“What’s in it for me?” is naturally the first focus of any investor. Therefore, a description of the benefit to the investor, if the company is successful in both obtaining funding and subsequently doing that which is required for a reasonable exploitation of the opportunity, is first provided.
There should be a description of the market research which has been done, including the identity of who has done the research.
Next should come a full description of the product, including the stage of development of the product and what is yet to be accomplished. To the extent possible proof of the level of product readiness for marketing should be provided. Services can be the product of companies seeking funding.
Then there should be a disclosure of the marketing plans, including their projected costs. In many cases the cost of marketing will be substantial and is underestimated by those already involved in the product’s creation and convinced of the projected customers’ desire or need for the product and its superiority. Product marketing usually takes longer and costs more than is estimated by the product’s sponsors.
Then, there should be a description of those who are both currently and critically involved and of those yet to be recruited. Entrepreneurs should recognize that they, as individuals, are not important to possible investors. Different skills and motivations are required for business creations than for business growth and management. Yes, it’s true that in some cases investors are motivated to bet on the jockey, but professional investors understand that great horses, need only good jockeys to win.
Lastly, business founders and owners can have different motivations than investors. Most business investors want, in the shortest period, the greatest, risk-adjusted, return. Business owners may have a longer-term objective and wish to reinvest cash flow in employee education and benefit plans and further product development. Although frequently professed differently, business owners really want funding and not partnerships, as the use of equities implies. Therefore, a sharing of revenue, rather than ownership works for both parties.
Revenue royalties are a means of allowing both investors and business founders to achieve their objectives, without the inherent and inevitable conflicts of interest resulting from investors owning equity. Executive compensation and other employee benefits are an obvious area of conflicting interest, as is research relating to future products.
Royalties can be limited to revenues above an agreed amount. Royalty levels can be staged reflecting amounts already paid to royalty owners. Royalties can be combined with debt, commencing only after the repayment of the debt. Minimum levels of royalties can be negotiated as a means of reducing the overall level of royalty payment due. Royalties can be subject to royalty issuer redemptions at multiples of investor cost of the royalty. Royalty terms can be agreed which are fair and reasonable meeting the needs of both issuers and investors. Royalty payments are federally tax deductible for royalty issuers and tax-free for royalty investors until the capital invested has been recaptured. Thereafter, royalty payments received are considered ordinary income, like dividends.
Those interested in learning more about our patented approach to using revenue royalties are invited to review rex-basic.com and my blog arthurlipper.com. There are many other royalty related writings I can recommend, and I welcome direct contact with interested parties.
In closing, I recommend that providing investors with business plans should only occur after the prospective investor has indicated an interest in learning more about the benefit possible from providing the sought funding. Also, it is better for both investors and entrepreneurs for the investment to be one which participates in revenue generated by the business, rather than in business ownership.
Arthur Lipper, Chairman
British Far East Holdings Ltd.
Del Mar, CA 858 793 7100
arthurlipper@gmail.com
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