A revenue-based financing instrument called a Revenue Royalty Certificate.
I'll gladly pay you Tuesday for a hamburger today. - Wimpy
The above quote sums up in one line what most first time capital seekers sound like to angel investors. I say this because the number one concern of investors is the preservation of their capital which includes the ability to extricate it from the company within a reasonable amount of time.
When the investor asks what sort of liquidity event the entrepreneur plans to create for this purpose and when, the answer is invariably vague. "Oh well, if everything goes perfectly we will IPO in a few years or be acquired by a big company." That folks is as confidence inspiring as Wimpy's famous offer. Investors require a minimal level of certainty. Vague answers only scare them off. That is the first big deal-killer.
The second deal killer is an inability to agree on a valution. The entrepreneur needs $500K and is offering 20% of the company for it. That's only fair, right? The angel wants 51% because of the high level of perceived risk. The chasm between the two valuations is in most cases too wide to bridge.
The third big deal-killer is over how any potential profits may be split if they do occur. Since the startup will be a private company initially the founders will want to minimize taxable income via the standard ways. This usually means that nothing is left over to share with the passive investors. Considering that his money could be tied up for five or more years without any return, can you blame the investor for not being excited enough to write a check?
Is there a solution? Is there a way to eliminate these three deal-killers? The answer is yes. It's done by using a revenue-based financing instrument called a Revenue Royalty Certificate.
Find out more about this amazing yet still little know tool which was recently written up in the WSJ: An Alternative Financing Option for Start-ups: Entrepreneurs Going the Revenue Royalty Route Use a Share of Revenue to Pay Back Loans
Get the details here on how to successfully use Revenue-Based Financing.