Both those founding and managing companies, and those who seek to benefit from investing in successful companies, share a wish that revenues will increase.

Those involved in the ownership and management of companies are also required to make decisions about: the price of raw materials and factor inputs; the availability of necessary labor on terms which allow for company profitability; and company policies regarding executive and staff compensation, retirement and healthcare plans, local taxation, and the level of fees and expenses necessary for the company’s operation.

Revenue royalty (royalty) investors, having purchased from a company a percentage of the company’s defined revenues, for an agreed period and subject to negotiated factors, are solely interested in the generation of corporate revenues, which will grow as customers increase in number. Royalty issuing company revenues reflect both the company’s ability to create that which benefits its customers, and its ability to effectively market its goods and services at a profitable price. The royalty investor is not concerned with the myriad problems with which the owners of businesses must contend. Their only concern is the timing and amount of royalty payments they will receive.

The primary concern of new business founders and early-stage invest is equity dilution, which impacts their ultimate financial benefit derived from the company’s success. Owning more stock of a losing company is less important than owning the stock of a winning company.

From the perspective of the entrepreneurs founding a company it is sad to observe the level of equity dilution which is usually required by investors buying equity from early-stage companies. In comparison, the sale by the company of a revenue royalty for early-stage financing purposes lessens or even possibly avoids equity dilution.

We have developed terms for royalties which meet the needs of companies seeking growth capital, as well as those of investors. One of the needs of companies often is the ability to terminate the royalty as a condition for future financings of the company or the company’s acquisition. The terms of the royalty structures we recommend, when professionally negotiated, can fairly meet the needs of both investors and royalty issuers.

 

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