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December 19, 2010

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I think revenue financing is the wave of the future. It's being used here in SV more and more.

If the start-up already has a quickly rising revenue stream, what risk is there to the investor following the revenue-based approach? Is his "51%" still justifiable? Is his position in negotiating for a fair shareholding in the start up weakened?

Will,

With an Revenue Royalty Certificate, the investor doesn't get any equity up front. Think of it as a hybrid. A convertible hybrid. By convertible I mean that once the principal and interest have been paid off in full, there may be an "equity kicker" triggered which gives the capital supplier a 1 to 5% equity stake in the company.

RRC's are amazing flexible and you can do almost anything with them. It all comes down to what you and the capital provider agree to.

I would like to set a time to talk and get your opinion on funding. I have built a site designed to support the products and companies that support this economy to help put Americans back to work. I would like to learn more about your RRC model.

It's an interesting concept for sure, but I think that calling it a startup funding strategy might be stretching it a bit as this tends to rely on existing revenue, not something most startups have. This is essentially a loan that is paid back by setting aside a percentage of revenue. One could also consider it a convertible note with trimmings (low ownership conversion, fix/sliding multiples, defaults etc). It will be interesting to see where this format settles out as anything is possible in financing. :^)

As always Peter you are spot on.

Most start ups need to answer the big 4 investor questions:

How much
How long
what is my end
and how do I get out

And even after all this is addressed, CAN YOU PULL THIS OFF!!

I have presented a pre-negoiated MBO as an exit at one times sales with 70% equity to the investor with a 2 year payback and mothly distributions and a management team with 25 years of sector success, "AND STILL GOT TURNED DOWN"

Make sure your investors are focused and everyone is on the same page.

Welcome to startup heaven

Debt financing sometimes is an opportunity for VCs to squeeze out/ wash out angels who do convertible loans to entrepreneurs. I've met a number of angel investors who are gun shy because they were squeezed out of companies that later did well, but the VCs in series A made sure to limit the equity available to angels and even threatened to pull their investment if they didn't get their way.

What safeguards are there for investors to avoid predatory VC practices around these and other loans, and how do VCs view royalty financing?

great discussion. www.revenuebasedfinance.com has a lot more info on revenue/royalty based venture funding.


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