Picture this: You follow everything I advise in this endless Intelliversity blog. Finally, finally, you have an interested investor. BIG step forward. Then he/she lets you know they want 40% of your company, or more, for their cash. Sounds like Shark Tank, right? Now what?
Well, there may be no solution for this particular investor, or on the other hand, maybe there is. If you’re ready with an alternative, you have a chance. So let’s talk about one of our most popular investment topics, Royalty Funding.
Financing through Royalty Funding (aka Revenue Royalties or Participation Funding) is all about having an alternative that many investors will consider seriously, and many will prefer. Why? Because they earn liquidity (cash) quickly and may be paid back completely within (say) four or five years, rather than have to wait seven to 10 years for you to sell (liquidate) the company, an event which actually rarely happens, and which you may not really want to do anyway.
If you’ve been reading past blogs on this topic here, you know why royalties are the better way (for both you and your investors) to invest in innovative companies, for most investors (except the Silicon Valley gambler types and Venture Capital firms.)
To continue this conversation with you, Arthur Lipper has released several new articles on the RoyaltiesWritings.com website, which is sponsored by Intelliversity. Refer to the following recent press release for details:
LOS ANGELES, October 17, 2017: The economics of revenue royalties, as developed by Arthur Lipper, well-known Wall Street investment banker and advisor, are not well understood. In a new analytical article, Lipper discusses how one conventional method of measuring the performance of an investment — Internal Rate of Return — works quite differently with royalties than with equity investments.
Excerpts from the article, now available for complimentary viewing:
“In projecting the possible result of investing in the stock of a company, many equity investors use a shorthand measure: the number of times the amount invested is anticipated to increase…”
It is generally accepted that an investment which doubles in a little less than 5 years has appreciated by 15% a year; by the same token, there has been only a 7% per annum IRR if the exit transaction takes place after 10 years.
However, conventional IRR tables anticipate the results of equity investment transactions; the traditional Internal Rate of Return (IRR) tables do not work accurately in determining the potential IRR of royalties transactions.
The tables used by venture capital and private equity groups assume the following knowledge: the cost their investment, the value of the existing transaction, and the period in which their capital is to be employed. They then use this point-to-point result to calculate the IRR projected during the given period. This means one input of capital at the beginning, and one output of exit proceeds at the end. All of the capital is exposed to potential loss, up to 100%, for the entire term of the investment.
In the case of royalties, the amount at risk decreases with each royalty payment (usually quarterly). We structure royalty transactions with multiple exit outputs, intended to have cumulative royalty payments equal to the initial cost of the royalty in between four to six years.”
Read the complete article here; no fees or registration required.
Revenue royalties are an area of special interest for Mr. Lipper, whose financial career extends over 50 years; he played a key role in the professional analysis of mutual funds and was the Publisher and Editor-In-Chief of Venture, The Magazine for Business Owners and Entrepreneurs. Further articles in the series, which will be highlighted on the website will appear regularly, and a complimentary newsletter to Royalties Express, with regular updates, is available on request.
Contact information regarding this press release: Michael North; [email protected]
More information about Arthur Lipper: http://www.pacificroyalties.com/management/.
Other new articles in this series, found at RoyaltiesWritings, include: “15 Questions Investors have about Revenue Royalties” and “Should a Royalty Investor Use Leverage to Increase the Return?” For investors among you, Investment Manager Questions About Starting A Royalty Income Fund will be of interest.
Taken together and with my earlier blog summary of the benefits of royalties, you’ll have a good feeling and rationale for offering royalties rather than equity to prospective investors. For a full and fun read on the subject, check out my eBook on royalties The Road Less Traveled, which you can download for free on the Intelliversity site. You’ll find it in the Library along the right side of the site.
For further discussion on royalties, with respect to your particular situation and financing needs, set up a telephone meeting with me by reserving a slot in my calendar.
Key Takeaway: The onus may be on you to insist on a royalty agreement when financing your company. Get clear on why. Also get clear on how to prove why royalties may be a better choice for your investors as well. Then connect with us by telephone to design a royalty agreement that fits your needs.
Bonus Idea: Convert your existing investors to royalty contracts, which they may prefer and which gets them off the cap-table.