Are investment returns guaranteed?
Investment returns are not guaranteed. By investing in a NextSeed offering, investors are entering into a contract with the business who agrees to pay the investors a certain amount over a certain time period. However, if the business cannot make its payments, investors may lose some or all of their investment. Before investing in a business on NextSeed, an investor should consider all of the risks associated with making the investment.
How does NextSeed calculate investment returns?
NextSeed strives to provide a fair and reasonable measure of every investor’s current debt investment performance. We update this metric on a monthly basis in conjunction with the latest cash payments made by businesses.
For this purpose, we are utilizing the concept of Net Annualized Returns (“NAR”) to measure the current financial return on each debt investment in your portfolio. With respect to a particular investment, NAR is an annualized measure of the rate of return on the principal invested over the life of that investment. It is calculated based on actual cash payments received each month, net of any service fees, actual write-offs and actual recoveries. NAR is not a forward-looking projection of the performance of an investment, and it reflects the full principal value of the investment until and unless the investment is written off.
On NextSeed, we currently offer two types of debt investment products (a term note and a revenue sharing note), and NAR for each investment product is calculated differently to better reflect its underlying characteristics. Additional explanations for NAR calculations are described below.
In addition, we have adopted the concept of Total Net Annualized Return (“TNAR”) to approximate the overall financial return on your debt investment portfolio on certain investment types you have made on NextSeed. TNAR is a weighted average of the NARs on all investments in your portfolio based on the formula described below.
With respect to a particular investment, NAR is first calculated when an investor begins to receive payments from the underlying business. Until that time, no calculation of NAR will be available for such investment, and only the investments that have a stated NAR will be considered in your TNAR calculation.
How does NextSeed calculate NAR for a term note?
NAR for a term note is calculated using the following formula, which is applied to each monthly period ending during the term of a term note from the 1st full month following the closing date to the final and Nth month of such term:
This formula is applicable to any monthly period during the term of a particular note, where the “i” refers to such monthly period. If during any monthly period no payments are received by the investors, then the interest and late fees received (if any) and service fee paid, in such monthly period will be zero. If a particular note is written off, we subtract the entire outstanding principal amount of the note from the numerator. But if a portion of such written off note is later recovered, we add back the amount recovered net of applicable fees. Once the net payment amount is determined for a particular monthly period, we divide such amount by the outstanding principal as of that monthly period. This calculation yields a fraction for the monthly period.
This calculation is performed for each monthly period, taking into account all interest received, late fees received, service fees paid, and all charge offs and recoveries made relative to the principal outstanding in such monthly period. We then annualized the result of the calculation by taking the sum of (1+ the dollar-weighted average performance for all monthly periods), raising it to the 12th power, and subtracting 1. This calculation results in NAR for a term note, which is expressed as a percentage.
How can investors estimate the implied return of a revenue sharing note at any point in time?
A revenue sharing note on NextSeed requires the business to make monthly payments equal to a fixed percentage of its monthly gross revenue until cumulatively the total amount paid to investors has reached the promised investment multiple by the business either before or by the note’s maturity. As a result, the payment received by investors could vary month to month, subject to changes in the monthly gross revenues of the business. Because of this variance in monthly payments, a standard simple interest rate calculation does not appropriately measure investors’ expected return underlying the revenue sharing note.
Given the expected varying cash flows coming to them under a revenue sharing note, investors could evaluate the expected investment performance using the concept of Internal Rate of Return (“IRR”). IRR is a popular methodology commonly used by corporations and investment professionals to measure the profitability of potential investments. Investors can calculate the expected IRR of a revenue sharing note using the estimated monthly cash flow derived from their own assumptions and assessment of the financial projections provided by the business.
References to the IRR methodology (and the academic explanation) and the different ways to calculate IRR can be found from public sources such as Wikipedia and Investopedia.
NAR for a revenue sharing note is calculated using the following formula which is applied to each monthly period ending during the term of a revenue sharing mote from the first full month following the closing date to the final and Nth month of such term:
This formula is applicable to any period during the term of a particular note, where Ct refers to the cash flow in each period and the “t” refers to the applicable monthly period. The cash flows received by the investor are calculated in addition to a lump sum remaining required payment by the business at maturity of the note (final t period) in accordance to the note purchase agreement. If a payment is missed or the issuer defaults, the NAR would be adjusted down accordingly to reflect that event. The NAR calculation does not seek to make assumptions or projections regarding the performance of a business or investment, but still reflects the full value of the investment unless the investment is written off.
How does NextSeed calculate portfolio TNAR?
TNAR for an investor’s portfolio is calculated using the formula below, where “i” refers to the number of investments made sequentially in an investor’s portfolio and “N” refers to the latest and Nth investment made by such investor.
Portfolio TNAR does not include NAR calculations for investments that are not yet required to begin payments under their applicable note purchase agreement (including during the Startup Period).
What are the limits of NAR and TNAR return calculations?
The NAR and TNAR calculations described above represent only one of many different ways to calculate and measure the return on cash invested. There are other methods for evaluating the historical and potential investment returns on fixed-income securities and other investments that you may prefer to use to assess the performance of your investments. As NextSeed is unable to provide any other measure of investment returns other than as described above, you should consult your financial advisors if you have questions about measuring your investment returns.
Note that debt securities offered on NextSeed are not guaranteed or insured and investors may lose some or all of the principal invested subject to an issuer’s ability to fully service the debt and not default.