An alternative to ordinary share issue?
Startup Lead Investment Paper (SLIP) is a faster and easier way for early-stage companies to raise capital than through a share issue.
There is a lot to think about as an entrepreneur when raising capital, especially for the first time. By using SLIP, you can postpone some of the issues and still raise capital in a good and predictable way.
A SLIP is a standardized agreement for early-stage financing of start-up companies. It provides a structured framework for the investment process and typically includes key terms and conditions, such as valuation, ownership stake and investor rights.
SLIP is designed to simplify and accelerate the capital raising process for entrepreneurs and investors, and it provides a more efficient and transparent approach compared to IPOs. The deal is best suited when the full team of the startup is not yet in place.
In short, a SLIP allows the company to raise capital in an entrepreneurial way in exchange for giving the investor(s) the right to subscribe for shares in the company at a future date.
The SLIP was created by Stig Nordal after he worked with technology companies in Silicon Valley, and is thus a Norwegian adaptation of the way in which companies are recapitalized. In the US, KISS (Keep It Simple Stupid) or SAFE (Simple Agreement for Future Equity) is often used to solve the same problems.
An early-stage start-up is often worth very little in terms of intrinsic value. You might just have a good vision and a solid plan - and thus a high potential. To succeed, entrepreneurs need both ownership and (a lot of) capital to create real value.
The first investors thus give the company "runway" (the period of time the company has before it runs out of capital) in the hope of creating value until the first traditional capital increase, where the value of the company is set, and which also applies to the SLIP investors.
If a traditional recapitalization process is followed, the "paper value" of a company will increase as a result of the issue/recapitalization.
In order to incentivize co-founders and the core team with shares after a capital increase, they will either have to invest significant amounts or buy the shares at a discounted price and pay benefit taxation. For most people, this will represent a higher price and risk than they are willing to take, making it difficult to get them on board.
If you have raised money using SLIP, co-founders will be able to buy in at a much lower price, often as a share of the company's start-up capital. This often makes the risk manageable.
This removes a "chicken or the egg problem" where the company on the one hand does not have the money to bring in good people, or the company's valuation is too high to properly incentivize co-founders.
When you carry out an ordinary share issue, there is a lot of paperwork and formalities to be completed. You have to hold a general meeting and issue shares - everything must be submitted and registered with the Brønnøysund Register Office. It can be nice to avoid this work when the company consists of a small number of employees with more than enough to do.
To reduce the administrative work involved in an issue, it is common practice to gather a number of investors before the formal work of holding a general meeting and passing a resolution. If issues are delayed, there is a risk that the first investors will withdraw before the money has been transferred, whether due to internal reprioritization, macroeconomic or geopolitical changes.
Not all investors have experience with the use of SLIPs and may therefore be skeptical about this way of investing.
It is important to understand the terms of the SLIP agreement and the consequences these have whether the company's value performance is good or bad.
Often, investors can demand a discount on the pricing of the company at conversion or an upper limit is set for the valuation of the company ("valuation cap") - sometimes both are used at the same time. These mechanisms protect investors from some of the potential downside and reward them for the high risk they take by investing early in the company. If an upper limit is used, this effectively sets the proportion of ownership after money ("post-money").
Simplified example: If you invest NOK 1,000,000 with a valuation cap of NOK 10,000,000, you will be left with 10% ownership after the issue.
If you have several SLIPs, convertible loans, options and warrants in play at the same time, it is important to calculate the dilution in the right way and in the right order so that everyone is left with the correct number of shares according to the agreements. The Unlisted Ownership Portal calculates this and helps you keep track.
Get in touch if you need help with emission and dilution issues.
Our recommendation is that all early-stage companies planning to raise capital should take SLIP into account when planning to raise capital.
We at Unlisted help entrepreneurs succeed with company building from a business perspective, lawyers and accountants also have important perspectives to add in connection with the use of SLIP and complex capital increases.
Article about SLIP in ShifterCF_200D↩
https://www.shifter.no/nyheter/viktig-melding-til-grndere-nar-de-skal-hente-kapital-for-forste-gang-utsett-verdivurderingen/123853
Note from SANDS describing SLIPCF_200D↩
https://docs.google.com/document/d/19ipwMHcpKudr9oGfcfCMm_Wa3DLQmWdw/edit
SLIP agreement document at Startup LabCF_200D↩
https://docs.google.com/document/d/1tMrQFrzwV25EcfhwpFu0bLLZ296yO-CF/edit
