While debt and equity structures are common when sourcing capital for startups, a revenue share structure can be an interesting alternative vs equity and debt based options. In today’s post, we’re comparing equity and debt vs revenue share structures and evaluating the potential advantages.

A Refresher on Debt and Equity

When sourcing capital, startup founders typically utilize one of two basic structures: debt or equity. We’ve discussed the differences between debt and equity in the past, but here’s a refresher:

With debt financing, the startup must pay back an investor’s loan within an outlined amount of time – with interest. Equity means the startup provides a portion of the ownership of the company to the investor in exchange for capital.

In the venture capital space, convertible debt is typically preferred because it combines the benefits of debt and equity into a single capital source. Convertible debt, usually in the form of a convertible note, is essentially a loan which converts into equity at an agreed-upon milestone or the maturity date.

But revenue sharing can be an interesting alternative. At its very basic, revenue sharing is a form of lending that involves sharing operating profits with investors as return on their investment.

Breaking Down Revenue Share

The primary benefit of a revenue share investment structure vs equity or debt is that both startup founders/management and investors are aligned toward the goal of creating sustainable revenue. Investors are repaid incrementally as the company generates sales, and repayment is typically 1.5 to 2.5 times the principal loan. Entrepreneurs benefit from a flexible payment structure – payments to investors are directly proportional to how well the company performs. If the company’s revenue growth is faster than expected, investors are repaid over a shorter period of time. If growth occurs more slowly, investors achieve ROI over a longer timeframe.

For investors, revenue share has a narrower focus – on revenue growth instead of future acquisition or IPO – which means focus is concentrated on the company’s financials regarding future revenue. Investors may not sit on the board or advise on business practices like they would for an equity stake, but they are incentivized to see the company succeed.

For startups, revenue share provides access to capital for companies with variable sales or for companies with an established market but without the size to attract VCs. It also allows management to maintain control of the company instead of answering to investors who hold equity shares or the need to risk personal assets as collateral for a loan.

Equity and Debt vs Revenue Share Models: Which Is Best?

Finding the right structure for any startup capital raise can be a challenge. Revenue share is still a loan, and repayment is a must. This means not only due diligence on the investor side but also the need to demonstrate strong growth potential on behalf of the startup. But with revenue sharing, both the startup and investors can contribute to the goal of sustainable revenue and ultimately drive a positive outcome for the business and investors through a simple, manageable investment structure.

MicroVentures provides multiple avenues for startups to get the funding they need, including revenue share and equity based models. Ready to get started? Apply today.

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.