Introducing the SLIP: Norwegian Startup’s Lead Investment Paper
Since we first started investing in Norwegian startups in 2013, we’ve been fully committed to being the most founder-friendly partner of ambitious founders building companies from Norway. Today, together with our legal partner SANDS, we are very happy to announce our newest contribution to this work; the SLIP-agreement.
Before we go into what a SLIP is, some context: When Norwegian startups raise money for the first time, some issues continuously occur:
- It’s difficult to set a fair valuation when companies are young
- It’s difficult to properly incentivize the core team in young startups
- It’s more time consuming than it should be
To elaborate a bit on these issues:
It is difficult to set a fair valuation when companies are young. On the one hand, startups are worth next to nothing when they start up. On the other hand, the founders need both ownership and a significant investment to turn the startup into something other than nothing.
Most startup investors (including us) accept that valuations in early stage don’t reflect the current intrinsic value of the companies, rather, early-stage startup valuations are typically more a result of how much money a company needs and how much equity it’s fair to give away for 12–18 months of runway.
It’s difficult to properly incentivize the core team in young startups. Once these paper-valuations are in place, a startup’s ability to incentivize new team members is dramatically reduced. A quick example:
Before taking an investment, most Norwegian startups are valued at 30 000 NOK. Say you bring in another co-founder and give her 20% of the company, she has to pay 30k*20%=6 000NOK to acquire the shares.
But if the company has received an investment of 1MNOK for 10% of the company; the startup’s paper valuation is 10MNOK. Meaning the same co-founder has to pay 10M*20% = 2MNOK to acquire the shares.
While most have 6000NOK in savings, very few have millions to invest. Meaning that startups with external financing suddenly have a very hard time incentivizing the first people joining their team. And without the right incentives, the chances of succeeding are reduced (ask every economist).
For others, this situation puts them in a catch-22 where you either don’t have the resources to bring in co-founders, or you have the resources but are then unable to incentivize people enough to be able to call them co-founders. The result being that fewer (potentially impactful) companies are founded. Also, not good.
It’s more time consuming than it should be. Bringing in the first money through an equity round involves more work. You need to hold a general assembly, you need to issue shares, and you need to register all of this in Brønnøysund. And if you forget to do it, you get to do another round of paperwork. Then you need to get every shareholder to agree on a shareholder agreement, which is not always a trivial task either. All important actions, but in our view something you can postpone until you have some more substance in your company.
To summarize these first paragraphs: some early equity financings prevent startups from building the foundation they need to become impactful companies. This is an unnecessary challenge, and why we in collaboration with SANDS have developed the SLIP; Startup’s Lead Investment Paper*.
So, what is the SLIP? The SLIP is an equity-instrument for young Norwegian startups looking to raise their first (read:lead**) round of funding, where the core team is not yet fully in place. It is developed specifically to tackle the issues addressed a few paragraphs ago, and it allows founders to bring in investments early on in a better way.
Apart from being an equity-instrument, the SLIP shares many similarities with convertible loans in that it’s simple and fairly uncomplicated. You enter into a separate SLIP with each investor, meaning a less complicated process, and you agree on a shareholder agreement when you subscribe for shares in the future. Less time fundraising means more time building company.
Another way of looking at it is that the SLIP is a warrant for a to-be-decided-in-the-future number of shares. The parties have to agree on a valuation cap and/or a discount — which is seen up against a future equity financing round — where the company has more to show for, and it’s easier to establish a fair and right valuation.
So — as of today we are sharing the SLIP-template with everyone through startuplab.no/documents, alongside a memorandum explaining in detail how to treat any SLIP investments from an accounting perspective. Obviously, we will continue to update it going forward, and very much welcome feedback and questions (for all of that, shoot us an email at email@example.com). And while you already knew this; remember to talk to a lawyer, we recommend the tech-team at SANDS led by firstname.lastname@example.org, before you use any template or sign any legal documents.
With the introduction of the SLIP, we hope more companies will be founded with better incentives amongst the founding team. This in turn should lead to better and more impactful companies, which is something we all want.
PS: Shifter also did a story on this. Check it out here:
Thank you to our friends at Alliance Venture, Momentum Partners, Idekapital, Viking Venture and Snö Ventures for giving feedback on earlier drafts of this instrument.
*Yes, we know we’re not very original branding using an acronym — but it’s easy to communicate. Also, who cares ¯\_(ツ)_/¯
**Because SFIP is really hard to both pronounce and remember.