Question Asked:

Why is a company seeking capital better advised to sell a revenue royalty than equity?

 

Bard’s Response:

There are several reasons that a company seeking capital would be better advised to sell a revenue royalty than equity.

• • Retaining ownership: When you sell equity, you are giving up a portion of ownership in your company. This can be a major concern for entrepreneurs who are passionate about their business and want to maintain control. With a revenue royalty agreement, you do not give up any ownership, so you can retain full control of your company.
  • Less dilution: When you sell equity, you are diluting the ownership of your existing shareholders. This can be a problem if you have a small number of shareholders, as it can make it more difficult to get things done. With a revenue royalty agreement, you do not dilute the ownership of your existing shareholders, so you can avoid this problem.
  • More flexibility: With a revenue royalty agreement, you can structure the deal to fit your specific needs. For example, you can set the royalty rate, the term of the agreement, and the payment schedule. With equity financing, you have less flexibility, as you are typically locked into a standard set of terms.

Of course, there are also some potential downsides to selling a revenue royalty. For example, you may have to pay a higher royalty rate than you would if you sold equity. Additionally, you may have to give the royalty investor more control over your company than you would like.

Ultimately, the decision of whether to sell a revenue royalty or equity is a complex one that should be made on a case-by-case basis. If you are considering selling a royalty, you should carefully weigh the pros and cons to determine if it is the right option for your company.

Here are some additional things to consider when making this decision:

• • The stage of your company: If you are in the early stages of your company, you may be better off selling equity. This is because equity investors are more likely to be patient and give you the time you need to grow your business. Royalty investors, on the other hand, may be looking for a quicker return on their investment.
  • The size of your company: If you have a small company, you may be better-off selling equity. This is because it can be difficult to find royalty investors who are willing to invest in small companies.
  • The industry you are in: Some industries are more attractive to royalty investors than others. For example, the technology industry is a popular choice for revenue royalty investors because there is a lot of potential for growth.

If you are still not sure whether to sell a revenue royalty or equity, you should consult with a financial advisor or investment banker. They can help you assess your company’s situation and make the best decision for your business.