The FLEX Note is one of our imaginary new Instruments which makes sense in theory but we’ve never tried in practice. It’s based on a simple observation:

There’s only one way to fire your investors: buybacks.

FLEX Notes allow Visionary ventures playing The Sovereignty Game to buy back their equity-style investors, without taking equity or real debt. This assumes that there’s a natural place in the capital stack between equity and debt, and that there’s at least one investor crazy enough to own a security in that zone of the risk spectrum.

That’s obviously a great deal for founders. Why would anyone want to take equity-style risk without unlimited upside? The answer: once companies playing The Sovereignty Game achieve Escape Velocity, they become very easy to underwrite - they’re profitable at scale with a defensible business model, so they no longer carry venture-style downside risk. But the capital markets only serve these companies with two bad options: controlling equity seeking unlimited upside rents or cumbersome debt from debt providers who have no idea how to underwrite & price this risk.

Berkshire Hathaway in its legendary decades achieved 27% IRR. If we can predictably average that across our portfolio, we are happy to be bought back!

The FLEX Note

What makes the FLEX Note so disruptive?

A FLEX Note is a new convertible note standard designed to be a win-win-win for companies, existing investors and for the FLEX investor.

For companies, it provides flexibility: it can be used as covenant-light, long-term, zero interest rate debt that can be bought back and refinanced at any time, or it can be used as frictionless bridge capital between rounds, postponing the need to do another legally expensive priced round that changes board and preferred investor control dynamics.

For existing investors, it provides liquidity: if the company isn't ready to IPO, sell or buy back investors, and investors want liquidity, the FLEX investor will be able to exercise its Secondary ROFR to provide liquidity, which also benefits companies by consolidating the cap table and relieving exit pressure.

For the FLEX investor, it provides differentiation and returns: Even if bought back, we receive target returns. If existing investors sell, we buy up the cap table. If we aren't converted, we skip on dilution. If we are converted, we got into a great company at a great price off-cycle.

Whereas no bank, debt-fund or VC fund would provide money at these terms, but almost all private companies across stages would take money at these terms. Banks offering senior debt are covenant-heavy, charge interest and offer medium term capital. Banks that provide venture debt are followers and don't invest off-cycle. Debt funds don't want to convert into equity or buy up cap tables. VC funds want control and don't want to be bought out. But all private companies want... flexibility! Hence the arbitrage.

This also allows for off-cycle investment: there's no need to wait for the next priced round, or to negotiate for allocation in competitive deals. Because of the win-win-win design, this positions the FLEX investor as a long-term capital partner to both the company and the existing investors, instead of creating an oppositional dynamic with existing investors (eg. Tiger).

Compoundingly yours,

Visionary

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