Begging Bowls Can Be Attractive

The non-profit community is financed by the successful presentation of need and the social benefit of research and services currently provided.

The senior executives of most non-profit organizations are forced to spend much of their time and effort in raising the funds necessary for the continuation of their operations.

In the case of research efforts, the resulting success will take the form of some medical product or service, which will probably be licensed to commercial enterprise. The license will likely require both an advance payment and a continuing benefit from the use of the licensed or sold intellectual property.

Therefore, rather than seeking charitable donations, a royalty could be sold by the research unit to both those wishing to contribute to the social benefit of the project’s success, as well as to those prepared to risk investment for profit.

Those currently engaged in the research effort will have career advantages. Also, the public will benefit if the research is successful, assuming the product or service is delivered to the public, by an entity profiting from the manufacturing and/or distribution. The risk-taking royalty investor could also benefit from the success of the intellectual property: creators, developers and product distributors. Each of the contributors is dependent on the royalty investor’s initial funding,

There is additional benefit to those owning the intellectual property financed through the sale of a royalty rather than sale of equity when raising capital. Of course, the holder of a royalty is also able to donate the royalty to its issuer. Therefore, it is possible that the needs of both investors and philanthropists can be achieved using the same instrument and approach, while the research unit has significantly expanded the universe of possible funders.

Since revenue projections, which are the basic element of calculating the fairness of royalty terms, are not likely to be available another basis for determining what could be a fair return for the royalty investor must be found. Of course, in any research-based project there is the possibility that there a successful product or service will not be commercialized and that therefore the royalty investor will suffer a 100% loss.

However, we can develop fair terms based upon the amount of money paid for the royalty and the investors’ targeted return on all or nothing projects.

Investing in scientific and/or and early stage business outcomes is a bit like ageeing to buy a foal sired by a stallion with a great record of winning races. For the investor to profit the foal must be fed, protected, nurtured, developed and trained. The foal must also be managed in terms of the jockey selected to ride the horse and the specific races to be entered. If all of these requirements are met it is possible for the investor to profit, if the horse is better than its competitors. Of course, there is always a justified feeling of pride and pleasure in seeing the animal perform. Having once owned 7 racehorses I know that it, like investing in early stage companies or anything which is “new”, is an odds-against proposition. Therefore, the gains, when they come, need to be significant.

The proposed deal for royalty investors, in a situation where realistic revenue projections are not available, should call for a large percentage of early revenues to be paid to the investor and a much-reduced percentage after an agreed multiple of the investor’s investment has been received.

For readers seeking to structure specific royalty deals, for the fair benefit of all of the parties, that is what we do professionally. All we need to know is: the amount of money to be invested, the number of years before revenues commence, the projected pre-tax profit margin after licensing the intellectual property or selling the product or service and annual size of the market being addressed. The more information about the size and timing of revenues which can be provided the easier our job and better the result.

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Arthur Lipper, Chairman
British Far East Holdings Ltd.
+1 858 793 7100

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Blog Management: Viktor Filiba

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