3 Potential Investment Outcomes for Chisos
Here are 3 different potential outcome scenarios for a Chisos investment, and see if we're right for your portfolio.
4 min.
You've probably heard about Income Share Agreements, or ISAs, in the education space as an alternative to student loans. But what about ISAs for entrepreneurs? There are plenty of benefits of income share agreements.
In this article, you'll learn the 9 most important pros of ISAs for founders, and 4 cons, too.
An ISA is a financial agreement where a capital provider offers something of value (like cash or education) in exchange for a percentage of future income.
New to the concept of ISAs? Learn what income share agreements are and how ISAs work.
At Chisos, our first innovation was to modify ISAs to fit the needs of entrepreneurs and those who invest in them.
We call this approach a Convertible Income Share Agreement, or CISA. With the CISA, we write checks of $15-50K to idea- and early-stage founders.
We won’t spend much time at all on how the CISA works, but in a nutshell, it combines:
(Watch this explainer video to learn how the CISA works and explore benefits for founders. For a deeper dive, download the Ultimate Guide to CISAs here!)
ISAs are flexible forms of capital designed for situations that traditional forms of financing aren’t built to handle.
Here are 13 common pros and cons of Income Share Agreements for entrepreneurs:
Of all the benefits of income share agreements for entrepreneurs, the biggest one is that they're an option when others aren’t available. At the earliest stage of starting a business, most banks will perceive you as too risky to offer a loan. And less than 2% of startups are funded by VCs or angel investors. If you’re non-white and non-male, your chances of securing VC funding dip even further.
The few remaining options - personal savings, a high-interest credit card, and cash from wealthy connections - aren’t accessible to many founders.
We think ISAs are a great option for startup funding, but they’re particularly valuable when other good options don't exist.
"Among 4,475 companies that received venture capital funding in the past five years, the typical founding team was a two-person, all-male, all-white U.S. university-educated team residing in Silicon Valley."
- GrowWire, 2020
One of the main benefits of income share agreements is that you can access capital quickly.
To secure a VC investment, you'll need to spend hours building pitch decks, messaging with VCs, prepping for meetings, and negotiating agreements.
On the other hand, you can simply apply for a CISA from Chisos online. Once approved, you'll get a check and can start building your business your way.
ISAs are distinctly different from traditional debt, such as small business loans or high-interest credit cards. For debt-averse founders, this is a big benefit.
Traditional debt includes an interest rate, which is typically based on credit score. On the other hand, ISAs take a different approach to interest, and usually look at credit score in combination with lots of other factors.
For example, unlike traditional debt-based financing, the CISA doesn’t charge compound interest.
Many income share agreements offer flexibility in how and when you repay the ISA, unlike traditional bank loans. For example, Chisos offers $0 payment periods for those times of hardship when your income is impacted. (We often call these deferment periods.)
Most, if not all, ISAs also include a salary floor. That means that if and when your salary ever drops below a certain amount, you won’t owe any payments for that time. For Chisos, that salary floor is $40K.
We know that a lot of founders ultimately leave their full-time job to focus on their startup. If and when you decide to take that step, your CISA agreement shouldn't be a burden.
We created the CISA payments to fit your life - instead of the other way around.
Income Share Agreements are based on the idea that you'll pay back a percentage of your income to the ISA provider. This percentage, referred to as an Income Share Rate, is designed to be low enough to be affordable.
Since this Income Share Rate is a percentage of your income, it scales to fit your financial situation. With an ISA, the amount you owe might change based on how much you’re earning or how quickly you pay it off.
Most ISAs are tailored in one way or another to the industry or career path of the people they're built for. For example, one popular ISA program for nursing school students doesn’t charge any interest at all.
We built our CISA for startup founders. If you raise more than $3M in funding, your repayment cap drops to 1X.
One of the main benefits of ISAs is that they align your interests with the ISA provider. To be blunt, ISA providers make more money when their ISA recipients succeed financially. That means that most ISA providers offer support. Education-focused ISA providers may offer career coaching or recruiting connections.
Our entrepreneur-focused CISA includes access to a community of other founders, resources, and access to startup advisors.
When you accept VC funding, you also accept that other parties have the ability to weigh in on how you run your business. That doesn't happen with an ISA.
With a CISA, you'll retain your rights to make any and all decisions about how to launch and scale your company.
ISAs are a great alternative to traditional fundraising efforts, particularly in the earliest stages of growth. If your business is pre-product and pre-traction, you'll have a really hard time finding anyone willing to invest.
That said, here are a few potential drawbacks to consider:
Most ISAs survive even if your career plans change. For example, say you get an ISA to start your business. If after a few months, you decide not to pursue the idea, you'll need to continue making ISA payments.
Along those lines, an ISA is not designed to prove or test the viability of a business idea. ISA providers want to extend capital to people who are going to be financially successful - that's how they make a profit. But an ISA is not going to help you "fail fast."
Again, most ISA payments are a percentage of your income. If you're earning more money during your repayment period, you'll end up paying more back.
However, you’ll never pay more than the repayment cap. At Chisos, our repayment cap is 2.0x.
There’s no universal standard - or even common guidelines - for how an income share agreement should be structured. That means you’ll need to read the fine print to make sure the ISA doesn’t include any hidden clauses or requirements.
You wouldn't take out a bank loan or bring on an investor without reading the agreement carefully. The same rule applies for an Income Share Agreement.
Since ISAs are new, there isn’t much regulation that governs how and when they can be extended or serviced by the ISA provider. Small business loans, on the other hand, are highly regulated.
While there are benefits to reduced regulation, some individuals may prefer to have a little more legal clarity.
Ready to apply for our CISA? Start your application here!
Have questions or comments? We’re here to help!
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