Investor Offer Without Collateral and at a Low Pre-Money Valuation: How to Structure the Deal

1) Principle: Trade “Cost of Capital” for “Risk Manageability”

When there is no collateral and the pre-money valuation is below the round requirement, investors typically ask three questions:

1. How do you cap the downside (i.e., scenario of capital loss for the investor)?
2. How do you accelerate hypothesis testing?
3. How will I see risk decline as tranches are released?

The answer is structure — not verbal IRR promises. Structure defines (i) when and on what terms money arrives (tranches), (ii) how risks are limited (covenants and preferences), and (iii) which transparency and influence rights are granted (reporting and reserved matters).

2) Key Terms

• Pre-money — company valuation before the round; used to calculate equity sold.
• Tranche — a portion of the round released upon meeting agreed milestones.
• Covenants — binding restrictions/obligations that reduce risk (e.g., no new debt without investor consent).
• Liquidation preference 1× (non-participating) — on exit/liquidation, the investor first recovers 1× invested; any residual is split among shareholders with no additional investor participation.
• Discount/Cap (convertible) — discount to the next round price / valuation cap at which the note converts (early investor protection).
• Reserved matters — list of corporate actions requiring investor consent (new share issues, debt > X, M&A, etc.).
• Convertible with coupon — a note paying interest (e.g., 6–8% p.a.) until conversion; the coupon stops after conversion.

3) The Offer Framework: 7 Blocks Investors Scan First

Block 1: Instrument & Key Term Ranges

Select one primary instrument aligned with stage and investor profile:

• Equity. Pre-money range and target stake to be placed. Guidepost: for SaaS at the growth stage, 6–12× ARR is commonly discussed — not a promise, but a negotiation range.
• Convertible. Discount/cap range, term, early conversion rights. Guidepost: discount 10–25%; cap aligned with peers.
• Revenue share / coupon until conversion — if interim cash yield is required before milestones.

Show ranges, not a single point — it signals flexibility and reduces unproductive back-and-forth.

Block 2: Tranches and Milestones

You are not “inflating IRR” — you are de-risking capital deployment.

• Split the round into 2–3 tranches.
• Tie each tranche to 1–2 verifiable milestones (metric/date/artifact).
• Avoid vagueness: “successful launch” is weak; “MRR ≥ €60k, churn ≤ 2% by Month 7” is strong.
• For hardware/regulated businesses: certification, TRL, COGS targets, letters of intent/purchase orders.

Block 3: Covenants (Soft and Hard)

Baseline expectations:

• Debt: no new borrowings > €X without investor consent.
• Dividends: none until metric Y is achieved.
• Transactions: consent for M&A and major contracts/leases > €X.
• Reporting: monthly KPIs and financials; view-only dashboard access.

Keep 3–5 material covenants; 8–12 “just in case” items slow down and jeopardize the deal.

Block 4: Preferences and Investor Rights

• Liquidation preference 1× (non-participating) — the standard “soft” preference.
• Pro-rata rights — ability to participate in the next round on the same terms.
• Reserved matters — concise consent list for key corporate actions.

Block 5: Transparency and Operating Control

• Reporting rhythm: monthly KPIs (MRR/ARR, churn, burn, funnel conversions); quarterly P&L and cash flow.
• Meeting cadence: monthly KPI review (30–45 minutes).
• Data room: checklist-based document set prepared in advance.

Block 6: Founder’s Skin in the Game

• What has already been invested (cash/time/assets).
• Forward commitment: “additional €X by Date Y” or reduced compensation until milestones are met.

Block 7: Process and Timing

• “Intro → call → data room → Q&A → term sheet → due diligence → closing”.
• Time targets: “Term sheet by DD.MM, closing by DD.MM”.

IRR linkage. IRR follows structure and execution: tranches, controls, metrics ↓ risk → reasonable return corridor. Verbal promises without structure erode trust.

4) Investor Control Rights (No Collateral, Low Pre-Money)

• Observer — board observer with access to information/discussions, no voting rights; a “light” control setup suited to earlier stages.
• Board seat — voting director seat, typically with larger checks/lead investor.
• Reserved matters / veto list: new share issues (except planned ESOP), new debt > €X, M&A/asset disposals, changes in control.
• Cadence and format: scheduled board meetings (e.g., quarterly), quorum, materials circulated in advance.

5) Three Typical Configurations (When to Use)

Configuration A. Convertible with Tranches (Pre-Seed/Seed, Fast Sprints)

When: limited assets, metrics ramping quickly.

Skeleton:

• Instrument: convertible note with 15–20% discount or €7–9m cap, 24–36-month term, early conversion at the next round.
• Tranches: 40% → 40% → 20% of proceeds.
• Milestones: T1 — “3 paid pilots by M3”; T2 — “MRR ≥ €60k, churn ≤ 2% by M7”; T3 — “MRR ≥ €100k by M12”.
• Covenants: no new debt > €100k; no dividends; monthly reporting.
• Rights: liquidation preference 1× (if liquidation occurs pre-conversion), pro-rata.
• Communication: monthly KPI review; dashboard access.

Works if: (i) credible GTM team, (ii) 1–2 paid pilots/references, (iii) investor pack ready (deck, model, data room).

Configuration B. Equity with Soft Preferences (Late Seed / Series A)

When: revenue and unit economics exist; no collateral.

Skeleton:

• Instrument: equity, pre-money range; 10–20% stake to be placed.
• Preference: liquidation preference 1× non-participating; pro-rata.
• Tranches: 60% / 40% (second tranche tied to growth and unit economics).
• Covenants: consent for long-term contracts/leases > €X; hiring limits for C-level without consent; no sale of key assets.
• Reserved matters: new shares (except ESOP), new debt > €X, M&A.
• Skin in the game: founder cash commitment/reduced comp until Mx.

Works if: (i) positive founder reputation, (ii) revenue/cohort history, (iii) transparent cap table.

Configuration C. Hybrid: Coupon to Milestones + Convertible (Hardware/Infrastructure)

When: a “bridge” is needed to validate hardware/logistics.

Skeleton:

• Instrument: convertible with a modest coupon (e.g., 6–8% p.a.) until conversion; discount/cap similar to A.
• Tranches: aligned to manufacturing/certification stages (e.g., CE/FCC, testing, pre-orders).
• Security: pledge of equipment/purchase orders (where practical).
• Covenants: no milestone shifts or product configuration changes without consent.

Works if: (i) engineering team with relevant certifications, (ii) realistic certification roadmap, (iii) LOIs/letters of interest from early customers.

In practice, the outcome hinges on calibrating structure to the investor’s risk profile: instrument → tranches → covenants → rights. This is exactly how we assemble offers in live transactions.

6) Before/After: How Your Odds Improve

Before. “We need €1.1m. No collateral. Valuation €8m. Happy to discuss on a call.”

After.

• Instrument: convertible with 15–20% discount or €8–9m cap, 36-month term, early conversion at the next round.
• Tranches/milestones: €400k → “3 paid pilots by M3”; €400k → “MRR ≥ €60k, churn ≤ 2% by M7”; €300k → “MRR ≥ €100k by M12”.
• Covenants: no new debt > €100k; no dividends; monthly reporting + dashboard access.
• Rights: liquidation preference 1×, pro-rata, reserved matters (new shares, debt > €100k, M&A).
• Skin in the game: “€220k already invested; +€50k within 60 days after T1”.
• Process/timing: term sheet by 15.10, closing by 30.11.

Why it works: the investor sees managed risk and a roadmap — not a request to “believe”. Even without collateral.

7) Jurisdiction and Documentation (Minimum Viable Reality)

• Entity form and governing law (charter/constitutional documents).
• Cap table, ESOP plan.
• Key contracts (customers/suppliers/leases).
• IP: ownership/registration/assignment.
• Financial statements (simplified are acceptable at early stages).
• Privacy/compliance policies where relevant.
• Draft term sheet, investor deck, financial model, data room.

8) Monthly Reporting: Exactly What to Show

1. Revenue/subscriptions: MRR/ARR, MoM growth, churn (gross/net).
2. Unit economics: CAC, LTV, LTV/CAC, gross margin.
3. Sales funnel: leads → demos → closed-won (stage conversions).
4. Finance: concise P&L, cash flow, burn.
5. Milestones: tranche status, lag/over-performance, corrective actions.
6. Risks: top-3 risks of the month and mitigation plan.

Format: one dashboard page + one commentary page.

9) Common Mistakes — And How to Avoid Them

• Mistake: “We’ll promise a high IRR and that will fix it.” Reality: IRR emerges from structure and execution — it does not replace them.
• Mistake: 8–12 covenants “just in case.” Fix: keep 3–5 material items; move the rest into reserved matters.
• Mistake: vague milestones (“launch,” “partnership”). Fix: anchor to numbers/dates and artifacts (contract, certificate, amount).
• Mistake: hiding weak spots until due diligence. Fix: state risks and mitigation — it builds credibility.

10) Red Flags for Investors

• Participating preference > 1× at early stages without strong rationale.
• Cap far below a sensible market range, coupled with hard covenants.
• No pro-rata rights while demanding enhanced control.

11) Short Offer Template (Copy and Adapt)

Disclaimer

In non-standard cases, offer parameters must be tailored to the investor’s risk profile and jurisdiction. In practice, 1–2 working sessions are usually sufficient to turn a set of ideas into a functional term sheet.

All ranges are indicative, not commitments. The final structure depends on stage, asset quality, jurisdiction, and investor profile; discuss specifics in the term sheet.