Project Overview & Funding Term Sheet — ABXY

This document outlines the capital structure, investor distribution waterfall, and operational frameworks for ABXY, a design-forward retro-console game lounge and small-plates bar targeted for the Williamsburg, Brooklyn waterfront.

1. Capital Requirement & Capital Stack

The target capital requirement is $1,600,000 for the headline second-generation archetype. The figure is an estimate pending a general-contractor buildout estimate, an architect test fit, and an insurance broker indication; it is sized to fund the second-generation buildout plus an operating runway and reserve covering the planned ramp with headroom for a slower one. A premium-corridor conversion site (higher rent + buildout adders) re-sizes the raise toward the mid-$2M range — see the two-path comparison in the business plan's Capital Requirement section.

Founder cash is funded in full at closing, pari passu in time with Class A capital — it is a cash contribution, not retroactive sweat equity. Class A equity is non-recourse to investors. The founder personally signs the good-guy guarantee on the lease and the standard personal guarantee on equipment financing — the personal credit risk of the project sits with the founder, not with Class A.

2. Corporate Governance & LLC Structure

Creative and operational authority rests entirely with the founder; financial accountability to investors is structural. Governance is split by share class:

• Class A (Investors): Passive. Financial rights plus the information and protective rights below. No voting rights on operations, and no input on daily operations, menu, hours, programming, or staffing.
• Class B (Founder): Active. Holds all operational voting rights and sole managing partner status.

Information Rights

All Class A investors receive:

• Quarterly financial statements (P&L, balance sheet, cash flow, and the Distributable Cash calculation) within 30 days of quarter close.
• Annual reviewed financial statements prepared by an independent accountant.
• The annual operating budget, shared before the start of each fiscal year.

Observer Seat

The lead Class A investor holds a non-voting board observer seat: attendance at quarterly business reviews, with no vote and no operational authority. "Lead" means the largest direct Class A check — the Friends & Family SPV (Section 8) is treated as an administrative vehicle and does not aggregate its pooled checks to claim the seat.

Protective Provisions

The following acts require the consent of a majority of Class A capital. This list is exhaustive — nothing else requires investor consent:

1. Sale, merger, or dissolution of the company.
2. New indebtedness above $100,000 in aggregate (excluding the equipment financing in the capital stack).
3. Related-party transactions, and any change to founder compensation or the Management Fee beyond the terms in Section 4.
4. Issuance of new equity that dilutes Class A (see Section 6).
5. Amendments to the operating agreement that adversely affect Class A's economic or protective rights.

3. The Cash Flow Distribution Waterfall

Distributions are paid quarterly from Distributable Cash—defined as gross revenues minus operating costs, fixed costs, a rolling 60-day working capital reserve, and a 3% CapEx reserve for tech/furniture replacement.

Cash flows move down a strict multi-step hurdle:

[ Step 1: 8% Cumulative Preferred Return ] ──> Current year's pref + any accrued unpaid pref, paid first to Class A.
                  │
                  ▼
[ Step 2: 100% Capital Payback Floor ] ──────> 100% of remaining cash goes to pay down Investor principal.
                  │
                  ▼
[ Step 3: THE EQUITY FLIP ] ─────────────────> Principal hits $0, accrued pref current. Split flips to 70% Founder / 30% Investor.
                  │
                  ▼
[ Step 4: Management Fee Catch-Up ] ─────────> Accrued unpaid Management Fee (Section 4) paid to the founder — below capital.

• The Hurdle (Preferred Return): An 8% annual return calculated against the investors' remaining unreturned capital. The hurdle is cumulative but non-compounding: if Distributable Cash is insufficient to meet the 8% threshold in any given year, the shortfall accrues as a simple (non-compounding) balance and is paid ahead of capital return in subsequent years. Accrued unpaid pref does not itself earn a return.
• The Fee Catch-Up: The Management Fee is subordinate to capital — accrued unpaid fee is paid only after Class A capital and all accrued pref are fully returned (Step 4, below capital). See Section 4.
• The Payback: All net cash flow remaining after the preferred return (Step 1) goes directly toward reducing the investors' initial $1,000,000 principal.
• The Flip: Once investors' unreturned capital account hits $0 and all accrued pref is current, the equity ratios permanently shift to 70% to the Founder / 30% split among Investors.
• Promote Ratchet: Once Class A investors have received cumulative distributions equal to 2.0x their invested capital (all sources — pref, payback, and post-flip distributions), the split steps up to 80% Founder / 20% Investors in perpetuity.
• Pre-Flip Liquidation Ratio: Prior to the flip, any residual proceeds from a sale or liquidation (after return of capital and accrued pref — see Section 5.2) are split 50% Founder / 50% Investors. This pre-flip ratio is intentionally richer to investors than the post-flip 70/30 split, compensating capital that exits before payback completes.

4. Founder Compensation & Fees

Founder compensation matches the operational phases of the business:

• Year 1 (Active Operator): The founder draws no salary in Year 1. Founder compensation begins with the Management Fee below.
• Year 2+ (Oversight Role): Once a General Manager takes over daily operations, the founder's management entity receives a 4% Management Fee on gross corporate revenues for ongoing brand and GM supervision.
• Fee Subordination (below capital): The Management Fee is subordinated to both the preferred return and the return of Class A capital. It accrues monthly (carrying forward without interest) but is not paid until Class A capital and all accrued pref are fully returned — Step 4 of the waterfall in Section 3, at/after the equity flip. In a third-party sale before payback, the accrued fee is paid after investor capital and accrued pref but before the 50/50 residual split (Section 5.2, Scenario A).
• Year 2+ cash oversight fee: Separately, the founder's management entity draws a modest cash oversight fee of ~$40,000/year from Year 2, carried as an ordinary operating expense (not a waterfall item) — compensation for the active equity-oversight role during the repayment period, distinct from and far smaller than the deferred Management Fee above, and reflected in the financial model's cost structure.

5. Exit, Liquidation, & Founder Buyout Options

The Founder retains explicit mechanisms to achieve full ownership or execute an exit, governed by two distinct structural paths:

5.1 Founder Buyout Option (The "Clawback")

The Founder retains the exclusive right to buy out Class A Investors at any point within the first sixty (60) months of operations, independent of a third-party sale.

• The Valuation: The buyout price is based on the Fair Market Value (FMV) of the business at the time the option is exercised. FMV is established by a three-appraiser mechanism: the Founder and a majority of Class A capital each appoint one independent appraisal firm with specific NYC hospitality expertise; those two firms jointly appoint a third; the median of the three valuations is binding.

• The Buyout Price: Investors are bought out at their proportional share of FMV (e.g., 30% of total enterprise value post-flip), subject to a minimum call price floor: through the end of Year 4, no less than 1.75x invested capital, with no deductions — distributions already paid do not reduce the buyout price. After Year 4, the floor steps down to the greater of FMV share or 100% of unreturned capital plus accrued unpaid pref.

• Pre-Flip Exercise: If the option is exercised before the equity flip, the buyout price equals the amount Class A would receive if the company were sold at the appraised FMV with proceeds distributed through the Scenario A waterfall in Section 5.2, subject to the same minimum call price floor.

• The Result: Upon payment of the buyout balance, the Class A Investors' unreturned capital accounts and permanent equity splits are reduced to 0%. 100% of equity and cash flow rights revert solely to the Founder.

The floor exists to compensate investors for selling their upside: if the business is performing well enough that the Founder wants to call the position, the option is priced accordingly.

5.2 Third-Party Sale Scenarios

If the business is sold to an outside buyer, proceeds are distributed via a legally binding liquidation waterfall based entirely on the status of the investor payback:

Scenario A: Sale Prior to Capital Payback (Pre-Flip)

• Assumed Sale Price (illustrative): $3,000,000. Remaining Investor Capital Balance: $1,000,000. Accrued Unpaid Pref (illustrative): $80,000. Accrued Unpaid Management Fee (illustrative): $190,000.

1. Investor Floor: Investors receive the first $1,000,000 to bring their unreturned capital balance to $0.
2. Pref Catch-Up: Investors receive the next $80,000 to satisfy all accrued unpaid preferred return.
3. Management Fee Catch-Up: The accrued Management Fee of $190,000 is paid to the founder — after investors are made whole on capital and pref, before the residual split.
4. Residual Split: The remaining $1,730,000 is split according to the pre-flip liquidation ratio defined in Section 3 (50% Founder / 50% Investors).
5. Final Payout: Founder receives $1,055,000 ($190K fee + $865K residual); Investors receive $1,945,000 total ($1,000K capital + $80K pref + $865K residual).

Scenario B: Sale After Capital Payback (Post-Flip)

• Assumed Sale Price (illustrative): $3,000,000. Remaining Investor Capital Balance: $0. Accrued Unpaid Pref: $0 (current by definition at the flip). Accrued Unpaid Management Fee: $0 (caught up at Step 4, post-flip).

1. Investor Floor & Pref Catch-Up: Skipped entirely ($0 balances).
2. Residual Split: The entire $3,000,000 is split according to the post-flip permanent equity ratio (70% Founder / 30% Investors).
3. Final Payout: Founder receives $2,100,000; Investors split $900,000.

Sale prices above are illustrative for waterfall mechanics only and are not a valuation claim.

6. Follow-On Capital & Dilution

If the company raises additional capital beyond the stack in Section 1:

• Class A Consent: Any issuance of new equity that dilutes Class A requires the consent of a majority of Class A capital (per the Protective Provisions in Section 2).
• Preemptive Rights: Class A investors hold pro-rata preemptive rights to participate in any subsequent equity raise on the same terms, exercisable within 30 days of notice.
• Pari Passu or Better: New capital may not be issued with rights senior to Class A's preferred return, capital payback position, or liquidation priority without Class A majority consent.

7. Additional Investor Protections

• Key Person: If the Founder dies, becomes permanently disabled, or ceases active oversight of the business for more than 120 consecutive days, the Management Fee stops accruing and a majority of Class A capital may require the appointment of a qualified operator to assume the oversight role.
• Transfer Restrictions & Tag-Along: The Founder may not transfer Class B units to a third party without offering Class A investors the right to sell their units to the same buyer on the same terms (tag-along).
• Drag-Along: If the Founder accepts a bona fide third-party offer for the whole company, Class A investors are obligated to sell on the same per-unit terms, with proceeds distributed per the Section 5.2 waterfall.
• Removal for Cause: A majority of Class A capital may remove the Founder as managing partner only upon a final determination of fraud, embezzlement, felony conviction related to the business, or willful misconduct that materially harms the company. The determination is made by expedited arbitration (JAMS or AAA, New York, NY). Removal for cause does not affect the Founder's Class B economic interest.
• Books & Records: Class A holders of $100,000 or more (directly, not through the SPV) may inspect the company's books and records on reasonable notice, at their own expense.
• Sunset After Payback: Once Class A's capital and all accrued preferred return have been fully returned (the equity flip), investor rights step down: quarterly reporting becomes semiannual, the observer seat terminates, and the Protective Provisions in Section 2 reduce to items 1 (sale, merger, or dissolution) and 5 (adverse amendments to the operating agreement). Information rights otherwise continue for as long as Class A holds an interest.

8. Capital Sourcing & Cap Table Hygiene

To eliminate administrative overhead and tax accounting friction (K-1 generation), small check allocations are strictly gated:

• The Core Round: Minimum direct investment ticket size is set to a hard floor of $50,000.
• Friends & Family Allocation: Checks under $50,000 (e.g., $10K–$20K) are pooled into a single, separate Special Purpose Vehicle (SPV) LLC. This SPV acts as a single line item on the main operating company's cap table, consolidating administrative and distribution logistics.