Royalty Based Financing Agreement
Under equity financing agreements, entrepreneurs have to give up much of their ownership to get money from outside investors. If you don`t have to give up your equity positions, it can motivate the founders of a company to continue to be successful. It also saves them a lot of money on legal and registration fees related to equity and securities financing. Basically, licensing funding is much friendlier with “the little guy” in the business world. As part of licensing financing, a company receives money through an investment based on future revenues. Think of it as an advance on a paycheck. Investors get their money back from royalties representing a certain percentage of the turnover of the company in which they invested. Like traditional loans, these types of investment agreements are considered to be fully paid as soon as the conditions are met. A small business interested in licensed financing operations can negotiate an additional period of time, so that once the agreement is reached, there will be no licence fee for a quarter or more. It may also be possible to see a delay between the time the revenues are earned by the company and the period during which royalties are paid to investors. This type of agreement can give small business time to bring capital to work and increase its turnover before a percentage of turnover is paid in the form of royalties. In most cases, these agreements are acceptable to investors because they always offer a better offer than most equity financing agreements that pay only when the stock is sold.
Evaluation: Not necessary. In this case, there is a mutual agreement to pay 1.5% of your monthly income until the investor receives a capitalization of $2 million (2x yield). As a result, the royalty cap is generally met within 4 to 6 years. In this scenario, the cost of the $1 million investment from VC was $9.7 million, but only $2 million from the royalty-based alternative funding. It cost almost 5x more to take the money from VC. In addition, you retain 100% of the equity with RBF and retain control of the entity. Part of the reason licensing financing has gained popularity in recent years is that it offers an alternative to traditional financing methods such as equity financing and regular debt financing. It is also particularly popular with small businesses.
Licensing financing is a relatively new approach, offering an alternative to financing regular borrowing (commercial loans and credits) and equity financing (venture capital and share sales). In the case of a licensing agreement, an entity receives a certain amount of money from an investor or group of investors. The money could be invested in the introduction of a new product or in expanding the company`s marketing efforts. In return, the investor receives a percentage of the company`s future income over a specified period of time up to a certain amount. The investment can be considered an “advance” to the company and periodic percentage payments can be considered “royalties” paid to investors. Licensing financing is generally the best way to operate for small businesses that have some pricing elasticity, so they can raise prices to cover the percentage of royalties without losing customers. Licensing financing is also suitable for companies where increased marketing efforts have a direct impact on revenue. However, licensing fees may not be a good option for companies with very narrow profit margins. In summary, the capital obtained through licensing financing can enable a young company to bring a new product to market or expand its marke efforts.