Revenue Royalty Certificates: Advantages of Revenue-based Financing Instruments
I have been writing about some of the advantages of raising startup capital using instruments such as Revenue Royalty Certificates (or Revenue Royalty Agreements, if you prefer). As soon as you sell any equity for capital the pressure starts to mount for a liquidity event of one type or another. As I mentioned earlier, investors can only make money through a liquidity event. That’s when they normally recover their principal plus any capital gain that has hopefully accrued.
The Holy Grail of Investing: the Liquidity Event
While your investors may pretend to be patient for a year with each month after that they typically start becoming more impatient to see something on the horizon that resembles the the Holy Grail of Investing, namely the liquidity event. This normally happens one of three ways:
1. a venture capital firm puts A Round money into the company which can sometimes be used to buy out the original investors (and more oftentimes not because later investors don’t like having their money used to enrich earlier investors. They want to used for things that will make them a good return.),
2. an acquisition by a larger company,
3. or in rare cases, an IPO, if a whole lot of things go right for the company without venture capitalists getting involved.
Since the investors want to take advantage of every opportunity to take the company closer to an exit they will begin to differ if not downright clash with the founders whose vision is more long term. In most cases, the founders are committed to making the company a huge success instead of just something to be flipped at the soonest opportunity.
Revenue-based Financing Builds Cooperation
When you use an RRC to fund the company everyone is basically rowing in the same direction. That direction is towards enabling the company to generate revenues which can then be used to pay back the capital with interest. So long as the company is paying its revenue royalties as agreed upon there is little incentive for its backers to meddle in the affairs of the company.