qualifying round of equity fundraising that raises at least £700,000.
A founder (or together with a VC) can buy out/pay off the FEA early if the fundraise is going exceptionally well or high profits are coming earlier than expected. But since we have Participation rights, we reserve the right to buy more equity at a 20% discount off the current valuation.
As of the date that shares from the Qualifying Round are issued to investors, the investee's debt repayment obligations go to £0, however, they do not get back any amount of debt repaid prior to the Qualifying Round.
At the Qualifying Round, the initial investment made into the company less the amount repaid in FEA will convert at a 20% discount to the valuation at that round. The Qualifying Round Valuation is the post-money valuation at that specific Qualifying Round and is calculated by multiplying the price per share by the total number of shares issued by the company. An example of the conversion is if the Company is valued at £1,000,000 and investors put in £30,000, then, investors will have 3% equity in the Company. But if Horizan was to invest £30,000, our equity stake would be 3.75% with the discount applied.
If the Qualifying Round Valuation is greater than £5,000,000, the Horizan will convert at a valuation of no more than £5,000,000, without any discount.
Hope this answers many of your questions! As always, feel free to ping any of us a message on Linkedin or Twitter if you have more questions.