Loyal invests $10K in cash plus $10K in services (mentoring). You give back $10K in services (reporting) plus $10K in equity. So the net investment is $10K in cash for $10K in equity. In the data contract we ‘give’ you $10K. In the mentoring contract you ‘give’ us $10K in equity.

You should be suspicious of paid mentoring. And legally you can’t just give us shares or a note, there needs to be cash of some sort. So we assign a value to the mentoring to get the shares. (And since the $10K in the data contract is for data services, it can’t also be for equity.)

Investors who pay cash for shares get <40% monthly reporting rate. By paying for data Loyal gets >90% monthly reporting. The whole point of the $10K is to perform diligence for the $200K investment, so reporting is crucial to Loyal. We know if we pay you, you will (generally) report.

If Loyal stops delivering mentoring after three months (for instance), Loyal only keeps 15% of the shares. If Loyal cancels the data contract they don’t have the information to make follow-on investments, which is what Loyal wants ($10K investing is not financially rewarding). Loyal would still have to pay you 50% of the money, because of the forced notice they have to give to cancel the data contract. The contract is designed to give you and Loyal incentives to stay in it.

Actions speak louder than words. Loyal has a 98% acceptance rate to date on their $200K offers, with the entrepreneurs sometimes turning away other people’s money to take Loyal’s.

Consider Vinod Khosla’s famous quote that ‘70-80% of VCs add negative value’. Look first for a fund that will do no harm, not ones that think they have all the answers. And with >900 advisors, and >300 portfolio companies, Loyal has many relationships in virtually all areas.

Loyal only funds companies from FI and INSEAD. You are welcome to speak with people you know in either network. Both networks are tight. If Loyal were a bad actor, you would quickly hear about it. Note that Loyal has a strong incentive to treat everyone well, as a result.

You are welcome to reach out in your own network to do so. You are also welcome to listen to these videos of some Loyal entrepreneurs. Loyal no longer introduces applicants to portfolio companies because the data showed that it wasted portfolio company time. Those who were going to accept anyway did; suspicious ones doubted any reference Loyal introduced.

As you can see from your offer process, Loyal does the amount of diligence appropriate for a $10,000 relationship, then goes on trust from there. They feel it is fair to expect the same back.

Only large investors have power in companies: small investors are almost always powerless. Loyal starts off as a small investor, and gives you a chance to test them out, with you in control. Loyal believes working together is far more informative than references and pitching each other.

Most founders are interested in the advisors, or the follow-on $200,000, not the $10,000. And fundamentally, this is about building up a mutually trusting, loyal relationship. If you find it hard to trust enough to take a relatively tiny risk, with someone sharing a strong network with you, and who cares a lot about their reputation in that network, then maybe Loyal is not a good fit.

As of August 2023 Loyal had made 94 follow-on investments, and 14 at the next stage.

Loyal has a confidential database of >900 advisors that they can screenshare on a video call. It includes senior people, like a board member of a central bank, a top surgeon, top consulting partners and senior executives. And it includes low profile people with deep technical expertise in topics like data security, digital marketing, software architecture or hardware design.

Loyal would prefer to always make $200K follow-on investments. For cash management reasons the fund has sometimes started with as little as $50K as an initial follow-on, with an option to top up the balance within three months. To date, the final amounts after top-up have ranged between $100-200K.

In countries like India and Pakistan, where mentoring payments to a foreign entity incur large tax bills, Loyal has a revised contract structure with lower mentoring payments. Please contact us to request the India/Pakistan contract if you are in one of these countries (only).

Please tell Loyal in a Zoom ‘exit interview’. Loyal wants to design an offer that will work for every entrepreneur. If you have found a good reason not to take it, other entrepreneurs will come up with that same reason, and Loyal needs to modify their offers accordingly. Thank you!

You agree to give Loyal data each month (Clause 1), on a platform they provide (Clause 4) in return for a $1,000 per month payment until $10,000 is reached (Clause 3). If you don’t report, the only penalty is you don’t get paid (Clause 2). Loyal is licensed to use your data for specific purposes (Clause 5), including sharing data with its investors (Clause 6), and must otherwise keep it confidential (Clause 8). You continue to own your data (Clause 7). Either party can terminate the agreement (Clause 9), though Loyal VC must pay you the full $10,000 if they terminate except in specific conditions. If you intentionally lie to Loyal VC penalties apply (Clause 10). Loyal can assign this agreement, as can you with Loyal’s permission (Clause 11).

Metrics are not specified in the Data Agreement, as they will vary from company to company, and change over time. Loyal will agree on metrics with you in the first monthly call after the agreement is signed. Besides asking for standard financial metrics, such as sales, expenses and cash on hand, they will work with you to find the right operational metrics for your business.

Any professional investor will want to review a full due diligence data room on your company before investing, which includes all of the items outlined in this post. Other investors expect you to assemble and share all these materials over a few weeks between offer and closing. Loyal asks you to gradually assemble and share these materials over multiple months.

No. If you make important changes such as updating your cap table, you should update the due diligence materials promptly. Most materials may go many months between updates.

The ‘Loyal Parties’ include Loyal VC LP, Loyal VC GP Inc, Loyal Venture Advisors Inc and any other related parties Kamal Hassan and Michael Kosic have significant roles in.

Strictly speaking, Loyal could withhold payment for that month. This has not been a problem in practice so far. It is in your interest to share information that Loyal asks for, since Loyal having more information reduces the perceived risk of investing in you, and makes it more likely that they will. And Loyal is often flexible in practice: they want to build a strong working relationship.

Since Loyal’s controller only works part time, Loyal makes the $1,000 payments only once a month, typically on the tenth of the following month. If you haven’t been paid by this time, it is typically because: (i) you didn’t submit your monthly report or other agreed paperwork, (ii) you didn’t have your monthly call, or (iii) you didn’t give Loyal your correct banking information.

Loyal’s policy is that on international payments each party pays their own bank fees. Loyal pays all of the bank fees on our side from a transfer, so we pay our bank around $1,020 to send out $1,000. On international transfers your bank will often charge a fee, or will use an intermediary bank who charges a fee, which often means you receive only $980 or so.

No. If you don’t want to share data, the only thing that Loyal can do is withhold payment for that month, as outlined in Clause 2. You can also terminate the agreement per Clause 9.

No, your data can only be used for permitted uses listed in Clause 5a.

As outlined above, Loyal is unable to force you to share data. If you have a good reason to not share something (e.g., a patent not yet filed), then don’t. Your worst consequence is a withheld payment for that month. You are protected from Loyal unreasonably withholding payment, since that damages their reputation in the Founder Institute and INSEAD networks.

Loyal is putting multiple restrictions on what it can do with your data, to protect you. Since Loyal knows that your data is confidential and important to your business, they want to ensure that you are aware of how your data will be used and shared, and this means more language, to describe it in a readable manner that you can understand.

Loyal could eliminate Clause 5 and 6 and just put in a line ‘you give Loyal permission to use all data you share’. That would be much simpler and more reassuring to most founders. And it would also give Loyal far more power, and you far less protection, than this contract does.

You are giving Loyal a very limited license. As outlined in Clause 5a, they are only licensed to use your data to (i) make investment decisions, (ii) do their own analyses, (iii) build investment algorithms, and (iv) to give advice. Many of these are things that benefit you directly.

Loyal is planning to work with subcontractors, for example to develop algorithms to help Loyal do smarter investing. Loyal needs Clause 5b to be able to work with them. Note that Clause 5b refers back to Clause 5a: the data is still only used for the core licensed activities.

If Loyal breaches the agreement and uses your data in a way it agreed it would not, you are able to sue Loyal for breach of contract, and pursue remedies through the applicable courts.

Loyal works with hundreds of companies. This would mean getting hundreds of approvals before the fund could start working with any supplier. This is impractical.

Yes. Loyal is using your data to develop a new investing model that ‘gives entrepreneurs a chance’. You don’t benefit directly. You are indirectly ‘giving it back’ and supporting later entrepreneurs who will benefit from Loyal or other funding. You are also getting paid, and are getting the potential for follow-on funding from Loyal VC LP.

Yes. GDPR is an example of an ‘applicable privacy, data protection’ law that applies per 5b.iv.E.

Competitors are explicitly excluded under Clause 5.b.ii. Additionally Loyal has to notify you of each party who will see your data, under Clause 5.b.iii, so you can identify competitors to Loyal.

No. Clause 5.a.iv explicitly states that any information specific and identifiable to the company is kept confidential. Only Anonymized Data can be shared with any potential competitor. Note that Loyal does work with competing companies, and may use information from one company to inform investment decisions in other companies, without sharing data.

Loyal VC has invested in over 300 companies. That should be a large enough group of portfolio companies that data will not be attributable to any one company.

No. This clause, as written, helps Loyal reduce the risk of being named as co-defendant in a court case where you are at fault. Loyal doesn’t want to be sued for your mistakes.

All confidential data you share with Loyal is covered by Clause 8. Loyal will not be able to share it with other VCs (who are not also LPs in Loyal) without breaching confidentiality.

You should be able to prove that the data was virus-free when you gave it to Loyal, and that the fault must lie on Loyal’s side, not yours.

Any Limited Partner receiving information is bound by confidentiality agreements before data is shared, so they cannot share your data with competitors without breaching confidentiality.

You can always sue either Loyal or the Limited Partner in the Loyal VC fund for breach of contract, or otherwise to protect your interests.

It is good legal practice to limit the term of a confidentiality agreement, to avoid unknown unbounded liabilities. Loyal still intends to keep your data generally confidential thereafter, even though any historical information that Loyal has in its possession will likely not be commercially useful to you after this 3 year period.

Loyal does not anticipate terminating the agreement early. This clause was included for situations where the founder stops working full-time on the business, or there is an intentional misrepresentation made to Loyal with any of the deliverables.

Loyal must make the $1,000 payment for each month in which the company provides the required information, up to the date of early termination.

Loyal is obliged under Clause 5b.iv.A to ensure that Permitted Recipients only use the data for the purposes outlined under 5a. If a Permitted Recipient shares your data freely, then Loyal is in breach of its obligations to you, and risks being sued by you.

Clause 10 will apply only in circumstances where you have made what Loyal believes to be an intentional misrepresentation. In this case, Clause 10 is intended to make Loyal whole by requiring the repayment of funds made in the context of false information. Loyal believes these clauses are reasonable in the circumstances, and the best way to avoid having them apply is to not make any intentional misrepresentations or provide false deliverables.

A mistake, error, typo or an accident would not be considered an ‘intentional misrepresentation’, so Clause 10 would not apply. Loyal is not intending to penalize companies. However it does not want to invest in companies that intentionally provide false information.

No. All amounts mentioned are (in USD and) inclusive of tax.

Loyal may want to reorganize, or even sell the fund, in the future. This clause gives Loyal freedom to be able to do these things - which Loyal feels are good corporate practice to permit, even if they are not forecast - without needing permission from every investee company.

There are three different versions: an Investment and Mentoring Agreement for people who issue shares or convertible debt to Loyal in return for mentoring services a Canadian version of the Investment and Mentoring Agreement that includes HST (tax) a Mentoring Agreement (Warrants Version) for people who issue warrants to Loyal

Loyal offers you monthly mentoring in return for warrants. This removes the payment, reinvestment and payment offset clauses … in return for your signing the multi-page warrant.

This is a standard way to assign advisor or mentoring shares. The advisor gets the benefit of the current valuation, and shares ‘vest’ over time (Clause 6) if the advisor keeps supporting you.

Since they are now a shareholder in your business, Loyal will still be motivated to mentor you even after the two year period is over. After two years, they should do it from self-interest rather than because they are forced to by a contract. And the two year mentoring term in the contract helps make sure Loyal stands by you and supports you, even if your business struggles at first.

Loyal offers you monthly mentoring and access to the global mentor pool for two years (Clause 1), in return for $10,000 (Clause 3), which Loyal agrees to invest into your equity (Clause 4). You can offset the payments and not transfer cash (Clause 5). You agree to attend the mentoring (Clause 2), with no penalty if you do not. If Loyal doesn’t offer mentoring for at least two years you get a proportional amount of the equity back (Clause 6). You can cancel the agreement at any time (Clause 8), and if you cancel, go bankrupt or sell, Loyal keeps their equity (Clause 7). Loyal can assign this agreement, as can you with permission (Clause 9).

No. Cash payments under the separate Data Agreement stop after ten months. Mentoring is under this Mentoring Agreement, which explicitly promises twenty months of mentoring.

Loyal gives you a sales receipt for $10,000 for advance payment of the mentoring service. You can send the $10,000 in cash to Loyal, and have Loyal turn around and send the cash back to you for shares. This can be easier for your accountant. You can also do it via paperwork, without transfers, using Clause 5 and Appendix B. The choice is up to you.

The initial $10,000 payment is a prepayment/deposit for mentoring for 24 months. This is similar to a prepaid subscription. Loyal must offer at least 20 mentoring sessions in this time or you can ask for the money back (this is why we do it as a sales receipt).

The mentoring services are invoiced at $500 per session for up to 20 sessions, until the $10,000 USD prepayment/deposit has been used. No more invoices will be issued after this point even as mentoring continues. This coincides with the vesting of any financial instrument.

Loyal issues an official sales receipt which acknowledges receipt of the $10,000 as a prepayment or deposit for the mentoring services. Because it is a deposit it is fully or partially, refundable if Loyal does not offer mentoring. An invoice is not issued until the service has been rendered. An invoice acknowledges the expense on your side and the income to Loyal.

Yes, both are available on request. Please contact Loyal’s controller at mary@loyal.vc

Loyal sources companies through two communities with very connected networks: Founder Institute and INSEAD. It is easy to confirm Loyal’s bonafides within these communities.

Most investors will find it reasonable that you have issued <1% of your shares to an advisor, especially if that gives you access to >900 advisors for the same price.

The mentoring service is delivered by Loyal Venture Advisors, who are the management company that contract with all of the advisors. They sell the equity to Loyal VC LP in a related party transaction. Your issuing equity directly to Loyal VC LP keeps things simple for you, since you don’t need to issue shares, then turn around and register a change in share ownership.

Loyal still has to offer mentoring, as outlined in Clause 6. If Loyal does not offer this mentoring, then the unused portion of the deposit is forfeit, and Loyal Venture Advisors Inc will compel Loyal VC LP to return a suitable proportion of the warrant, shares or notes.

Yes, you can. And there is no advantage to you to do so, since Loyal keeps the shares.

No. All amounts mentioned are inclusive of tax.

We can use our existing companies and advisors as resources to support you in getting this template. This is why we give you two months after onboarding to issue the document. Note that we only provide the support of our network after the first two contracts have been signed.

You have two months after signing the first two contracts to issue this third contract. This allows us to support you if you need advice in issuing the contract. If you want to proceed, just sign the two contracts we sent, and we can start working together.

Loyal uses a modified version of the Founder Institute warrant, which has over 6 pages and 25 clauses, and gives the holder a number of special rights. Many people prefer to give Loyal common shares or a SAFE, to save on legal work and avoid giving special rights away.

Loyal prefers to take common shares, to keep their interests 100% aligned with the founders. In some cases, a company may find it easier to issue a convertible (or SAFE) note, perhaps because they already have a convertible note or SAFE issued to other investors. That is fine.

If you choose the two transfers approach, issue shares based on the GBP received in your bank. If you use the Appendix B approach, have your accountant use the appropriate rate on the date you officially make the payment to yourself, as instructed in Appendix B.

Loyal VC LP and Loyal do an internal transaction to transfer your shares (or note) between related parties. You are saved extra paperwork by just issuing directly to Loyal VC LP.

The shares or note are tied to the mentoring provided by Loyal. As outlined in Clause 6 of the Investment and Data Agreement, so long as Loyal makes mentoring available for 20 months - whether you use it or not - Loyal VC LP will keep the shares or note. If Loyal does not make mentoring available, Loyal will compel Loyal VC LP to give up a fraction of the shares or note.

Loyal will issue a (typically) $10,000 receipt for the payment you make for mentoring, as outlined in Clause 3 of the Mentoring Agreement. The company is instructed by Loyal to pay the Loyal invoice by issuing the shares or convertible note to Loyal VC LP, a related party. You owe Loyal, and Loyal VC LP owes you an equal amount. You can either use Appendix B, or you can send Loyal cash and have Loyal send it back. The choice is up to you and your accountant.

You can always make an offer to buy back the shares or note from Loyal VC LP. In this case, Loyal VC LP is free to choose to accept the offer or not. Note that there may be specific rules in your company’s shareholder agreement or the note itself that govern these offers.

No. First, Loyal VC never says 'no' to a company, since you are in an ongoing relationship. It only says 'yes' or 'not this month', so it is impossible to ever say Loyal has passed on the deal. Second, Loyal invests mentoring time, and money, in every company: if successful companies can buy them out at (any less than 3-6x) face value, while failures fail, the fund will lose money, and will stop supporting entrepreneurs like you. Third, you can always make an offer: if Loyal hasn’t invested the $200K, it would be rational for them to look carefully at a fair buyout offer.

In very rare cases, there may be a disagreement over the current valuation of the company. If, for instance, you believe your company is worth $10M and Loyal believes it is worth $4M, one simple way to overcome this is to issue a larger mentoring invoice (e.g., $25,000 in this case). This gives Loyal and Loyal VC LP the share percentage they feel is fair (in this case 0.25%) for their support, while allowing you to keep the valuation at the $10M you feel is fair. This is done only in highly exceptional cases (once to date).

Yes, in theory. Loyal structures the contract this way to be sure you give the data. The only thing you need to do - and the only way you get paid - is by sharing data and having a monthly call with Loyal. Considering that Loyal structures the whole contract to get the data, to do follow-on investing with, it wouldn’t make a lot of sense for them to stop paying for it, let alone what that would do to their reputation in the tight INSEAD and FI circles they work in.

As a high-level description, a warrant is a contract that gives the holder the right to buy shares from you in the future at today’s share price. It is similar to an option. Because the holder (in this case Loyal VC LP) still has to pay you (in this case another $10,000) in the future to get the shares, it is cheaper for you than issuing shares today.

Loyal agrees. You can always issue Loyal VC LP an equivalent number of common shares, or a SAFE note or other convertible debenture, instead. Tell Loyal which you prefer.

Loyal VC LP can exercise the warrant whenever they want. While hypothetically they could do that at the time of your next seed round, warrant holders normally wait until you are selling the company to exercise. That’s why the warrant lasts 15 years, to give lots of time for a sale.

You can offer to buy the warrant back from Loyal VC LP at any time. If you meet the conditions and do this under the ‘option to repurchase’ clause (unique to Loyal’s warrant, not FI’s) Loyal VC LP must sell. If you just make an offer, Loyal VC LP is free to accept or decline.

The Loyal VC Warrant is substantially similar to the Founder Institute Warrant that all graduates of FI are required to enter into. This is intentional, to ensure that FI graduates are already familiar with the terms. Loyal uses the same warrant with all companies.

Loyal VC LP uses the same warrant terms as FI, who have had lawyers localize their warrant in each country. Since the amounts involved are so small, it doesn’t make sense for Loyal VC LP to hire local lawyers to review your new terms. You can issue shares or a note instead.

While this is not Loyal VC LP’s intention, in this unlikely case you will only be obligated to provide the limited information required by the Loyal VC Warrant (not the additional information required during the term of Loyal’s Data Agreement).

You may want to speak with your lawyer about scaling the work to be appropriate for the size of the exposure you have in the contract and warrant.

The warrant only asks for simple unaudited quarterly statements. It is good practice for any company to prepare their own internal accounting data within 45 days after the end of a quarter to ensure a proper understanding of the financial performance of the business.

Loyal and Loyal VC LP use the same terms as Founder Institute. According to some studies, it takes 12 years for 90% of startups to exit, so Loyal believes that a term of 15 years is reasonable and aligns the interests of the company and Loyal VC LP in the long-run.

The much more limited reporting in the Loyal VC Warrant would still apply if you canceled the Data Agreement. The limited reporting allows Loyal VC LP to manage its equity in the company.

Loyal uses the same terms as FI. If pro rata rights are exercised it means Loyal is investing more money, which is normally positive from the company’s perspective.

Possibly yes. Loyal uses the same terms as FI. If this concerns you, a good time to address it is when Loyal makes the next investment, when one line can be added to the investment agreement explicitly clarifying that the new shares aren’t covered by the warrant’s pro rata right.

Loyal and Loyal VC LP use the same terms as Founder Institute. If you prefer, you are welcome to issue Loyal VC LP shares or notes as outlined earlier, which dilute normally.

The option to repurchase means that the company is permitted to buy out the Loyal VC Warrant prior to its exercise or expiry, as outlined. Loyal added this term on request of other portfolio companies who wanted the ability to ‘clean up their cap table’ to remove Loyal as a security holder in case Loyal didn’t make further investments. Note that the option applies only to the Loyal Warrant, and may not apply to other investments Loyal may make.

Yes, if Loyal does not make mentoring available to the company for at least 20 out of 24 months, then the warrant face value will be reduced, per Clause 4 of the Mentoring Agreement. Loyal and Loyal VC LP will come to an internal arrangement to make this happen.

No. This transaction is your first step in a long term relationship with Loyal, where you presumably want us to want to keep investing more later. It is also precedent setting for other early investors. Given that the amounts at stake are very small (fractions of a percent), the ‘win’ from a higher valuation can be more than offset by the longer-term impact on later fundraising.

No. These investment banking methods are suitable for established companies, whose forecast financials are a small percentage increase over their current financials. If you are forecasting a very different future than past, that becomes very uncertain. We can’t calculate a company’s value on ‘made up’ financials.

The proper way to calculate your valuation would be as a scenario analysis: for instance, we could say that your company has a 1% chance of being a $100M business, a 9% chance of being a $10M business, and a 90% chance of being worthless, hence a value of $1.9M. The problem is that the scenarios and probabilities are impossible to state accurately today.

An investor who thinks you are unlikely to raise at the cap will value the discount more. (Or if they are in the business of gaining the maximum possible in a bankruptcy of your company they will care about the interest rate more, and will probably ask for a proper convertible note with stronger bankruptcy terms rather than a SAFE note.) An investor who thinks you are likely to do well will value the cap more. Loyal always cares much more about the cap than the discount.

No. This basically tells the investor ‘it would be dumb for you to invest now, hold onto your money and wait for the seed round’. If you do this, the only investors you attract into the SAFE are ones who don’t deeply understand venture capital math. The cap on your SAFE should always be lower than your expected seed round valuation, to reward investors for investing now.

Yes and no. Your valuation should always be linked to your traction. The valuation increase between Loyal’s round and the seed round should be proportional to the traction increase between the two stages. If it is not, then the Loyal round is either undervalued or overvalued.

One standard, and surprisingly effective, rule of thumb is to say that you give up 5-10% of your company in each angel round, and 20-30% of your company in each venture round. So, for instance, if you raise a $100,000 angel round your company should be valued at $1-2M.

If you only expect to have a 15-20% increase in your traction between today and the moment you do your seed round, i.e., you are so close to your seed round that investors are starting to talk to you now, then the discount rate is enough. If not, it isn’t and you need a lower cap.

Typically, people will look at your business and say ‘you have the traction and progress to raise $100K right now, but you don’t have the traction for $1M’. If you ask for too much, you just won’t raise the money, which indirectly says ‘the valuation you were asking for is too high’.

Another rule of thumb is that each full-time founder adds about $500K to the valuation. The view here is that you need to make it worthwhile for a founder to give up two years worth of their salary. Having $500K of shares, or $250,000/yr in uncertain compensation is normally enough.

Based on the rule of thumb above, you’re saying that joining the business full-time, which you haven’t yet, isn’t worth $2M/year in uncertain compensation for you. That says you think there is a very high probability the company would fail - otherwise you would take the $2M/year. So a high valuation combined with being part time is a very negative statement.

Ask your mentor or the angel group how much they will invest at that valuation. It’s easy to advise people of a number when you aren’t the person putting in the money. Often they will say you don’t have enough traction yet for them, which is another way of saying that you aren’t worth $4M today. You need to decrease your valuation by the traction increase needed.

Typically in a large crash valuations in the private market will fall to match those of the public market, i.e., be down roughly 20-30%. Often what happens right after a crash is that entrepreneurs are anchored to pre-Covid valuations, which investors are no longer willing to pay, so the investment market freezes up until entrepreneurs accept the new lower prices.

Yes, in a way. Loyal requires a minimum of 0.1% of the shares of your company to justify providing advisory support from our network of >600 advisors. If your company valuation is >$10M, you would need to issue additional advisory shares to Loyal to bring Loyal’s holding up to the company’s required minimum of 0.1%.

The valuation is discussed verbally between Loyal and the company. If you don’t know what this should be in your case, discuss with Loyal. Once agreed, Loyal asks the company to fill in send us an email to confirm that you agree with the valuation used. You then issue paperwork.