Unconventional ownership

Blackthorn never raised a conventional VC round. I believe this is because we had no original focus and a bit because we required customers be using Salesforce. It was 2018 when I tried to raise VC as part of the LAUNCH Accelerator, pitching 100 investors in-person, who all said no. So I ended up financing the business unconventionally.

Many founders give me kudos for bootstrapping, but this wasn't on purpose. I wish we had more money along the way. But now, 8 years from inception, employees and I hold more ownership of the company than usual. Myself + employees own 78% of the company. We have no board. I'm often asked by founders how Blackthorn was structured and financed, so here we go.

Interesting how none of this has to do with engineering software, but rather keeping the team alive.

1. 2015: Authorized 10M shares as a Delaware C-Corp. Three classes of shares. Preferred, Class A, and Class B.
2. We issued ~4.5M shares of Class A to the cofounders. 15% allocation for employee options.
3. From 2015 through 2017, we issued options to employees. Anywhere from 10,000 to 50,000 at a time, depending upon the role and multiple grants for objective output. The options were structured as a one year cliff, 25% vest per year, for 4 years. So on day 366, they vested 25%, day 731, another 25%, etc. ISO for W2 US employees, NSO for contractors or international employees. We did not allow for exercising pre-vesting. The business was funded primarily through services projects.
4. In early 2018, I bought out the only other shareholder, my cofounder.
5. In mid 2018, a family member and a friend gave us $150K, which totaled 5.8%. We were at $300K ARR and the funds were raised at a $3M valuation. (Their shares are worth millions today on paper. I've already paid their principal back in a share buyback early last year. They're happy.)
6. I went through the LAUNCH Accelerator in September 2018. They gave us $100K for 6% of the company in a convertible note.
7. During this period, I asked employees to take voluntary pay cuts. Of our team of 7, 4 of them took cuts (we paid them back eventually). I gave everyone more options and begged them to stay. They didn't know how dire the situation was, (at one point we were down to $7k in the bank account), but they did know things were very tight. (Over the course of the company, three times we've asked employees to withhold comp. I think one time an employee left out of uncertainty, but that's the only outlier situation I recall.)
8. In early 2020, we needed cash and employees wanted to buy more shares than their granted options. So we did an employee stock purchase round and they bought $180K of Class B shares. At exit maybe we’d have gotten around 10x, so the purchase was set at ~8x, when we were around 2M ARR. It was a big risk for them, as we weren't exactly a thriving company. In 2025, those shares will have exceeded the 5 year threshold, eligible for QSBS (Qualified Small Business Stock) tax treatment, where the first $10M of exit proceeds will be tax free to them, provided when the company sells we have less than $50M in assets. (That $180K today is worth millions on paper. I advised them that you have to be willing to lose it all, so only put in what you want. Multiple people had their families contribute through them. Each person who bought shares is still at Blackthorn today.)
9. At some point the employee option pool ran out, so we issued more options into the pool. I think this happened twice, around 100,000 each time.
10. We never raised a 'qualified financing over $1M' per the LAUNCH convertible note's conversion definition, so the note never converted. I asked Jason to convert the note, which converted into ~6.3%.
11. We accelerated growth of the company through Capchase, starting in April of 2021. We got up to $2M of debt.
12. I bought two companies in 2021, with the second, Textey, having a $1.2M down-payment. Capchase funded this amount for us. So our Capchase debt was around $3.5M (including interest), of which they extended to a three year payback for us (a bit more interest). This worked out well for both parties.
13. In early 2022, we raised $927k through an AngelList-hosted angel round. $75M pre-money on a SAFE, 20% discount. We were going to be at $9M ARR within a month. Approximately an 8.3x multiple. Preferred shares. 1x liquidation preference.
14. At this time, we also did a few smaller loans with a friend.
15. In mid-2022, we changed our vesting to be a 1 year cliff, 1/36 thereafter (monthly vesting over three years).
16. In mid-2022, I asked 55 growth VCs, who all previously emailed me to write us a big check, if they'd do a mostly-secondary round and some primary, without a board seat. Every one said no, except one, of whom gave us a 7x valuation for a bigger check than I wanted. It meant I'd sell more of the company than I think our future valuation and growth would support, so I said no.
17. I then sought out a traditional debt facility. Level Structured Capital and RF-Partners wrote us a $10M check on a $14M facility, when we were around $8.5M ARR. We paid off the remainder of the Textey payments, closing fees, and had to keep a minimum bank balance. So of $10M, we only ended up with maybe $2.5M of growth investment we could use. We used the funds to hire mostly engineers as we needed more velocity and management. This cost us some warrant points, an 'exit/royalty fee', and some closing fees. But it both helped the business grow quicker and afford our debt with room. We later had the facility raised to $18M. We can draw on the facility based upon some covenants, one of which is our ARR growth.
18. Earlier in 2023, we did another angel round of about $400K, same terms as before, just a higher valuation as our ARR had grown. Class A on a SAFE with a 20% discount, around an 8x. Even though we can get a 10x+ at exit, I've aimed to give lower valuations to angels as the funding amount is lower, they're not taking a board seat, the process is pretty painless, and I know most of them. They also act as advisors, available for me to email them with questions whenever one arises. Most are exited founders I've met along the way.
19. We're still not EBITDA positive, but will be in the April timeframe. The last two months were cash flow positive. We've used the debt facilities to fuel growth and hire ahead of revenue, achieving the same general concept as raising VC, just without having to form a board. This allows us to control the decision making of the business, though we do have to pay off the debt in a few years. All of the ancillary debt will be paid off in late 2024, leaving only interest payments on the main facility, while our EBITDA grows.
20. To pay off the debt when it matures in 2026, we can do a VC round, pay off some of it with cash flow, get a senior lender's line of credit, restructure some of the debt, or more than likely, do a combination of all of these. Our ARR at that point should be north of $30M generating 10%+ EBITDA, which is a business model that many senior lenders are keen to get exposure to.

Hope this helps any entrepreneurs with your creative thinking on how to fund a business if you can't get VC! Email me if you have any questions, always happy to tell you what we did wrong! [email protected]

-Chris