Get Your Business Funded: Creative Methods for Getting the Money You Need

Pros and Cons

There is a lot to be said for revenue sharing/royalty financing deals:

• You do not have to share equity, board seats, management decisions, or power with an angel or VC. Remember, equity and royalty are different. When an investor takes an equity position, he or she also will have an advisory role. Not so with a royalty deal.
• Because the deal is not a loan, state and federal securities laws are inapplicable, again, as opposed to an equity arrangement.
• Because there is no debt, the advance does not show up as a liability on your balance sheets. It is a “contingent liability.”
• Investors can get immediate payment, as, once again, opposed to an equity deal where repayment to the investor may not occur for some time.
• Your shares in your business are not diluted.
• You are not involving friends or family in your business affairs.
• Repayment is made through future sales.
• The investor has a strong and reasonable assurance of repayment.

The downsides are fewer, and less obvious.

• Royalty financing works best with established companies that have a track record of sales. It is much more difficult for a new startup to presell when it does not yet have a revenue stream.
• You are still taking on debt and one of your main avenues for growth—future sales—will be earmarked toward repayment of that debt.
• Some royalty deals can take years to pay off, and therefore may end up being much more expensive than a bank loan.
• Investors may not like that their income potential from the deal will ...