Basically, instead of a traditional loan that has a fixed interest rate, investors lend money on the basis of an agreement where the company re bourse them through royalties. Borrowing financing involves obtaining a traditional credit in which you do not give up ownership of your business. Like traditional loans, these types of investment agreements are considered to be fully paid as soon as the conditions are met. Royalty financing is a type of investment in which the company receives money on the basis of future revenues and is akin to an advance on a pay cheque. Read 5 min Here`s a true story you might find familiar: a young CEO runs an exciting start-up in agriculture, with a solid IP (a patent portfolio) with a possible future of a billion dollars in revenue. He is a longtime friend of mine indeed and has „suffered“ from my advice for nearly a decade on raising capital and using copyright, if possible as a preferred structure. In fact, when he brought in about a million dollars of angelic capital, knowing that he was aware of the complications, he agreed to a stock sale with a pre-money valuation of about $10 million. Why did he not insist on a revenue-participation contract (licensing financing) and not give up equity? David R. Evanson: „Royalty Treatment – the use of royalties as a form of corporate financing.“ Entrepreneurs. September 2001. The financing of royalties is a kind of compromise between the two. Investors see higher returns than traditional loans and companies do not need to exchange equity for financing. As a general rule, investors do not invest in the business with licensing financing, but the company must repay investors even if it is not profitable.
Royalty financing is a loan and, if the company is unable to repay the loan, it should sell its assets to make those payments. Key Takeaway: It may be up to you to insist on a licensing agreement for financing your business. Tell me why. Also explain how investors can show why royalties can also be a better choice for them. Then log in to us by phone to design a licensing agreement that meets your needs. 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. 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. Depending on how well the product works and the loan terms, royalty financing can be expensive.