Revenue Based Financing

Back when we were doing our MBA Monday series on Financing Options For Startups, I got an email from my friend Andy Sack. Andy was one of the first entrepreneurs we funded by in the mid 90s with our Flatiron Fund. He's done something like a half dozen startups since then and he's a veteran in the very best sense of the word.

Andy said "You missed an important option Fred – revenue based financing. I've got a new firm called Lighter Capital that does just that". I said, "Can you write a blog post for MBA Mondays explaining how it works?" So today, we have a guest post/advertorial on Revenue Based Financing from Andy/Lighter Capital. I hope you like it.


Fred’s series on alternative financing options has been awesome to follow, especially because it broadens the discussion of how companies can fund business growth when they can’t (or don’t want to) raise venture capital or bank debt. Fred’s original list missed one option – revenue-based finance – that's near to my heart and I’ve been encouraging entrepreneurs and angels to consider, and Fred graciously let me offer my insights here.
Disclaimer: I am founder of Lighter Capital and have a self interest in educating and promoting the use of this new type of financing called revenue-based finance.  I’m also a serial technology entrepreneur and believe this type of financing has real advantages to traditional debt and traditional real advantages over equity for the entrepreneur.

A revenue-based finance (RBF) investment provides capital to a business by “selling” an ongoing percentage of a company’s future revenues to the investor.  For simplicity, you can think of it as a revenue share type of arrangement. Investor gives capital to company in exchange for a small percentage of gross revenues. RBF lives as a hybrid of bank debt and venture capital. This kind of financing has been around for a while in non-tech industries such as mining, film production and drug development, but it’s recently been gaining traction in the world of growth finance and early-stage technology funding.
I want to explain how an RBF structure is different than traditional funding sources, detail what situations could be better suited for an RBF structure (for entrepreneur and investors alike), and offer a word of warning about the businesses that aren’t a good fit for the structure.
First, let me explain how a revenue-based loan works:

Instead of a typical bank loan which requires a business to pay a fixed interest payment, a revenue-based loan receives a percentage of revenues over a specified amount of time, allowing "interest" payments to fluctuate when a growing company has inconsistent cash-flows or lumpy or seasonal revenues. In a world where business costs such as software and infrastructure are increasingly becoming “as-a-service” and adjust with the ebbs and flows of a business needs, RBF payments automatically ramp up and down along with a business. It’s the inherent variability of RBF that makes the structure so appealing so appealing.  Imagine if your business loan payment reduced to zero if your business revenue dropped to zero for an unanticipated quarter, and then automatically kicked backed on when your revenue returned. Another way of saying this is RBF turns loan repayment from a fixed expense to a variable expense.

So, when does it make sense to raise revenue-based funding?
Revenue-based loans are, by nature, most appropriate for companies already generating revenues but without hard assets typically required to get bank loans. It’s especially applicable for companies that have lumpy, seasonal, or hard to predict revenues.

For entrepreneurs, revenue-based loans are attractive to founders who are allergic to dilution and loss of control.  The structure of RBF is often non-dilutive to founders and does not require a board seat. The financing is obtained without having to agree to a valuation, which leaves management in control of the company and typically requires no personal guarantees from management.

RBF means you can grow without swinging for the fences

For investors, funding using an RBF structure provides an opportunity to get a return on their investment without needing an exit. While this is clearly an advantage for investors, it also means company founders shouldn’t get as much pressure from investors to “swing for the fences” and the projected return due to the investor can be lower as the entrepreneur repays the investor more quickly.

As Fred has mentioned before, big exits are rare for startups. Some ideas have the potential to be home runs, but others are better suited to operate as smaller, standalone businesses. For the companies in the latter category, raising money from VCs who expect the big exits can misalign goals. A revenue-based loan has the potential to better align incentives for investors and founders in these cases. With that said, if you’re a pre-revenue, startup still figuring out your business model or considering some kind of “go big or go home” strategy, there can be realadvantages to working with the equity-based venture capital or angel investors. Similarly, certain businesses, especially brick-and-mortar and manufacturing-focused businesses may not have the margin profiles to pay monthly payments of 2-5% of revenues.
An RBF structure isn’t limited to specific funds – angels, VCs or banks could theoretically provide capital in this manner, but the risk/return profile of RBF doesn’t always fit the investor’s needs. Similarly, RBF may not be the best funding option for all businesses. In the right circumstances, the hybrid approach of revenue-based finance for startup funding can have advantages over traditional debt or equity, but there are admittedly situations where the more traditional options still make sense – such as restaurants or infrastructure-heavy startups.
If you’re considering raising money from angel investors, I’d suggest discussing this in the event that it may align your incentives better or at least help avoid some of the painful valuation negotiations. There are a few funds –Lighter Capital and Next Step in Texas, among others focused on this type of structure and I’d suggest taking a look at those options as well. There are clearly different scenarios where any number of Fred’s financing alternatives could prove more appropriate for your business, but the revenue-based loan structure can be a great option for profitable companies looking for a straightforward way to raise funding without dilution, change of control, or a personal guarantee.

#MBA Mondays

Comments (Archived):

  1. Rohan

    Thanks Fred/Andy. Really like this as a practice. Very ‘real’ and pushes companies to focus on revenues vs thinking of burn rate!

    1. Krh2536

      This is a scheme to produce income without creating anything but a perceived source of revenue. It is why the financial world is in the situation it is in. You people are simply promoting a lousy scheme. Try creating a real product. Get your hands dirty. No thanks.

  2. William Mougayar

    That’s creative. Can you summarize the conditions you like to see, ie pre-revenue, revenue, or profitable? And is there a dollar range you look for? I think a hypothetical example with real numbers would help. Thanks

    1. JimHirshfield

      I second the motion.let’s see an example please

    2. Mark Essel

      What @wmoug:disqus and @JimHirshfield:disqus said.We saw 2-5% of gross revenues mentioned but specifics would be great.

    3. Andy Sack

      Hi William – Sure:- We look for companies with trailing twelve month revenues between $500k-$5m and growing, with 50% gross margins.- We generally lend out $100-500kAs an example: we’ve loaned out $200k to a company doing $1m in annual revenues and then the company pays us 3% of revenues over 10 years, or in certain instances, we introduce a “return cap” where if the company repays us an agreed upon amount within a shorter period of time, the loan terminates early. 

      1. William Mougayar

        Great. Thanks for that example. It’s almost like a mortgage then! Now, I get it…:)

      2. Craig Plunkett

        This sounds like a great method of financing for scaling a utility business like a Wireless ISP.

      3. Jeremy Dunck

        I like the model, but one concern I have is the difficulty in stacking – with VC, dilution and preference are well-understood ways to manage multiple rounds of financing.  What happens if I need multiple rounds of RBF?Also, in your example that’s 1.5x payback of current revenue but over 10 years, equivalent to about a 4% interest rate, so I assume you make that investment having been convinced that revenue will grow, resulting in a higher payback.  How is coming to that conclusion (of growing revenue) different or similar to coming to the decision to make an equity investment?

        1. James Peterson

          Payback form. Startups rarely pay dividends, and so equity investors focussing on startups typical receive their payback only when a liquidation event has occurs. With this model, the payback is more certain (albeit smaller, but still with potential for large returns).

    4. fredwilson

      what do you think of the shade of blue we are using to signify mod status?

      1. William Mougayar

        Looks good to me. It reminds of ski slopes labeling,- green is more difficult than blue 🙂 

      2. ShanaC

        Needs to be a tad deeper. It doesn’t match the green or the grey of the blog as well as it should.

  3. Trish Burgess-Curran

    Thank you so much for the post.  I had not heard about this financing option before and I find it very interesting – a good example of ‘creative thinking’.Having said that, I have a question: I am not sure how this type of financing allows us to avoid going through a valuation process. I agree that we (investor and entrepeneur) do not need to have a valuation in the traditional sense but we do need to agree on likely / potential revenue streams so that we can then agreen on the likely / potential timeline for payment and the monthly payments in percentage terms. I can see how the method allows us the entrepeneur additional flexibility – and also to focus on revenue generation, which should be the main concern anyway – but there needs to be a common agreement to the potential of the company – i.e. its value.I may be missing the point…

    1. fredwilson

      You dont have to put a value on the business but you do need to project revenues

  4. Neal7799

    Are there any RBF peer to peer companies/agents that lower the risk also for the loaner ? 

    1. joeter

      My company,, is launching before the end of 2011 to fill that gap.Compared to the typical “all-or-nothing” crowdfunding approach, we use a milestone based system and match businesses with strategic experts from their industry. Since we reward our experts with cash bonuses based on any surplus cash returned to funders, we expect the alignment of interests will keep our experts incentivized to continue helping their businesses achieve goals that should improve overall value.Those of you considering revenue based financing should definitely come check us out.  Our experts are going to start accepting applications sometime in November. Also, if anyone has any questions about our model, feel free to email me.Great post overall, Andy – you’ve been doing an impressive job educating people about how revenue based financing works.  I hope some of the companies we support overlap one day, and we will have the chance to work together.

  5. Robert Thuston

    I dig it.”For investors, funding using an RBF structure provides an opportunity to get a return on their investment without needing an exit.”

  6. Peter Jennings

    I remember Seth Godin writing about this form of financing a couple of years ago. I think it has great potential, particularly for businesses that have enough clients to prove their model, but not enough to fund expansion to take on additional clients. Would also be interested in hearing more about how deals like this could be structured.

  7. leigh

    I’ve been happily whining lately that my new business is growing too fast and we don’t want or need investors (and have been advised against it) but we do need and want cash flow to ensure the quality of our work as well as continuing of BD (vs. fearing it which is where we are at now believe it or not) — banks will insist on personal guarantees bc we are only five months old… . conundrum for sure ….Hum….wish this funding model was more developed and of course, in Canada 🙂

    1. ShanaC

      Maybe there are some and you just don’t know yet…

      1. leigh

        that’s true – maybe Andy will comment if he knows any at some point 🙂

        1. Andy Sack

          Hey Leigh – sadly we can’t loan in Canada and I don’t know anyone who does early-stage loans like we do up there. There’s a company in Canada Alaris that does revenue-based loans, but they’re a much bigger scale. We’ve seen some great companies in Canada that would be awesome to fund. Stay in touch with us and we’ll keep you posted if we add that capability.

          1. leigh

            will do… but hopefully by the time that happens we’ll be exhausted but over the hump :)ps. if all goes well, we hope to have an office in Atlanta by end of Q3 next year 🙂

    2. LE

      “banks will insist on personal guarantees bc we are only five months old”I think you have to decide if shiftingthe risk from your own assets to someoneelse is worth the extra interest youwill be paying.For arguments sake if you are ableto  borrow against your house your cost of financing will be very low (easily under 5%..).If you use this type of financing yourcost will be at least 25%.I think given the gap between thosetwo numbers you have to decide howmuch you believe in your ideabefore you increase your costslike that.

  8. andyswan

    I might be a little dense this morn after a big Cards win last night….but could you explain the following:When is the loan considered “satisfied”?You say the RBF loan is for a specific amount of time.  Is this based on a set timeframe and the lender is just “taking a hit” when revenues dip….or is this based on a principal + interest scenario and the company is simply pushing off the debt a bit more as revenues dip?Example:  You loan us $100k.  Do we agree to pay 5% of revenues for 60 months no matter what revenues are….or do we agree to pay 5% of revenues until $100k + 11% annual yield is zeroed out?I can see validity in all scenarios…. the former seems more of you “betting” on my company’s growth while the latter seems more bank-like, with less stringent qualification and payment requirements (and thus I’m assuming a higher yield).Thanks for doing this.

    1. leigh

      good questions 🙂

    2. Andy Sack

      Andy: the answer is YES 🙂 Depending on the company, these terms will change, but broadly: the repayment is over the 60 months, but we’ll have caps where if the company repays a certain amount – say 2x within 2 years (to keep it simple), the loan is terminated and we part ways. So yes, if the company’s revenues grow rapidly, we’re paid back sooner and get a increased yield – but the entrepreneur should be happy cause the business is doing awesome

      1. pj

        What if the business is already doing awesome? How low would the required yield go?For example, if AirBnb came to you to do RBF instead of the next VC round, what would their terms look like?

  9. Mark Essel

    Am I the only one who likes the idea of hiring with revenue based financing?

    1. Tom Labus

      I have hired that way and been hired that way.Needless to say as a hire I was very motivated.

      1. Mark Essel

        That’s fantastic Tom. Glad to hear it’s already happening.

    2. laurie kalmanson

      funny you should say that. i am actually in talks with a founder now; not that i don’t believe in the company’s $B future, but some cash in as the company gets cash in would be nice.

    3. Guest

      What about revenue-based financing to create new positions? Outside capital could fund the creation of a new role that you expect will increase the revenue of your business.

      1. Andy Sack

        Israel – we’ve promoted this to companies in the past and some of our investments did just that. We loan to a company to hire a salesperson, new hire generates new sales (revenues), we get repaid and the company grows revenues. Win win.

        1. pj

          This only works if you are very sure the new sales guy will deliver.Personally I like to offer sales guys a commission scheme that pays them based on performance – if they don’t sell they starve, if they do well the sky is the limit.A deal like this always appeals to those with a real sales mentality.

  10. ShanaC

    A) I think this is fascinating. How are the terms of repayment developed?B) Why aren’t banks embracing this as a form of small business loan?

    1. Cam MacRae

      Some banks do – it’s usually called Musharakah.

      1. ShanaC

        Umm, one for people not part of the Ummah?

        1. Cam MacRae

          I meant that to be considerably more wry ;)Western banks prefer to punt on the casino than the community?

          1. ShanaC

            That only gives me the same WTF reaction as the occupyws post did.*sigh*

  11. Tom Labus

    At what level of revenue does RBF become doable?

  12. johnmccarthy

    Thanks Andy.  Like others, I would like to see you flesh out some examples.  One issue I have run into in the past with this type of financing is not getting full credit for a 12-month paid-in-full subscription or services contract.  The theory being, that revenue is earned monthly, so a revenue based financier would view any paid but unearned funds as not fully fundable as they represent a liability and may be subject to re-payment if the company goes out of business or does not perform the service.  Obviously lots of ways to solve this issue, but would be great to hear how you see people handling this issue.

  13. Scott Barnett

    I echo the sentiments so far that an example would be wonderful.  I was also assuming that there would be some small equity play here such as warrants, but you don’t mention that, so is this truly a bank loan with more creative payment terms?  In the example where you said the company had no revenue for a quarter and paid no money back, is there a penalty associated with that?  What do you hold as collateral?I’d really like to see a detailed example.  This looks cool, but I can see several ways where the company could get in big trouble based on your terms.  The devil is in the details!!

  14. Brian Broadbent

    You can apply this financing to startups as well provided you have a business with a proven business model and a clear path to cash revenue. The structure could be something like this.I will pay you X% of revenues until you double your money.If the business does well, they get paid back faster (say 2-3 years) but it also means you have a more valuable business. If they get paid slower, it means the business is not doing as well but they still earn an equity like return.But for the structure to  work, you need a business model where the entire business model is profitable from almost day 1. Otherwise, you are effectively saddling a business with debt that cannot afford it.

  15. Kasi Viswanathan Agilandam

    I understand RBF takes the roller coaster ride on the revenue with the entrepreneur. Does RBF takes  the risk of going down with the entrepreneur and raising with the entrepreneur?That sounds too sweet and not able to digest “funding without dilution, change of control, or a personal guarantee” … what happens when the projected revenues does not happen … say market fails you … or a competitor run the truck on your model.

    1. Andy Sack

      You read that right… if the company’s revenues dip, our payment goes down accordingly. It’s higher risk than bank debt for sure, but we do enough research on the companies we work with to be comfortable with the risk – ie we’re confident they’ll continue generating revenues. 

      1. Kasi Viswanathan Agilandam

        call me.

        1. David Semeria


          1. Kasi Viswanathan Agilandam

            liked that … i posted a wrong message here. It was supposed to be to my freind through yahoo.

  16. davidu

    How is this wildly different from an A/R line, and moreover how is this really a capital injection rather than simply a float of cash (a loan)?

  17. Prestonpesek

    Without a stated coupon owed, isn’t the investor at risk of creating a situation where the company intentionally delays revenues until a time period beyond which an RBF investor would be entitled to their percentage?  What mechanisms are in place to incentivize the borrower to maximize revenues during the time that an RBF investor is entitled to its percentage of revenues?I may guess an answer to my own question, that the stated investment term is sufficiently long as to be a natural hedge against the company’s intentional delay of revenues, but if there are other mechanisms, I’d be curious to understand those.  Thank you.

    1. Andy Sack

      The primary mechanism is that entrepreneurs are agressive and like to make money! If you’re running a company making $1m/ year, delaying those revenues to manipulate a repayment doesn’t make sense. So the first thing we do is only loan to entrepreneurs who seem serious and who have established revenue traction. Your other response is accurate as well – the loan terms can be 5-10 years.

      1. Prestonpesek

        Thanks for your prompt response.  I would guess that if RBF is the primary debtburden of a company, then the later years of an RBF term would probably be theoptimal time for a company to reallocate its resources into non-revenuegenerating research or infrastructure that won’t result in monetization untilafter the RBF debt period ends.That said, if a company is at that stage in its evolution where it has alreadyhad a minimum of 4-5 years of sustaining revenues, and can afford to invest inthis type of non-revenue generating activity, then it has already likelyreturned a handsome profit to the RBF investor, and any reduction in revenuesat the tail end of that investment term is likely to be immaterial.Thanks again.

  18. kidmercury

    yup, all a part of the future as the ponzi scheme that is the global economy comes crashing down. i like the RBF stuff outlined here very much, although if i was a startup investor, i would want something more analogous to equity returns — what andy sack has outlined here is more akin to debt returns, which i think is insufficient return for the risks involved in startup investing. 

  19. JaredMermey

    Are there any examples of RBFs that include options for the entrepreneur such as a buyout or a conversion to equity? I’m guessing — like most types of financing — anything is possible, but good examples of clean options would be cool to see.Thanks!

    1. Andy Sack

      Broadly a buyout or equity conversion could be possible revenue-based structure, but it’s not standard for us. Would be curious about your thoughts how this should work if you think we should explore those

      1. JaredMermey

        My two cents — without having thought much about this — is that the buyout would be an easier option to include for both parties. Previous to any agreement, I am sure both sides will have revenue projections for the company. You can figure out the present value of the cash flows at any given time through the end of the loan, then assign a multiple that the company would have to pay the investor for the right to buyout the remainder of the payback period. **I have no idea what the exact multiple would be** but for it to make sense it would have to be greater than the present value of the original projected cash flows but less than the present value of the updated projected cash flows. The option takes some of the upside for the investor, but it still ensures they will receive more return than they originally projected yet saves the entrepreneur from continuing the royalty should they be beating the original projections. The equity conversion would work similarly but there would have to be a floating valuation of the company. The buyout would then represent a fraction of the company’s valuation and could converted into the appropriate amount of equity. (Pro: The investor will end up with both cash back and equity in this scenario)I’d love any feedback on this idea. Quickly, I think the obvious drawback is that it is more complicated than a simple RBF…

  20. Eric

    I’ve had a few of these pitched to me on the investor side.  They claim a 30 to 35%irr, which makes me think this is a very expensive piece of capital.

  21. Andy

    I dislike the fact that I have to immediately take money from top line revenue and give it to my financier. Especially if I’m not getting the tax benefits that I would from debt financing. (correct me if I’m wrong on that). However it is an interesting concept that the revenue financing payment would drop to zero in a down quarter, how much more of a cut do you have to take in an up quarter to account for that risk as a finance provider?

  22. Heather

    Great post, Andy.  We’ve been doing royalty based financing at LaunchCapital for a bit now, and find it a great fit for many companies.  One thing not mentioned that we’ve found an important differentiation: for those with fast-growing startups, you’re likely better off with equity.  It is generally not a good idea to take money out of your company to repay debt – you need every dime to plow back into that fast growth.  You need what we call “permanent working capital” and in a high-growth company, equity is a better fit.  However, for those with linear growth expectations, who are typically ‘uninteresting’ to traditional VCs and angel investors, this is a great, flexible option.  

  23. Celine Schmahl

    Really great post. I hadn’t heard of RBF before, so it was really interesting!Two questions:1. You say that RBF is “most appropriate for companies already generating revenues but without hard assets”. Can it also function as seed funding? Too much risk there?2. Do you know if that approach is used in Europe?Thanks a lot in advance for your reply and for the great post!

    1. Andy Sack

      Hi Celine – Structurally, RBF can work for any company from seed funding to late-stage growth funding. My fund, Lighter Capital, focuses on companies doing b/w $500k-$5m in revenues, but an angel investor could potentially use an RBF term – you’re right that it’s riskier. I’d be happy to provide advice or guidance for what the terms could look like if you were working with angels who would consider it. I don’t know if it’s used in Europe, but imagine it could be used, I’m not aware of investors using the structure there though.

      1. Steven Milstein

        Andy,Regarding seed funding, is it conceivable to target a cohort of early adopters to be revenue based financiers, instead of charging them for the startup service? Any advice, or, guidance for what the terms could look like would be greatly appreciated.

  24. LE

    I think this is a great business to be inif you manage the risk obviously.I’m not so sure it’s good for entrepreneurs though.I’d like to see a pro forma contract.In any case from http://www.lightercapital.c…1) “We also ask for a small stock warrant.”(Q: How small is small?)2) “so we’ll be straight with you: we want to earn about 25% IRR, on average.”(But could be more …)3) Early payback:”we include as a standard feature fair early buy-out clauses.”No mention what what “fair” is.Obviously there will be substantial liquidated damages otherwise companies would use this for bridge financing.

  25. joeagliozzo

    I think this could be great for a certain segment of companies, but I wonder if you couldn’t get to the same solution by simple factoring.  Say your company is growing quickly and you need cash to hire, advertise, grow your infrastructure, whatever.  If you had a stable or growing subscription based (or maybe even ad based) revenue stream I would advance you say 50% of your next six months revenue, setup a lockbox account and then pay myself back and forward you the rest.  I might charge 1.5% per month for this.  It’s a good return for investors backing the paper and good for the business, because they don’t have the dilution inherent in raising equity and when the loan is paid back they can either re-up or not at their choice.Provided you use the advance to create more customers, this would be the cheapest way to expand your business top line revenues.If you specialized in subscription based online businesses and agreed to a standard set of metrics (and online access to data) with the companies you financed, this would be a great business compared to conventional factoring where you have to verify deliver, assign A/R, collect etc.

    1. Carl J. Mistlebauer

      If you are an online company that sales subscriptions, then you are paid via credit card.  Lots of company provide loans on receivables if they are credit card based.  The fees are much higher than 1.5% a month…but its not hard to acquire this type of financing.

  26. Carl J. Mistlebauer

    I have to admit that RBF is a pretty interesting concept.I do believe that you might be a little short sighted; this model could work very well for a manufacturer or someone who produces goods and sells B2B and B2C.If you take tee shirts for an example.  For a traditional manufacturer selling B2B normal margins after COGS are roughly 40% for a domestic manufacturer and if you import, then your margins are normally 55%; this assumes that one is a specialty manufacturer and not supplying Walmart.By going B2C even if these sales only account for 25% of your overall sales, which is just a basic line assumption, then your margins shoot up an additional 18.75% overall all…so then you are at 73 % margins after COGS.When manufactures factor, they are factoring B2B invoices, or invoices at wholesale pricing.  Thus to pay a factor fee of wholesale invoices hurts.  But when you have “blended” revenue (B2B and B2C) then you have a whole different basis to finance from.  

  27. Ed Mello

    Our firm–Cypress Growth Capital- has been making royalty-based investments since the beginning of the year. We invest amounts from $1M to $3M in companies that have at least $1M in annual revenue and are cash flow positive. Our geographic focus is the Southwest US. We have made four investments in the last seven months. We invest in technology-enabled business services companies. We are actively making investments using royalty financing. More info at http://www.cypressgrowthcapital.comThanks to Andy Sack for an insightful post and for his enthusiasm for royalty financing. Lighter Capital and Cypress Growth Capital are certainly in  the vanguard on this new financing alternative for entrepeneurs and business owners.

  28. Alon Moritz

    Factoring is the closest thing I can think that is similar to this, I did this type of financing back in the early 90’s and then again when I ran my tech company in 1997-2007. The key to look for I think which was not mentioned in this article is return of goods or dissatisfied clients. In the factoring world it used to be accepted that the rate of returned goods should not exceed 2%. The other issue is that as with factoring the the higher the risk the higher the interest. Alon [email protected]

  29. jason wright

    It’s not clear to me how and when and on what terms the initial loan sum is repaid.Say $500k is loaned over ten years at 3% of annual gross revenues, when is the original $500k repaid?Is that sum index linked to say inflation or base rates over the ten years, or any other attached tenure to insulate it from depreciation over the term? Is the gross annual % the only return mechanism on the loan? Is no other part of the business collateralized against the loan?

  30. jason wright

    It’s not clear to me how and when and on what terms the initial loan sum is repaid.Say $500k is loaned over ten years at 3% of annual gross revenues, when is the original $500k repaid?Is that sum index linked to say inflation or base rates over the ten years, or any other attached tenure to insulate it from depreciation over the term? Is the gross annual % the only return mechanism on the loan? Is no other part of the business collateralized against the loan?

  31. Geof

    Andy;  This does sound interesting.  Any restriction in regard to dealing with Canadian companies?  If the gross margin was 30-40% would be a game stopper? 

  32. IdeaLeader

    I’m from Canada and it might be the air up here but…  I must be missing something.  What security is taken on behalf of the investor?  Shares, real estate, tangible assets?  Why would an investor put capital into debt without some sort of security.

  33. Namek Z

    Hi Fred I did a variation of this agreement with a law firm in Silicon Alley for my new startup accelerator/fund…a portion of legal fees are deferred and are only paid back when we generate I don’t have to worry about draining too much cash and the revenue share is capped

  34. gubatron

    I find it funny people think that it’s creative to basically take a loan and promise to pay with the money you will make over a period of time.I hate that so much of the entrepreneurial world is about sucking it up to VC firms, instead of trying to build a product that lifts itself up with its own earnings.If you build something that solves a problem and you are frugal as fuck (meaning you can code a lot on your free time with a partner) it can happen. The costs of internet startups are more accesible than ever, storage costs are 1/4th of what they were in 2007, cloud computing options everywhere, you don’t need to deal with hardware, no need to waste time setting up many things that are now cheap services. All you gotta do is make your product happen, not take a salary, and eventually you’ll be profitable to a little extent. Then you can make the decision to suck up some money if you want to speed up your growth, it all depends on your ambitions or how much value your product is.I like this financing model a lot better than giving away any equity at all I must admit.I guess one of the best examples on how to make it without VC firms is making smartphone apps. Very low cost to make, sound business model (Selling bytes to a worldwide market of shopping zombies that’ll buy anything to be distracted), in addition you can put ads on a free version that you can use as marketing collateral. Why take VC money, for marketing perhaps? “All” you need is code. Need designers? gets you top notch design for real cheap. Need translators, a dime a dozen. No need to hire. Keep your burn rate to a minimum. Just build something that matters and the money will come.

  35. Thomas Thunell

    Thanks for the post – I had never heard of this kind of financing.  You mention that RBF can require a company to pay up to 5% of revenues (so for a 30% margin company, sacrifice ~15% points of gross margin – essentially 1/2 of your gross margin).  In your experience, when a company has taken on a RBF then looked to raise a traditional VC round, is it difficult to do because of this margin compression?  

    1. Andy Sack

      it’s a fair point to raise. 2 things here:1) we’ve found that focusing on companies w/ 50%+ gross margins is the best way to alleviate the added cost of capital factored into the margins by taking on RBF2) when we’ve invested alongside VC or angel investors, the investors have looked at it as a good way to get additional capital without giving up equity dilution and control

  36. José María de Arcas

    Sounds very creative…would it be similar to margin financing in a trading account? An example would switch on the lights…Many thanks

  37. Chris H

    What are the tax consequences of a revenue-based loan?  Is the imputed interest tax-deductible?

  38. Frank Demmler

    I’m sorry that I’m late to this discussion. First, this funding mechanism has been around for a long time. In fact, Arthur Lipper III, publisher of Venture magazine, coined as a Revenue Participation Certificate. He introduced it in his book, Guide to Investing in Private Companies, in 1984.I have used this form of financing many times over the years. As noted, it’s non-dilutive to the company and it’s simple to understand by the investor (at a superficial level). The tax treatment of the distributions (return of capital vs. income) is challenging and requires professional guidance.If not noted elsewhere, this type of structure dictates a different management paradigm than an equity investment. Where equity investors are seeking capital gains returns, this deal structure focuses on cash-on-cash returns and requires the company to be managed with cash flow as its primary orientation.The way that I’ve structured these deals is to have the % of sales continue until some multiple of the capital commitment is returned. That multiple has usually been 2-3X. The actual multiple comes from negotiations that optimize the royalty rate, the company’s business plan and when cumulative revenues would hit the target multiple cumulatively, and the resultant rate of return.From the entrepreneur’s perspective, the pitch is, “I will provide you with [2-3] times your money and if I hit my plan, your rate of return will be [70]%. Even if it takes a little longer your rate of return will be [30]%.” The posturing conveniently ignores the fact the company may not succeed and there may be minuscule returns.Another benefit of this structure is that it allows for variations that can be useful to the company, such as no payments for the first [12-18] months, thereby letting the company preserve its cash during its very earliest days.

  39. Mark Essel

    I’d wager not enough sources to provide adequate competition in the area since it’s new to tech/startups, but am also curious.

  40. andyswan

    “Instigator” status confirmed.I could probably figure it out myself but I don’t understand yet exactly what the entrepreneur is committing to in terms of what it takes to satisfy the loan.

  41. leigh

    Wouldn’t the competition be choosing no funding (and missing a great deal) or the other alternative forms of funding?  

  42. Mark Essel

    Yes of course Leigh.Was thinking conditionally but other funding methods are always possible

  43. Mark Essel

    Say my company generated 500k in gross revenues in the last 2 quarters and my projected revenue is 1 million for the next year (flat for simplicity). I agree to hire you and you agree to work for 10% of the gross revenue as compensation. If the company yields 2 million in gross revenue then the employee earns 200k. It may work better as a form of profit sharing, but that makes timing and book keeping sensitive.

  44. andyswan


  45. leigh

    lol glad i had my “well duh” moment before my first meeting 🙂

  46. Mark Essel

    In that case I assume only that the employer and employee agree to the risk structure and benefits of revenue sharing.

  47. Jeff Farmer

    This is what happened in the NBA.. and why they are now locked-out.

  48. joeter

    The biggest push back against our own revenue based model was that customer revenue is the cheapest form of financing a business can take on.  That’s why businesses typically raise money by selling equity at the growth stage, instead bringing on debt, so they can reinvest their cash earned through sales.There’s also a large group of investors in the valley who feel focusing too early on revenue can jeopardize a user experience and lower the chances of a “home run” as Andy mentioned.  It all comes down to how you structure the terms of the royalty.  Important points include prepayment features, caps, floors, and the ability to defer payments in a way that can address the issues mentioned above while still providing backers an adequate return based on their perceived risk.The biggest challenge for revenue based financing proponents (myself included) is that the financing model still needs to “cross the chasm” and mixing in too many terms and conditions may scare away potential users.  There is definitely a challenge to balance simplicity and functionality.

  49. leigh

    we are including rev sharing on new business offerings that the team creates — ala — you create something new that we can sell to clients then you get a piece of that revenue.  Lots of enthusiasm for that also bc it encourages innovation from them which they all do in their spare time anyhow but now they aren’t scared to bring those ideas to us (as many companies have the we own all your IP contract BS)

  50. Matt A. Myers

    I like this idea a lot. Not sure how it would apply to my plans currently … but I like it!

  51. Cam MacRae


  52. ShanaC

    There is a lost muppet, where?

  53. PhilipSugar

    2X without unlimited upside and you share in the downside doesn’t seem usurious.  Especially if there are no personal guarantees (which would be a deal breaker)Expensive yes, but why wouldn’t it be.  Max you get is 2X.  Min….well that’s much less.As he points out it is at least different from both vc financing which might not be a good fit, and traditional bank loans which multiply the all in nature of an entrepreneurs portfolio.