REFERENCE DOCUMENTATION
Complete documentation of the FRDM Collective financial model, share classes, waterfall mechanics, and the 50/50 operator structure.
| Class | Holder | Economics | Waterfall Position |
|---|---|---|---|
| Class A-1 | Seed Investors | 1.50x preference + 5.0% participation | 1st (First Out) |
| Class A-2 | Series A Investors | 1.50x preference + 3.0% participation | 2nd (If Raised) |
| Class B | Operators | 50% Rollover Equity + 50% Operator Promote | 4th |
| Class C | Management | 25.0% of profit pool (anti-diluted) | 3rd |
The operator pool (75% of proceeds after Seed and Management) is split 50/50 between two components, providing operators with both a guaranteed floor and performance upside.
Pool Size: $74.3M
Pool Size: $74.3M
1.50x × $5.0M = $7.5M
First money out. Paid before anyone else.
1.50x × Investment (if raised)
Second position. Only applies if Series A is raised.
5.0% × Remaining = $10.4M
5.0% off the top of remaining proceeds after preferences.
3.0% × Remaining (if raised)
3% participation if Series A is raised.
25.0% × Remaining = $49.5M
25% of profit pool. Anti-diluted — never changes.
75.0% × Remaining = $148.6M
50% Rollover Equity
$74.3M
50% Operator Promote
$74.3M
Entry Valuation = Entry EBITDA × 5x
Operators roll in at 5x their entry EBITDA. This determines their rollover equity share.
Available for both rollover equity and operator promote units
Operators can elect 83(b) treatment at roll-in to lock in capital gains treatment on future appreciation.
| EBITDA Range | Market Multiple |
|---|---|
| $0 - $150K | 1.8x |
| $150K - $300K | 2.5x |
| $300K - $500K | 3.5x |
| $500K - $750K | 4.5x |
| $750K - $1M | 5.5x |
| $1M - $2M | 6.5x |
| $2M - $4M | 7.5x |
| $4M - $5M | 8.5x |
At exit, operators receive a promote multiple based on their ending EBITDA tier. This is applied to the 50% operator promote pool.
| Ending EBITDA Tier | Promote Multiple | Target Net Multiple* |
|---|---|---|
| $0K - $400K | 0.53x - 0.77x | 4.03x - 4.27x |
| $400K - $500K | 1.18x - 1.42x | 4.68x - 4.92x |
| $500K - $600K | 1.58x - 1.82x | 5.08x - 5.32x |
| $600K - $700K | 1.93x - 2.17x | 5.43x - 5.67x |
| $700K - $800K | 2.33x - 2.57x | 5.83x - 6.07x |
| $800K - $900K | 2.73x - 2.97x | 6.23x - 6.47x |
| $900K - $1.00M | 3.08x - 3.32x | 6.58x - 6.82x |
| $1.00M - $1.25M | 3.48x - 3.72x | 6.98x - 7.22x |
| $1.25M - $1.50M | 3.93x - 4.17x | 7.43x - 7.67x |
| $1.50M - $1.75M | 4.33x - 4.57x | 7.83x - 8.07x |
| $1.75M - $2.00M | 4.78x - 5.02x | 8.28x - 8.52x |
| $2.00M - $2.50M | 5.18x - 5.42x | 8.68x - 8.92x |
| $2.50M - $3.00M | 5.28x - 5.52x | 8.78x - 9.02x |
| $3.00M - $4.00M | 5.38x - 5.62x | 8.88x - 9.12x |
| $4.0M+ | 6.18x - 6.42x | 9.68x - 9.92x |
*Target Net Multiple = Rollover contribution (~3.5x) + Promote Multiple. Actual net multiples may vary based on portfolio performance.
After all promote tier payouts are made from the 50% operator promote pool, any remaining capital becomes the Performance Bonus Pool. This rewards operators who grew faster than their tier minimum.
Distributed by growth rate (Exit EBITDA ÷ Entry EBITDA). Operators who grew the most get the largest share of the bonus pool.
$5.0M
1.50x
5.0%
25.0%
5x
50.0%
50.0%
4 years
$18.0M
$2.0M
8.0%
$216.0M
$17.9M
3.58x
$49.5M
$148.6M
$208.5M
$74.3M
$74.3M
An 83(b) election is an IRS provision that allows you to pay taxes on equity at the time of grant (when value is low) rather than at vesting (when value may be much higher).
For FRDM operators, this means you can elect to be taxed on your entry valuation rather than your exit valuation.
Example: If you roll in at $400K EBITDA (5x = $2M entry value) and exit at $1.5M EBITDA (8x = $12M exit value), you're taxed on the $2M, not the $12M.
Section 721 Exchange
Your business rolls into FRDM tax-deferred. No immediate tax event.
Profits Interest Units (PIUs)
You receive PIUs representing your share of future profits. These have $0 value at grant.
83(b) Election Filed
Within 30 days, you file 83(b) to lock in the low basis. Future appreciation is capital gains.
Exit = Long-Term Capital Gains
At exit (4+ years), your payout is taxed at LTCG rates (~20%), not ordinary income (~37%).
| Scenario | Tax Rate | On $10M Gain | You Keep |
|---|---|---|---|
| No 83(b) (Ordinary Income) | ~37% | $3.7M tax | $6.3M |
| With 83(b) (LTCG) | ~20% | $2.0M tax | $8.0M |
You save ~$1.7M on a $10M gain by filing 83(b). Consult your tax advisor for your specific situation.
PIUs are a form of equity compensation in LLCs that give you a share of future profits rather than current value. Key benefits:
You must file your 83(b) election with the IRS within 30 days of receiving your equity. This deadline is strict and cannot be extended. Our team will guide you through every step of the process as part of your onboarding.