Happiness is a Warm Puppy (or a Royalty Investment)
Want to hear a story that will make you happy? You’ll want to hug your investor.
You and your investor(s) argue about valuation for six months and can’t come close. Your business opportunity is fading into the sunset. Not good. Then, after reading a blog on the Intelliversity site, you finally agree to fund your venture through royalties, rather than selling equity. It’s morning in America. You breathe a sigh of relief. So do they.
Why is everyone relieved? It’s all about relationships without worry. Your agreement is a little like profit-sharing except for the amount you pay back is proportional to your revenues each quarter, rather than your profits. Brilliant! The investor(s) are comfortable with that because they don’t have to worry about your expenses, i.e. how you’re spending company cash. They also don’t have to worry about when you’re going to sell the company. No complaints or nasty board meetings. They only worry about your top line revenue and they can even help with that through connections, ideas, etc. Royalties are a true relief.
OK, then so what happens if you grow faster than you expect? That’s great except now the royalties are growing faster than you expect. You want out.
Arthur Lipper, who is one of the creators of the Royalty Funding idea, leads the way to a solution. Refer to the following recent press release for details:
LOS ANGELES, November 10, 2017: Revenue royalties, a financial system developed by Arthur Lipper, may sometimes be redeemed early before they are due. In a new article, Lipper analyzes why it may be desirable for the issuer or the investor to terminate royalty payments early, and the logical financial consequences. This article spells out how royalty payments made up to the date of redemption should be credited against the redemption right payment.
The title is “Crediting Royalty Payments for Redemption Calculation,” and the full article is now available for complimentary viewing here, no fees or registration required.
Here are some excerpts:
“The negotiation of a redemption right as a means of terminating the royalty payment obligation is fair and necessary to attract business owners to use royalties as a means of financing that does not dilute existing equity holders.
“The redemption right should recognize the amount of royalty payments made prior to the exercise of the right, as the terms of the redemption right require an overall payment of a multiple of the cost paid by the investor for the royalty.
“The reality of the arithmetic is that each royalty payment made, up until the amount invested equals the original cost of the royalty, reduces the investor’s risk. Once the cost of the royalty has been recaptured, all payments are profit.”
Revenue royalties are a special focus for Mr. Lipper, a well-known Wall Street investment banker and advisor whose financial career extends over 50 years; he played a key role in the professional analysis of mutual funds and was the Publisher and Editor-In-Chief of Venture Magazine. Full disclosure: He’s also the Chairman of the Board of Advisors of Intelliveresity.
Further articles in the series, on the website http://www.royaltieswritings.com, will appear regularly, and a complimentary newsletter Royalties Express, with regular updates, is available by registering free on the website.
This series is supported by Pacific Royalties and by Intelliversity. You’ll find a series of articles there at varying levels of sophistication rounding out the subject of financing your company through royalties.
Taken together and with my earlier blog summary of the benefits of royalties, you’ll have a good feeling and rationale for offering royalties rather than equity to prospective investors. For a full and fun read on the subject, check out my eBook on royalties The Road Less Traveled, which you can download for free on the Intelliversity site. You’ll find it in the Library along the right side of the site.
For further discussion on royalties, with respect to your particular situation and financing needs, set up a telephone meeting with me by reserving a slot on my calendar.
Key Takeaway: Royalties are not a trap – this style of funding is like a warm puppy. It makes you feel great! There’s a simple way out of your contract if your company is more successful than you expect. Learn how to include this in your agreement with investors.