The startup company having the ED (extraordinary discovery) which creates great benefit for those using the ED, must prove, produce and distribute the ED, and this requires funding.
The company believing that they have the ED, hereinafter called the Issuer (revenue royalty issuer), will need to identify and convince two different investing groups.
Group 1 will be investors who believe the company will be able to do what is necessary to create and manage a business generating either significant revenues or a payment for the acquisition of the company, at a price exceeding its cost of producing the finished, or proof of concept product. The investors will be paid a percentage of defined revenues, including any funds paid for the company or its assets.
Group 2 will be Assurers, those who assure the investors that they will be paid by the company, at least, the amount paid for the royalty. The Assurers will be paid a fee by the company for accepting the risk of making the royalty additionally attractive to the investors by mitigating their capital risk.
The risk and reward of investors and Assurers are both similar and different. Both are concerned by the need for the company to be successful in being able to pay royalties sufficient to at least return to the investors the amount paid for the royalty. If such a payment of royalties or other funds generated by the company are sufficient the investor will be able to recapture the funds invested and the Assurers will profit from the fee paid at the closing of the transaction plus the receipt of a continuing royalty from the company.
However, if the company fails to pay the investors the amount they invested, the Assurers will be required to do so, mitigating the risk of the investors and probably incurring a loss in doing so.
Due to the risk assumption by the Assurers, the company will be able to pay the investors a lesser royalty rate than would have been the case if the investor risk had not been mitigated. Commencing upon the full recapture by the investors of their investment principal, the company will pay a royalty to the Assurers calculated as the difference in the royalty rate agreed by the company to be paid the investors and that which would have had to be paid to the investors absent the Assurer commitment to the investors.
Therefore, if the company finds it necessary in selling its royalty to investors, there is an initial fee paid by the company to the Assurers for assuming the risk and a lower royalty rate to the investors. If and when the company pays back the amount that royalty investors paid for the royalty, the company pays a royalty to the Assurers with a royalty rate based on the differential of what would have otherwise been paid to a non-protected royalty investor. This means the only additional cost to the company in using the approach is the initial fee paid to the Assurers.
The investor must decide if the prospects for the company’s revenues or the sellout valuation are sufficient to be attractive if the royalty rate is less than it would be if the return of capital were not assured.
Those considering becoming an Assurer must decide if the risk/reward ratio is sufficiently favorable to take the risk of assuring the payment of the net amount to the investor.
Both will benefit if the company is successful, while only one has a capital risk.
Arthur Lipper, Chairman
British Far East Holdings Ltd.
+1 858 793 7100
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