Standardizing self-funded search investor terms

investor profile

September 19, 2024

by an investor in Austin, TX, USA

If you’re a self-funded search investor, you might be interested in participating in an initiative that a few dozen of us other self-funded investors are working on.

By way of background, I manage Main Street Capital Network, a group of over 100 SMB equity investors (individuals, family offices, and funds). We review pitches from a couple of searchers or independent sponsors each month.

A recent initiative of our group has been to work on a standard set of terms that self-funded deals can work off of (much like how angel investing has the SAFE note, which is a free, publicly available legal document for structuring seed investments that founders and investors both work off because they agree it's fair).

The capital raising process would be much simpler if there were a free, fair, and publicly available term sheet for self-funded preferred equity (that investors and searchers both thought was fair). Investors wouldn't have to worry whether key economic terms (preferred return, waterfall, etc.) and governance terms (limits on related-party transactions, tag-along rights, etc.) would be included in the deal. The focus is on a structure with blanks as opposed to actual numbers (e.g., "preferred return of [ ]%" as opposed to "preferred return of 10%").

We want to involve as many investors (and eventually searchers) as possible to produce a document that is considered truly fair and comprehensive.

Current Draft

The current draft of our work is in a Google Doc here: Term Sheet: Self-Funded Search Preferred Equity.

Next Steps

If you’d like to be kept in the loop on this process, please DM me your email or contact me at redacted redacted you have any opinions or questions about the above term sheet, please reply to this post or email me directly. We want as much investor input as possible!

About Us

At Main Street Capital Network, we review pitches from a couple of searchers or independent sponsors each month. If you’re an accredited investor interested in joining us to look at deals, please fill out this investor form. Also, if you have any questions about the group, please feel free to DM me here or email me at redacted target="_blank" style="background-color: rgb(255, 255, redacted

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commentor profile
Reply by a searcher
from Indiana University, Bloomington/Indianapolis in Chicago, IL, USA
Agreed here that standardization runs a bit counter to the spirit of why self-funded searchers embark upon this path in the first place. I've been an investor for the last 15 years across the spectrum: in self-funded searchers, dozens of pre-seed through series D investments, and also traditional buyouts for $bn+ PE fund. From those experiences - and having experience with market terms for equity investors - I think there are a number of items in the draft template that will potentially be considered non-starters for any sophisticated searcher who understands investing norms and has experience doing buyouts. Having said that, I do like the idea of creating a template and having standard deal categories for addressing positions (I believe the substance of those positions should remain flexible and a function of the deal, the searcher, and the opportunity!).
commentor profile
Reply by a searcher
from Dartmouth College in Hanover, NH, USA
I understand some of the skepticism but as Michael pointed out - the standardization would be much the same way that Y Combinator has effectively standardized SAFEs for venture investments. As someone who has raised venture (in priced rounds and SAFEs) - that standardization saved me an enormous amount of headache and high 5-figures in legal fees.

Furthermore - adoption of the YC standard has led to broader adoption of more entrepreneur friendly terms in the VC world. I'd hope that this could be done here.
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