When a startup decides to raise capital through crowdfunding, the following question often poses itself: “Should I offer equity or revenue share to potential investors?” With the same goal of raising capital, the execution and post-raise period can look significantly different depending on which route is taken. In this blog post, we’ll explore some key considerations for startups looking to make this decision and discuss which types of funding – equity vs revenue share – could be best suited for different industries and types of businesses.

Equity vs Revenue Share

Offering equity involves selling a portion of the company to investors in exchange for capital. This means that investors become partial owners of the business and may be entitled to a share of the profits and a say in the company’s decision-making process.

On the other hand, revenue share, also known as revenue-based financing, entails providing investors with a percentage of the company’s future revenue until a predetermined cap is reached. Unlike equity, revenue share does not involve giving up ownership or control of the business but rather a share in its future profits.

Key Considerations When Deciding

When a startup is contemplating whether to offer equity or revenue share during a crowdfunding campaign, several key considerations come into play:

Long-Term Ownership and Control

Offering equity means sharing the ownership and control of the business with investors. Startups should consider how comfortable they are with this prospect and whether or not they are willing to give a portion of decision-making power to external stakeholders.

Financial Implications

Equity financing can be like a double-edged sword. While it provides access to capital without the pressure of immediate repayment, it also means sharing the company’s future profits and potentially diluting the ownership stake of the founders. Revenue share, on the other hand, also allows startups to share future profits with investors, while not giving up ownership, but depending on the offering terms, it could result in paying out investors larger sums.

Growth and Exit Strategy

Startups should evaluate their growth and exit strategy. If a business is aiming for rapid expansion and a potential acquisition or IPO in the future, equity financing might be more suitable. Conversely, if the founders are committed to maintaining long-term control and are focused on sustainable growth, revenue share might be a better fit.

Investor Relations

Consider the type of relationship the founders want to foster with their investors. Equity investors may want to be more involved in the company’s operations and decision-making, while revenue share investors typically desire a less active role. Startups should weigh the importance of maintaining autonomy and control against the potential benefits of having more engaged equity investors.

Which Industries Should Consider Equity?

The ideal choice between equity and revenue share can vary based on the industry and the stage of the business. Here’s a closer look at some of the types that could be positioned well for equity financing:

Tech Startups and High-Growth Industries

For tech startups and businesses operating in high-growth industries, equity financing often aligns with their growth trajectory. These industries typically require substantial initial capital for research and development, marketing, and scaling operations. Offering equity can attract investors who are willing to take on more risk in exchange for the potential growth.

Companies with Clear Exit Strategies

Businesses that are strategically positioning themselves toward a specific exit strategy, such as IPO, merger, or acquisition, may find benefit in offering equity. These types of companies may prioritize user growth, market share, or strategic positioning over immediate profitability, for which equity may make the most sense.

Which Industries Should Consider Revenue Share?

Main Street

Often, main street businesses like breweries, ice cream shops, restaurants, or retail stores may prioritize their customer base, and may even desire overlap between their investors and customers. Main street businesses might consider revenue share in order to reward frequent customers and encourage word of mouth referrals so that investor/customers actively help the business toward profitability in the hopes of receiving their revenue share sooner.

Lifestyle Businesses and Service-Oriented Ventures

Lifestyle businesses and service-oriented ventures that prioritize profitability and sustainable growth over rapid expansion may find revenue share more appealing. Revenue share can allow these businesses to access the necessary capital without diluting ownership and control. It may also align with their focus on generating consistent revenue and maintaining a healthy profit margin.

Social Impact and Purpose-Driven Enterprises

Social impact and purpose-driven enterprises often prioritize maintaining their mission and values while seeking capital to drive their impact. Revenue share can be a compelling option for these businesses, allowing them to access funds without compromising their ownership or control. It can align with their commitment to sustainable growth and social impact.

Final Thoughts

In conclusion, the decision to offer equity or revenue share during a crowdfunding campaign is important for startups.

Equity may make the most sense when the dream is to build the next unicorn, attract top-tier investors and talent, and potentially change an entire industry. It’s typically better suited for entrepreneurs who are comfortable with the idea of shared ownership and plan on perusing exit opportunities.

Revenue share, on the other hand, may resonate more with founders who want to grow thoughtfully, maintain their autonomy, and create a business that generates wealth through operations rather than capital events. It can foster a different kind of relationship with investors—one based on mutual benefit from the company’s ongoing success.

Understanding the key considerations and evaluating the best fit for their industry and business type is essential for founders to make an informed choice. However, there is not a one size fits all solution. Startups should carefully consider their current position, goals, capital needs, and ability to maintain investor relationships post capital raise in order to decide their path.

Is your startup looking to make the decision between offering equity or a revenue share? Apply today to raise capital with MicroVentures – we can help you choose the right path for you!

Want to learn more about tips for startups raising capital? Check out the following MicroVentures blogs to learn more:

• Reaching New Audiences: Effective General Solicitation
• The Art of Bootstrapping: When to Pursue External Funding
• Less is More: Compelling Pitch Deck Design
• Navigating Equity Allocation: How Much Should I Give Up?
• A Startup Guide: Preparing for Due Diligence

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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.