Revenue Based Finance

Raising capital without parting with all your equity

When you need to raise finance for your company, you don't want to give away most of your equity in the first round of finance. Usually investors provide the majority of the investment capital in the form of subordinated loans. These loans are subordinated because no collateral or guarantees are provided. When the cash flow allows, the loans can be repaid so the investor is less exposed. The share capital remains in the company until the shares are bought back by the entrepreneur(s) or the shares are sold to a third party.

When the company is very successful, the shares might increase in value twenty times over. This poses a serious problem for the entrepreneur(s). They don't have the money to pay for the shares so they need to sell their company to buy out the investors.

Investors prefer the Royalty Based Finance (or Revenue Based Finance) for cross border investments. The benefits are that investors share the risks of the investment wit the entrepreneur(s) and the entrepreneur(s) can buy back their shares for a fixed price.

The RBF package consists of three financial element with which can be played until a mutual beneficial financial package is constructed. The elements are:
  • A minority stake in the share capital (usually 30%)
    • not more than 10% of the investment amount is paid in share capital
    • the entrepreneurs have the right to buy back the shares for a fixed multiplier (usually 3x the amount that the shareholder paid for the shares)
  • A subordinated loan for the rest of the investment amount against a fair interest percentage (between 5 and 8 percent for hard currencies)
    • shares can only be bought back when loans are repaid and interests are paid.
  • A royalty fee on the revenues, either the projected revenues or the actual revenues whichever is highest
    • royalty payments stop when all loans and interest are paid and the shares are bought back from the investor
Details of the investment proposal can be entered in the spreadsheet below:

More details on RBF and a document package for RBF can be found on: https://sites.google.com/site/nilsdewitte/rbf-document-package