Royalty Notes: A Debt + Equity Fusion?

---
Author:  Dr. Chris Wedding

​
If you’re an investor that likes the predictability of debt (check), but loves the upside potential of equity investments (yep), then Revenue Royalty Notes might be worth exploring.

Why might investors like Royalty Notes?

• Higher current income expected relative to most debt products
• More equity-like IRR potential
• 1-8% of revenue (not profit) paid to you monthly or quarterly
• Less uncertainty and more seniority than equity investments
• 3-5 year terms
• Remaining balance and mutiple on invested capital due at a predetermined maturity date

Importantly, future performance cannot be predicted by historical performance, so you’ve gotta feel good about the consistency and duration of a company’s past revenue, plus the sanity they used (or threw out the window) when making forward projections.
​

A Comparison: Royalty Notes vs. Debt or Equity (CaroFin)

And since it takes two tango…

Why might entrepreneurs like the Royalty Note structure for their growth capital?

• Alignment of incentives — “If I do better, then you do, too (at the same time).”
• No pressure to meet fixed debt payment schedules — “It’s easier for me to predict my success in terms of years, not months.”
• Capped upside for investors — “If I succeed, then I am thrilled to pay you more than senior debt would earn, but I’m happy to keep more of the upside.”
• Less micromanagement — “I’m paying you off of the top line, so I can largely manage my business strategy and expenses as I see fit. ”
• Responsive to seasonality — “Since my industry might have higher and lower revenue months, this structure allows me to worry less about the extra cash management necessary to otherwise pay you at prearranged times.”

One more tiny detail: If there’s no revenue in the business yet, then there’s likely no Royalty Note either. Gotta stick to expensive equity for the time being…


Conclusion

We may not be able to have our cake and eat it, too.

(Although people have been thinking about this since at least the year 1538.)

Nor can we defy the Heisenberg Uncertainty Principle and know both the velocity and position of subatomic particles at the same time. [Dang it, my life’s dreams ruined…]

(Geek out more here.)

But don’t dismay…

It is, in fact, possible to invest in companies with instruments having both debt and equity characteristics via the Royalty Note.

[Insert a long sigh, and cue inspirational music...]

To learn more about Revenue Royalty Notes, check out this article by CaroFin, a private marketplace for alternative investments:

• Revenue Royalty Notes — A form of debt investment with equity return potential...an alternative for investors pursuing exceptional current cash returns

---
Photo credit: Pratiksha Mohanty via Unsplash