Let’s Have A RAFFLE - update

Posted 2026-03-11

My original essay was intended to spur conversation… and it did! And I was able to significantly refine my thinking due to some great commentary from many others. Here are some updates.

Discussion

First, I want to mention people and sources that have been so valuable to me. There is some great stuff to read and think about!

There has got to be a better way and we’re trying to figure it out!

Real Equity for Businesses Under Seed (REBUS)

Several people thought RAFFLE was a bad name, so I am workshopping something new. A rebus is one of those puzzles with images that make words. I am not tied to this.

One observation that has come out of my discussion: SAFEs are set up... and work well… for venture investments. These are meant for binary outcomes - a rocket or a crash to zero, preferably as quickly as possible. The other two outcomes - a zombie and a lifestyle - are business outcomes. An outcome where a company is making $10M's in revenue and $M's in profit should be incented: that's a good business that’s good for the economy. But it’s a failure financially for venture investors and is therefore discouraged.

It’s no wonder that an instrument set up for binary outcomes is less than optimal for the reality that there is a broad spectrum of business outcomes.[1] By emphasizing venture outcomes, a SAFE investor drives the entrepreneur to deemphasize the best interests of the business in the pursuit of rocketship returns. But - in the vast majority of cases - a business outcome is most likely, and may even be preferred. Rather the pressure to make venture returns implied by a SAFE, entrepreneurs should feel free to choose the right course for the business.

I touched on a key element to handling business outcomes in my original essay: “revenue preference”. Since writing that, I have pursued multiple discussions on how, exactly, to use revenue to make everyone whole in a business outcome. I have come to the conclusion that requiring that a fixed percentage of revenue be returned to shareholders is the simplest way to accomplish these goals. For a zombie, that percentage is paid as dividends, which covers the carrying cost for the investors. For a lifestyle, the percentage more than covers dividends and the excess should be used to repurchase the equity. We thus cover all four cases for investors, while freeing entrepreneurs to make the right business decisions!

So here is my draft proposal for the terms that all Seed investments should use:

  • Simplified preferred shares (like Series First)

  • MFN

  • Information Rights

  • Liquidation Preference (1X participating)

  • Revenue Preference:

    • At Maturity (3 years), the Board shall declare a “revenue factor (RF)” with a floor of 4%. The Board may change this periodically thereafter, subject to the floor.

    • Shareholders shall have the right to convert all or part of their shares to “revenue basis (RB)”. For RB shares, the company shall reserve RF * (RB / REBUS) of net operating revenues after interest[2] into the Revenue Reserve (RR). The RR shall be used to pay dividends of 2%/quarter on RB shares. (Unpaid dividends are accrued and paid first when RR regains a positive balance.) Excess RR after dividends are paid shall be used to repurchase RB shares at 2X. The company may opt to accrue RR to do repurchases in blocks of a given size in order to reduce administrative costs.
      —> Important tax note: Dividends and buybacks negate 1202 rights. Therefore, conversion to RB status trades a significant tax benefit for immediate cash flow. My feeling here is that, at Maturity, the likely company outcome is clear. Therefore, stockholders should be able to determine if they want to retain 1202 (for rockets) or take the cash returns (for lifestyle). Note that conversion is irrevocable.

      —> Important legal note: Dividends and buybacks must be structured to comply with the law in the State of incorporation. This may lead to a need to accrue until the company meets applicable balance sheet tests.

    • Revenue Preference is eliminated upon a qualified financing. RB shares revert to regular status, but have lost their 1202 status.

That’s it. One easily-understood term covers business outcomes while the rest are standard for ventures. Thus, there’s not a lot new and unfamiliar here… and that’s a great place to have arrived!

[1] In some ways, a SAFE is applying digital to an analog problem… entirely consistent with its origins in financing software companies!

[2] “Net operating revenue” to avoid situations where the company has pass-thru revenues included in gross revenues. “After interest” to specifically subordinate to debt.

Addendum 2026-03-13

I was thinking about the “PE” investment model I discussed previously. It struck me how complementary the REBUS is to that model. Basically, the REBUS assumes that the business will thrive and throw off cash… a perfect PE company… while maintaining the upside should the company’s side hustle become a rocket. The REBUS thus enables me to focus on evaluating the business’ business potential rather than its venture potential. I have seen a lot of decks where entrepreneurs strain credibility in trying to make their company look like a venture. That undesirable behavior is unnecessary with a REBUS!

Copyright (c) 2026 Daniel Greenberg