Royalties are an agreed percentage of the royalty issuing company’s defined revenues. If there are no revenues, there are no payments due to the investor who has purchased a royalty, unless there are protective terms.
Our patented approaches include some or all of the following terms, which are intended to protect the investor and benefit the royalty issuer. The benefit for the issuer may be that without some protection the investor will pass on the opportunity and with the protections and sharing or shifting of risk, the royalty rate may be lower than would be without the protections.
Possible investor protections
The company’s critical assets, usually intellectual property, can be either transferred or liened to a third party and held for the benefit of the investor, depending on the occurrence of agreed events.
The royalty issuing company can assure the investor that an agreed amount of payments will be made during the course of an agreed period.
The company can also enter into an investor-initiated royalty repurchase agreement, known as a put, exercisable only at the end of a 60-month period, at the investor’s cost of the royalty, net of the royalty payments already paid. The put, if exercised, terminates the company’s further royalty payment obligations. It is unlikely these puts will be exercised if the company is generating revenues.
Independent entities can assure the investor of receiving an agreed amount over the course of an agreed period. The royalty issuing company can pay a fee to the independent entity to offer the investor this capital protection.
Although royalties only represent an ownership of an agreed percentage of revenues, and investors do not give the investor a vote or ability to influence management, there can be, under certain defined circumstances, a requirement of royalty investor approval for the taking of specific company actions.
It is important for all involved to understand and remember that it is the use of a royalty, instead of an equity related security, which permits the entrepreneurial founders of a company to retain the full benefit of ownership, in the event the company is successful.
The use of a royalty, with an issuer’s right of redemption, permitting the termination of the royalty on agreed terms, also delays the need or wish of the business owners to sell stock at a higher valuation than would have been the case at the time the royalty was sold.
The terms of royalties are totally flexible and an experienced advisor, which we consider ourselves to be, can in most cases create a royalty that meets the needs of both the owners of the company and the investors believing in the company. In the end, the investors get more income with less risk and the owners come to have a full retention of their ownership.
It is also important to note that many early-stage company founders do not realize that after selling shares of the company they control they become fiduciaries, responsible to the investors for the actions of the company. This is not necessarily the case with royalties.
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Arthur Lipper, Chairman
British Far East Holdings Ltd.
858 793 7100
Blog Management: Viktor Filiba