What Does it Mean to Invest in or Offer Revenue Share Securities? Fundopolis Breaks it Down.
Revenue sharing can be an interesting alternative to traditional equity and debt securities for both issuers and investors in the equity crowdfunding space.
What is a Revenue Share? Revenue share securities are very similar to debt securities. The main difference is that the payback amount differs each payment based on how much revenue the business has received during that period. Businesses pay back a percentage of net revenue each payment until the loan is paid in full.
Revenue Share Terms Explained
Payback Multiple: A multiple determines how much money will need to be paid back to investors by the maturation date. As soon as the revenue share security is issued, the face value of the note equals [your investment] x [multiple]. For instance, if you invest $100 on a note that has a multiple of 2.0x, it will be worth $200 at issuance.
Revenue Share %: The percentage of revenue payable to investors at the defined payment frequency. This will be calculated based on the gross revenue for the business for the previous month or quarter (depending on frequency). For example, if Company A had $40,000 in gross revenue for quarter 1, and a revenue share % of 7%, they would pay $2,800 towards paying down the note.
Payment Frequency: How often payments will be made to investors (quarterly, monthly, or yearly).
Maturation Date: This is when the note must be paid in full. Any unpaid balance is payable as a balloon payment on this date. Once the face value of the note (investment x multiple) has been paid in full, payment cease.
An Example: Payback Multiple: 2x; Revenue Share: 7%; Payment Frequency: Quarterly; Maturation Date: 7 years
If someone invests $500 in a company offering a revenue share note, the investor would receive $1,000 within seven years. The company is required to make quarterly payments equaling seven percent of its gross revenue for each quarter. It could be paid back sooner than seven years if the company does very well, but the note will be paid back within seven years, unless the issuer defaults on the obligation.
Why is this attractive to Funders? Investors can ultimately affect the return on their investment. By patronizing the business and encouraging, friends, family and social media circles to do the same, you can effectively help to increase revenue for the business. The more revenue the business takes in, the faster investors are paid back, and the higher the resulting return on investment.
Why is this attractive to Fundees? Offering revenue share, as opposed to equity, allows businesses to retain full control of their company and is favorable to businesses that can't support a fixed payment schedule (which is the case with standard debt securities). Revenue share is an opportunity to truly involve your investors in your success. Since the speed of their repayment is directly related to your gross revenue, it can create a unique bond between you and your investors. Communicating to them that by helping with your marketing campaign and using their circles to spread your message and marketing assets, they can help you grow awareness and revenue as a result. In addition, businesses can appeal to their investors to patronize them and urge their friends, family, and social media circles to do the same. It’s a win-win for everyone!