Revenue Participation in 2021: Why it May Be Best for You and Your Investors

Vision Master Alert:  Do not overlook Revenue Participation in 2021 as you seek to finance your vision. Revenue Participation in 2021 continues to gain attention as a way to power exciting new companies. Revenue Participation, or royalty financing, is a kind of investment in which the business at hand receives funding based on expected or future revenue. Think of it as similar to an advance on a paycheck. This method of funding works best when the investor has immense faith in the company.

This requirement for belief explains, in part, why royalty funding is so rare. But why is it gaining traction? It may be the responsibility of the Vision Master to insist on a royalty deal when financing a company. This responsibility is essential to understand, as royalties may also the better choice for investors.

A royalty deal is an excellent choice for companies in different funding stages. It prompts the investors to help the entrepreneur without giving away too much power over the company.

Review – What IS Revenue Participation?

As we all know, investors are hard to come by. When one comes along offering steep conditions, you may need to do whatever it takes to keep them on board. Suppose, for example; you come across an investor who insists on getting 40% or more of your company. That would be a commanding amount of stock to hand over. It could feel like giving away the keys to the kingdom. But with a royalty deal, you can get the capital you need and keep your captain’s hat on at the same time.

Revenue Participation aka Royalty funding in 2021 is about giving you an alternative that many investors will take seriously. Many investors will prefer it because they will earn cash quickly and because they might even be paid back entirely in just a few years, instead of having to wait a decade for you to sell the company. Investors may even realize that most young companies NEVER get acquired, so the ONLY realistic hope they have to get their investment back plus earnings is through a royalty funding deal. That’s what makes royalty funding a win-win for you and your investors.

But the reason that this funding model is catching on is that people are realizing its merits and seeing beyond its risky surface appearance. What’s changed, you might ask? People have more access to information. It also has to do with the elevated level of flux in the market. There’s more room for good ideas, and people with smaller amounts of capital have more creative power than ever before.

Strong Upsides for You and Your Investors

But there are a few things we need to understand about this funding model, chiefly the problems it solves.

For a start, there’s no dilution. You retain all of your stock. That should be enough to sell most start-up creators. Second, there is no fiduciary duty to your investor, just a contract. There is no exposure to the risk of being sued by your stockholders. There will be no attempts by investors to take control of your business decisions. If that doesn’t convince you, I don’t know what will. But there’s still more.

Revenue Participation in 2021l is similar to a loan, so disagreements about handling your company will not affect the investment. But it is unlike a loan in that your payments are proportional to your revenues and are therefore flexible. You only have to pay the investor if there’s revenue and in proportion to revenue. Finally, it means the investor has a strong incentive to help you grow your business.

At this point, you may be wondering why any investor would agree to such a deal since the possible returns from an acquisition are much higher. But there is really no short end of the stick when viewed as a portfolio strategy. That’s because it enables you to start generating income quickly, from which you and the investor derive benefit. They will receive a return on their investment more quickly. Perhaps best of all, the risk of loss is less severe. The amount of money returned from each deal is less, but the likelihood of getting anything back is much greater. Over a whole portfolio of angel investments, royalty funding is better for the investor.

So, everyone can walk away as a winner with royalty funding in 2021. There’s less pressure on investors to try to exert control over your company. That leaves you with the peace of mind you need to make good decisions, and everybody gets paid as long as your business succeeds in generating revenue. With all the pressure to perform Vision Masters are necessarily under, I think you’ll find; this funding model is a welcome game-changer.

Please make an appointment with me to discuss how to actually write a revenue participation agreement and how to argue for it.

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