- Lynx has created the SWEAT Note, an industry-first, transparent agreement enabling service providers to provide services in exchange for equity
- SWEAT Notes align the interests of startups, service providers and investors by incentivizing stakeholders to focus on the long-term value of an early-stage company as it strives toward exit
- Advisory team includes veterans with expertise spanning the venture capital, ESG, energy, legal, software engineering, cryptocurrency and public relations industries
Lynx has developed an industry-first competitive differentiation in how equity is allocated: Its ideated a unique and transparent SWEAT Note that aligns the interests of startups, service providers and investors toward the common goal of a successful exit.
The vertical-agnostic beta Lynx platform is now live. Initial industries Lynx has targeted to connect with entrepreneurs comprise legal, marketing, public relations, product development and fractional chief financial officer services.
“I’ve supported startups throughout my career as a digital-marketing service provider, but found sweat-equity arrangements too complex, cumbersome and expensive to be viable,” said Jameson Pitts, Lynx co-founder. “I jumped at this opportunity to help create an innovative alternative to legacy sweat-equity agreements. At Lynx, we present what’s been missing from the equation — a conceptual framework and legal instrument to structure such deals that are equitable for all parties and drive success.”
The innovation of the SWEAT Note is particularly significant today, as founders, executives and venture capitalists seek to curtail risk in the face of a looming recession. Startup valuations continue to plunge, tech-company layoffs are accelerating, the total of unicorns is falling and inflation is the highest in nearly four decades.
Simultaneously, interest in secondary markets is on the rise and the SWEAT Note structure allows service providers the opportunity to participate in those markets. The SWEAT Note also is a tool to increase Lynx customer security. It reduces startup burn rates while cementing shared return on investment among entrepreneurs, service providers and venture capitalists as they look toward a liquidity event.
The SWEAT Note
A SWEAT Note is a financial instrument that enables service providers to work for startups at a discounted rate in exchange for a note that will become equity in the future. The arrangement extends a startup’s runway and time to execute its vision. Because each party has a literal interest in the startup’s prosperity, failure rates for early-stage companies will decline. Service providers reap some of the value they help create. A SWEAT Note outlines how much will be paid in equity. It also determines the discounted rate by reducing the lead investor’s startup valuation. The premise behind this action is that the service provider’s efforts will increase the startup’s valuation in its next capital raise.
Here’s an example: If a service provider and startup agreed to a SWEAT Note’s terms, and the service provider did $500,000 worth of work — half of the startup’s burn — at a 20% discount and a $10 million valuation, the conversion would be 6.25% of equity. Without the discount, the equity shrinks to 5% of equity. In this example, the provider nets $625,000. That’s $125,000 beyond what it would have been f it charged cash for its services, all while allowing the startup to double its runway.
All-star advisory team
Lynx has assembled a group of veterans who are experts in their respective fields to guide this cutting-edge approach to growing, scaling and exiting.
Vic Pascucci III is co-founder and managing general partner at Chicago-headquartered Energy Capital Ventures, the only early-stage venture capital firm dedicated to the environmental, social and governance (ESG) imperatives and digital transformation of the natural gas industry. He will draw on his venture and mergers and acquisition experience to make recommendations regarding deal structure, Lynx’s core-product offering and strategy, and funding and investing.
Neema Amini is partner at Amini & Conant, a law firm based in Austin, Texas, and Lynx in-house counsel. Amini and his firm developed the SWEAT note, and will be applying his legal-transaction savvy to develop Lynx’s core product.
Craig Hammell was among the first engineers at the cryptocurrency company Coinbase. His technological know-how encompasses Web3 expertise. Hammell’s responsibilities will include recruiting technical talent.
Ethan Parker is founder and CEO of Treble, a boutique B2B technology public relations agency headquartered in Austin, Texas. He will bring to the fore two decades of experience in communications, PR and managing product and funding campaigns.
“Lynx’s SWEAT Note will prove especially valuable during this economic downturn,” Pascucci said. “Lynx offers startups an alternative way of doing business when the availability of capital has become more scarce. Lynx has made a template for and automated, in a fully transparent manner, what historically has been a time-consuming, customized and legally burdening process. The SWEAT note enables startups to extend their cash runway while providing an opportunity for service providers to participate in equity upside.”
Removing business barriers
“I cannot overstate how beneficial it is to have early collaborators incentivized to do their best work while also offsetting capital requirements,” said Charles Martin, founder and CEO of SafeHarbor, a fintech company based in Austin, Texas. “Our runway is now longer, and we’ve essentially brought in-house what were once external firms because of Lynx.”
Lynx reviews startups that join its network before introducing them to service providers. Lynx also endeavors to make high-quality matches. No obligation exists to pursue opportunities Lynx presents. Lynx will broker introductions only if interest exists. Lynx also will support venture and legal due diligence in the event of any deal.
The company’s free tools include a runway calculator, a SWEAT Note generator, an ROI calculator and a revenue calculator.
“The concept of sweat equity is definitely not new, and there are other types of arrangements that lots of companies use, like deferring payments, adviser shares or other options,” said Lynx co-founder David Stockton. “These options lack the simplicity and adequate provider compensation to be an employable fundraising strategy for startups. Putting sweat equity terms in a simple SAFE-like convertible note allowing top-tier service providers to invest services alongside investors is an industry first though.”
Startups, service providers and investors interested in learning more or joining the Lynx network may go to www.lynx.ventures.
Headquartered in Austin, Texas, Lynx Ventures has developed a networking platform that automates sweat-equity agreements among early-stage venture-backed startups and industry-best service providers. It is industry-agnostic with initial target sectors comprising legal, marketing, public relations, product development and fractional chief financial officer services. Lynx is transforming business partnerships through the SWEAT Note, an automated and transparent financial instrument that enables service providers to work for startups at a discounted rate in exchange for future equity. With that alignment in interests, startup success is likelier, with all parties reaping value to which they’ve contributed. The company’s free tools include a runway calculator, a SWEAT Note generator, an ROI calculator and a revenue calculator. Visit www.lynx.ventures for more information.