New financing instrument of Early-Stage Technology Companies reducing investor risk and allowing fou
Written by Arthur Lipper, Chairman British Far East Holdings Ltd. chairman@REXRoyalties.com
Early-stage tech startups often raise up to US$1.0 million and prepared to offer ownership of 25% to 40% of the equity of their company to investors.
The product or service of the companies have great potential values if the funding is enough to allow development sufficient to attract an acquisition by a company having the resources necessary to produce and market that which the company seeking funding has perceived and induced the participation of the company actually bringing the product or service to market.
In many cases, additional funding will be required and these funding’s will be highly dilutive of the ownership interest’s of the founders and earlier investors.
There is a better way for both investors and company founders to finance early-stage companies and that better way is for the company to sell to investors a long-term percentage of the company’s revenues. The negotiable instrument representing the revenue sharing obligation of the company is called a royalty.
Royalties can be for the entire amount of revenues of a royalty issuer’s company or only for the defined revenues as to specific products, revenues from some or all customers in agreed geographic areas, revenues up to a maximum all as the parties to the royalty purchase agreement agree.
Royalty investors can lose their entire investment if there are no revenues, even if there are assured minimum levels of revenues, if the companies are unable to honor their obligations. Royalty issuing companies can be terribly disadvantaged if revenues are generated but profit margins are not able to be maintained or reach anticipated levels as the royalties have to be paid regardless of profitability.
Royalties can also be made where the occurrence of certain agreed events trigger investor-related requirements on the part of the company. Most importantly, royalties should provide a redemption right benefit for the royalty issuing company and investor whereby the company may, on agreed terms, reacquire the royalties sold. These terms will include payments already made to investors and perhaps be a 5-fold return of the investor’s cost if within 60 months and a 10-fold return if within 120 months. There are a number of possible different ways of rewarding the investors for the termination of their revenue sharing rights, all agreed in advance.
The royalty issuing company is also free to attempt to negotiate the acquisition of the royalty with specific or all of the investors whenever they wish.
In summation, royalties allow company founders to obtain capital without surrendering ownership interests in companies or becoming fiduciaries for investors and only having sold a percentage of defined revenues.
The royalty investors, using our patented and recommended approach receive their royalty payments on the company’s receipt of revenue and hold an obligation that acquirers of the company will want extinguished. Of course, the company founders will continue to own their interests in the company and therefore be in a far better position than had they used the traditional means of financing the company. Royalties are win/win for both investors and company founders.
Those potential issuers or investors are asked to contact the publisher of this newsletter or the undersigned for more information and possible participation.
© Copyright 2018 British Far East Holdings Ltd. All rights reserved.
Arthur Lipper, Chairman
British Far East Holdings Ltd.
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