New companies usually attempt to raise funds when the founders believe their vision of creating a service or physical products will be both producible and deliverable to prospective customers, at a price of more than the cost of production and distribution, thus providing a profit.

The source of funding may include the founders, families, friends, those desirous of using the service or product, or investors. Each of the foregoing wish the effort to succeed for various reasons.

In the case of investors, their decision will be based on an assessment of risk versus reward, with the anticipated reward being a multiple of the risk. It is likely investors will be more prepared to accept risk at times when they are optimistic about overall economic conditions.

As there is nothing the founders can do about the investors’ view of the economy, they should structure the investment opportunity with less risk and a more likely positive return. This can be done by selling the investor a percentage of the company’s revenues, a revenue royalty, rather than a share of the company’s equity and its profits.

The profitability of a company is dependent on the continuing purchase by customers of whatever the company is selling, and at a price greater than the cost of producing the product or service and running the company.

Clearly, there are factors, both within and beyond the control of the company, which make the projection of profits difficult. The projection of revenues is also difficult, but less so, as there are fewer variables. The revenue projection requires that the company has been able to produce a product or service which can be sold to customers. The amount of customer sales depends on the value of the product or service to customers at the price being offered. The revenues are not impacted by the economics of the company, nor the per share equity dilution which may have been required for the company to attract necessary capital.

Royalties are contracts between the royalty issuing company and the investor regarding a percent of the defined revenues of the issuer. Royalties can be structured with great flexibility, based on the company’s situation.

Royalties are contracts between royalty issuing companies and

Investors regarding the percent of the defined revenues of the issuer which are to be paid to the investors.

Royalties are believed not to be securities.

The negotiated royalty rate represents an agreement between the issuer and investor regarding the percentage of the issuer’s defined revenues which are to be paid to the royalty holding investor.

Royalty rates can in negotiation be reduced by reducing investor risk.

Royalties can have royalty rates which can be modified, based upon the amount of royalty payments made during an agreed period.

Royalties can commence at agreed revenue levels.

Royalties can be paid daily or at any frequency agreed by the parties.

Royalties can vary as to revenue sources.

Royalties can be terminated on agreed terms.

Royalties can have minimum payment assurances.

Royalty payments can be third-party assured.

Royalties can be combined with debt.

Royalties are transferable and payments are tax-free to investors until they have recaptured the invested amount.

Royalty payments can be in agreed currencies and paid to anyone.

Royalty payments are tax deductible to issuers.

Royalties can be owned by individuals, companies, or trusts.

Royalties do not represent any ownership of the company.

Royalties do not vote, nor do royalty investors have any right or ability to influence the management of the royalty issuing company.

Royalty investors and issuers agree to the detail and timing of information the issuer is required to provide the investor.

We can advise both royalty issuing companies and royalty investors in the use of royalties, including those approaches to revenue royalty finance which we have patented. Royalties, though highly flexible, do not have to be complicated. They are simply an agreement of how a percentage of the royalty issuer’s defined revenues will be distributed to investors.

 

 

Arthur Lipper, Chairman                 arthurlipper@gmai.com
British Far East Holdings Ltd.

 

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