REVENUE SHARE AGREEMENT (DEBT-BASED)

A Revenue Share Agreement (‘RSA”) is a quasi-equity financing instrument (also called revenue-based loan) where periodic repayments are based on a percentage of the revenues up to a predetermined return on the investment (“Cap” or “Multiple”).

The RSA allows for higher level of flexibility because the repayments are not tied to a monthly amount or interest rate, but they fluctuate with the company’s revenues allowing for greater flexibility. Hence, when revenues are down due to seasonality or other unexpected factors, the repayment will be lower, and it will represent a smaller burden on the company’s cashflow.

Conversely, when revenues are high, the repayment will scale with the increasing revenue base and it will allow the investment to be repaid faster.

The RSA debt-based allows to retain ownership and control of the company, avoiding equity dilution or interferences in the management by external parties.

Purpose/Fit

Enabling for mission-aligned growth without equity dilution and requirement for exit

Can replace

Equity or debt (dependent on stage and purpose of investment)

Risk/Return Profile

Medium Risk/Average Return

Enterprise Lifecyle

Early-growth stage (post-revenue)

Maturity

Agreed between investors and borrowers based on a predefined multiple

Defining Criteria

Interest rate:

Unlike a loan or a convertible note, a Revenue Share Agreement has no fixed interest rate.

Periodic repayments:

They are based on a fixed percentage of revenues, or alternatively profit, cashflow or other financial indicators. The frequency is usually annually or biannually.

Revenue share:

It represents the percentage of the revenue agreed that the company shall pay to the investor.

Revenues:

It represents the definition of revenues agreed with the company. An example is the definition of net revenues according to common accounting standards.

Multiple/Cap:

It represents how many times the initial investment ("Multiple") or the total amount ("Cap") the enterprise shall repay.

Flexibility:

A Revenue Share Agreement has a flexible repayment period, until reaching a pre-defined multiple (e.g. 1.5x initial investment).

Return on capital:

The investor’s return on capital is dependent on the timing of the repayments. Hence, the faster the sales growth, the greater the return for the investor.

No collateral requirement:

Typically, there is no requirement for collateral but simply a convincing revenue history or high potential for future sales given proof of concept19 or past traction.

Interesting Variants and Options

Honeymoon, also known as grace period. Useful to provide the enterprise with the needed time to reach efficient scale.

A final repayment date for the remainder can be agreed upon. In this case the enterprise has to pay the investor the remainder (balloon payment) for reaching a pre-defined multiple (e.g. 1.5x) on this final repayment date.

Straight interest rate that is enhanced with a “royalty kicker”, i.e. a percentage of revenues payable to the investor on top of the straight repayment (which dilutes some of the advantages for the enterprise, mentioned before).

Conversion to equity or participation rights in future rounds of funding (see convertible note).

The loan could be combined with business development services in order to prepare the entrepreneur (“the borrower”) for loan monitoring, business growth, capital infusion, and help to reduce the risk of default.

The investor could be provided with the option to convert his or her investment to a normal loan upon achievement of a specific revenue level. In that way, the enterprise will pay back as they would do with a traditional loan schedule, thereby providing the creditor with interest principal payments. This variant offers the possibility to put a cap on the amount of money the enterprise will have to pay to the investors, and it helps them to make more accurate future financial projections

The Revenue Share Agreement can be used in combination with subordination of the loan, thus allowing the impact enterprise to attract further funding and investors (subordinated debt).

Linking financial rewards to the achievement of impact, for example reducing the multiple/cap or the revenue share – see “Examples of relevant terms” below.