The Booster Rocket That Won't Detach | Björn Kenneth Holmström

Introduction: The Fourth Leg

In a recent debate about the future of capitalism, a defender of venture capital made an elegant point: criticizing the VC model is like arguing that a table only needs three legs. Without the fourth leg—patient, risk-tolerant capital—the whole structure collapses.

He’s right. High-risk capital is structurally necessary for innovation. The question is: what happens when that fourth leg never leaves?

Imagine a rocket designed to reach orbit. The booster provides the fuel, the thrust, the initial escape velocity. It’s essential—the rocket can’t launch without it. But once the ship reaches orbit and the fuel is spent, the booster is supposed to detach. If it stays attached, it becomes dead weight, burning the ship’s own fuel just to drag itself along.

That’s the modern venture capital model. Investors provide the launch capital—absolutely necessary. But once a company reaches profitability and stability, those same investors continue extracting 10-20% of the company’s profits in perpetuity. Not because they’re still taking risk. Not because they’re still adding fuel. But because the contract says they own 20% forever.

We’ve confused temporary risk with permanent ownership. And in doing so, we’ve built an economic system where the only way to fund innovation is to sell it—permanently—to people who will extract from it forever.

This essay argues for a simple upgrade: redeemable equity. Let investors take their massive returns for the risk they took, then exit. Let companies fly free. Not because it’s morally superior, but because it’s structurally more efficient.

We’re not tearing down the table. We’re making the fourth leg detachable.

Part 1: The Risk Confusion

When you pay off your mortgage, does the bank own your kitchen forever?

Of course not. The bank took a risk lending you money for the house. You repaid that risk—principal plus interest. The transaction is complete. The bank doesn’t get to extract rent from your kitchen for the next thirty years just because they took a risk in 2005.

Yet this is precisely how venture capital works. And we’ve accepted it as natural for so long that we’ve stopped seeing how strange it is.

The confusion stems from conflating two different types of risk:

Operational risk is the ongoing challenge of keeping a business alive. Markets shift. Competitors emerge. Technology evolves. Regulations change. A company must constantly adapt or die. This risk is infinite—it never ends, no matter how successful you become. Even Amazon faces operational risk.

Capital risk is the specific danger that an investor’s money will be lost. This risk is finite. It has a horizon. Once an investor has been repaid—say, five times their initial investment—their capital risk goes to zero. They’re no longer at risk of losing money. They’ve won.

Here’s the problem: our current equity model rewards investors indefinitely for temporary risk.

An investor puts $1 million into a startup in Year 1. By Year 7, the company is profitable and stable. The investor’s shares are now worth $10 million. They’ve achieved a 10x return. Their capital risk has been eliminated—they could sell tomorrow and walk away with a massive win.

But they don’t exit. Why would they? The contract says they own 20% of the company forever. So in Year 10, Year 15, Year 20, they continue extracting 20% of the company’s profits. Not because they’re taking risk. Not because they’re adding value. But because the legal structure says they own a piece of the company permanently.

By Year 20, they have zero skin in the game—their original capital was returned many times over—yet they still extract as if the risk were ongoing.

This is what makes the modern VC model not capitalism but a tribute system. In capitalism, you’re compensated for the risk you take. In feudalism, you’re compensated for the title you hold. When investors extract profits decades after their risk has been repaid, based solely on a piece of paper saying they “own” something, which system does that resemble?

The Moonshot Exception

Now, a fair objection: “But VCs need 50-100x returns on winners to cover the 90% that fail!”

This is true—for early-stage, high-failure-rate moonshots. If you’re funding ten unproven ideas and nine will die, you need the tenth to return 50x+ just to break even. The power law is real for seed-stage bets on unproven technologies and markets.

But here’s what we’ve forgotten: most companies aren’t moonshots, and most capital isn’t seed capital.

The redeemable equity model isn’t designed to replace early-stage VC—it’s designed for the next phase. Once a company has proven its model, reached profitability, or demonstrated clear product-market fit, it no longer needs moonshot capital. It needs growth capital. And growth capital—capital for scaling proven businesses—doesn’t need 100x returns to be viable.

Consider the market segments:

Seed/Series A (unproven, 90% failure): Keep the uncapped model if needed for the power law math
Series B+ (proven model, lower failure rate): Redeemable equity with 5-10x caps makes sense
Later stage/profitable (established, minimal failure risk): Redeemable equity with 3-5x caps is plenty

Most of the perpetual extraction happens in that second and third category—companies that are already successful, where the “high risk” justification no longer applies. These companies continue paying the “moonshot premium” long after the moon has been reached.

The booster rocket provided essential thrust. But it’s been burning the ship’s fuel for fifteen years after the launch ended.

This isn’t capitalism. It’s a tribute system with better branding.

Part 2: The Silent Giants

If this model can’t work, someone forgot to tell Bosch.

Bosch, the German industrial giant, generates €90 billion in annual revenue and employs over 400,000 people. It’s one of the largest private companies in the world. And it operates as what we might call a Non-Dividend Enterprise (NDE)—it’s structured so that ownership is held by a charitable foundation that cannot sell the company or extract dividends. All profits are reinvested into R&D, wages, and long-term projects.

Rolex operates similarly—privately held, no dividends paid out, legendary quality control that comes from not having to answer to quarterly earnings calls. The company can invest in 10-year product development cycles because it doesn’t have shareholders demanding immediate returns.

“But those are old industrial companies,” comes the objection. “Can this scale to modern tech?”

Fair point. So let’s look at Valve Corporation—the company behind Steam, Half-Life, and Portal. Valve is a tech company, privately held, with no outside investors extracting dividends. It’s worth an estimated $10 billion and dominates PC gaming distribution. It can afford to experiment wildly (the Steam Deck, VR headsets, cancelled projects) because it doesn’t leak 20% of revenue to passive shareholders demanding predictable returns.

Or consider Epic Games (before recent funding rounds)—another gaming giant that maintained private ownership while building Fortnite into a cultural phenomenon and the Unreal Engine into industry-standard technology.

“Still not enough examples,” you might say. “If this model is superior, where are all the others?”

This is the right question with the wrong conclusion. The rarity of these companies doesn’t prove the model is inferior—it proves the infrastructure doesn’t exist yet.

Think about it: if you’re a founder seeking $10 million in growth capital, what are your options?

Traditional VC: Available, standardized term sheets, established legal frameworks, networks of lawyers who know how to structure the deals
Redeemable Equity: No standard contracts, no established legal precedents, no investor networks offering it, no lawyers experienced in structuring it

The “market” isn’t testing whether redeemable equity works better—it’s not offering it as an option at all. Founders choose permanent equity the same way medieval peasants “chose” feudalism: not because they evaluated the alternatives, but because it’s the only system available.

The absence of examples proves scarcity of infrastructure, not superiority of extraction.

And here’s the crucial point: the companies that do manage to avoid perpetual extraction—Bosch, Rolex, Valve—aren’t struggling. They’re thriving. They outcompete their extractive peers on quality, innovation, and long-term thinking precisely because they reinvest 100% of surplus instead of leaking 10-20% to passive shareholders.

An NDE doesn’t have a competitive disadvantage. It has a competitive advantage disguised as a handicap.

The model scales. The infrastructure doesn’t—yet.

Part 3: The Founder’s Dilemma

Here’s a thought experiment. You’re a founder seeking $5 million in growth capital. Two investors make you offers:

Option A (Standard VC):

I give you $5 million for 20% of your company
I keep that 20% forever
I extract 20% of all future profits indefinitely
I maintain voting rights and board seat permanently

Option B (Redeemable Equity):

I give you $5 million for 20% of your company
Once you’ve paid me back 5x ($25 million), my equity converts to zero
You reclaim full ownership and control
I maintain board seat and advisory role during the redemption period (typically 7-10 years)

Which would you choose?

Every rational founder would choose Option B. It’s not even close. You get the same capital, the same expertise and network during the critical growth years, but you’re not paying rent on that help forever.

The only reason founders choose Option A today is because Option B doesn’t exist on the shelf.

“But wait,” comes the objection, “if VCs know they’ll be paid out and exit, they’ll lose motivation to help you in Year 6. Permanent equity aligns incentives.”

This sounds plausible until you examine it. Let’s think through the actual incentive structure:

Years 1-7 (Redemption Period): The VC still owns 20% of the company and sits on the board. They’re deeply motivated to help you succeed because:

The faster you grow, the faster they hit their 5x return
The stronger you become, the more likely they get paid out
Their reputation depends on backing winners

During this crucial scaling phase—when you actually need the introductions, the hiring help, the strategic advice—the VC’s incentives are perfectly aligned. Possibly more aligned than in the perpetual model, because there’s a clear target to hit.

After Year 7 (Post-Redemption): You’ve already scaled. You’re profitable and stable. The VC has been paid out handsomely. This is precisely the phase where you need them least. You have your own network now. You’ve hired experienced executives. You know your market.

The claim that you need permanent extraction to maintain alignment is really an admission: “We only help you if we can extract forever.” That’s not partnership—that’s a protection racket.

And here’s the deeper issue: if a VC’s only motivation to provide value is perpetual ownership, what does that say about the value they’re actually providing? The best VCs—the ones founders actually want—are the ones who help because they’re good at it, because it builds their reputation, because they enjoy it. Those VCs would still participate in redeemable equity deals because they’d still get massive returns and lasting relationships.

The VCs who resist redeemable equity are the ones who know their ongoing contribution doesn’t justify ongoing extraction.

The Market Isn’t Free

Defenders of the status quo often say: “Founders choose VC freely. If they don’t like it, they can bootstrap.”

But this is like saying medieval peasants “chose” feudalism because they could have refused to farm the lord’s land. The choice between “accept perpetual extraction” and “have no access to growth capital at all” isn’t a free market—it’s a monopoly with two bad options.

A free market would offer:

Bootstrapping (no external capital)
Debt (fixed repayment, no ownership)
Redeemable equity (temporary ownership)
Permanent equity (perpetual ownership)

Right now, we only have options 1, 2, and 4. Option 3 doesn’t exist in standardized form. Founders don’t “choose” permanent equity because it’s superior—they choose it because the legal, financial, and institutional infrastructure only supports that one model.

The market isn’t testing which model works better. It’s not offering the test.

And every founder who chooses Option A isn’t validating the system—they’re demonstrating the absence of alternatives.

Part 4: How Redeemable Equity Works

The solution isn’t radical—it’s obvious once you see it. We need to redesign the equity contract so that temporary risk earns temporary ownership.

The Basic Mechanic:

Investment: An investor provides capital (say, $5 million) in exchange for equity (say, 20%)
Growth Phase: The company scales, the investor provides guidance, connections, and board participation
Redemption Trigger: Once the company repays a predetermined multiple (3x-5x of the original investment), the equity automatically converts
Conversion: The shares either extinguish (go to zero) or convert to non-voting preferred shares with no dividend rights
Result: The company reclaims full ownership and operational control

This isn’t debt. There are no fixed payment schedules. The company pays when it has the cash flow. If it takes 5 years or 15 years to hit the multiple, that’s fine. The investor still gets their massive return—they just don’t get it forever.

The Graduated Structure:

One size doesn’t fit all. Early-stage investments with high failure rates need different terms than late-stage growth capital:

Seed Stage (unproven, 70%+ failure rate): 10x-20x cap, or uncapped if needed for power law math
Series A/B (proven concept, scaling): 5x-10x cap
Series C+ (established, profitable): 3x-5x cap
Growth Equity (mature, stable): 2x-3x cap

The earlier and riskier the bet, the higher the multiple. The later and safer the investment, the lower the cap. This preserves the power law dynamics for true moonshots while preventing perpetual extraction from mature companies.

But Who Would Invest?

“This sounds nice, but no serious investor would accept capped returns.”

Actually, the largest pools of capital in the world are desperately seeking exactly these kinds of investments.

Pension funds manage over $50 trillion globally. Sovereign wealth funds manage another $12 trillion. These institutions aren’t looking for 100x lottery tickets—they’re looking for stable, predictable returns in the 7-12% range.

Why? Because they have different constraints than traditional VCs:

They’re managing retirement savings, not making bets with high-risk LP money
They need steady returns over 20-30 year horizons
They’re fiduciarily bound to prioritize stability over speculation
They’re already diversified across thousands of holdings

For these investors, a 5x return over 7-10 years (roughly 20-25% IRR) is exceptional—far better than bonds (2-5%), better than most real estate (7-10%), and more predictable than hoping for a unicorn.

“But these funds don’t do early-stage VC,” comes the objection. “Why would they take startup risk for bond-like returns?”

They wouldn’t—and they shouldn’t. Redeemable equity isn’t designed for seed-stage moonshots with 90% failure rates. It’s designed for:

Series B+ companies with proven business models
Profitable companies seeking expansion capital
Mature startups that need growth funding without surrendering control

These aren’t coin-flip bets—these are established businesses where the risk profile is fundamentally different from seed stage. For these companies, patient capital with capped returns makes perfect sense.

And here’s what unlocks: right now, pension funds avoid most startup investment because the risk-reward ratio looks terrible. They see 90% failure rates and ask “why would we take that risk?” The answer has been “because the 10% that succeed return 100x.” But that’s only necessary because of the power law problem—you need home runs to cover the strikeouts.

If you’re investing in proven businesses with 30-50% failure rates instead of 90%, you don’t need 100x. You can survive very comfortably on 5x returns across a diversified portfolio.

Redeemable equity doesn’t replace traditional VC—it opens an entirely new market segment. It allows the massive pools of patient capital to participate in innovation without demanding perpetual extraction.

Who Wins?

Investors: 20-25% IRR over 7-10 years, much better than alternatives in their risk class
Founders: Get growth capital without selling the company forever
Workers: Surplus stays internal for higher wages and better conditions
Innovation: More capital available for proven ideas, not just moonshots

Making It Real

This isn’t hypothetical. The legal infrastructure can be built:

Standard redeemable equity term sheets (lawyers can draft these)
Clear conversion triggers and redemption formulas
Board seat terms that align with redemption periods
Regulatory frameworks that recognize this as a distinct asset class

The only thing stopping this from existing is inertia. We’ve been doing equity one way for so long that we’ve forgotten it’s a design choice, not a law of nature.

The booster rocket is essential. But it’s time to make it detachable.

Conclusion: Building the Fourth Leg

The venture capital model isn’t evil. High-risk capital is structurally necessary for innovation. The problem is that we’ve confused a temporary function—providing launch fuel—with a permanent right to extract.

The booster rocket is essential. But it must detach.

Redeemable equity does exactly this: it rewards investors massively for the risk they take, then lets them exit. It aligns incentives during the critical growth phase without demanding perpetual tribute. It’s not a rejection of capitalism—it’s an upgrade to its operating system.

This isn’t hypothetical. The legal frameworks can be drafted. The term sheets can be standardized. The investor pools exist—$62 trillion in pension and sovereign wealth funds seeking exactly these return profiles. What’s missing is the infrastructure: the standardized contracts, the precedent cases, the networks of lawyers and investors who know how to structure these deals.

That infrastructure can be built. And it’s already starting.

Founders can begin requesting redeemable equity terms in their negotiations. Investors—particularly those managing patient capital—can offer it. Lawyers can draft the contracts. Regulators can recognize it as a distinct asset class.

Every system that seems permanent was once unthinkable. Mortgages that actually end. Employment contracts that don’t bind you for life. Equity that detaches after the risk is repaid.

We’re not tearing down the table. We’re adding the fourth leg that makes it stable: exit clauses for capital, autonomy for creators.

You’re looking at today’s menu asking why a dish doesn’t exist.

We’re writing the recipe.