REVENUE SHARE AGREEMENT (EQUITY-BASED)

A Revenue Share Agreement (“RSA”) Equity-Based is an alternative equity financing model which incorporates a predetermined distribution structure to investors based on revenues, for a specified period of time or up to a predetermined return on the investment (“Cap” or “Multiple”).

As for the RSA Debt-Based, it allows for greater flexibility because the repayments are not tied to a monthly amount or interest rate, but they fluctuate with the company’s revenues. 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 will allow for the investment to be repaid faster.

Unlike RSA Debt-Based instruments which treat the revenue share payments as a mix of interest and principal payments, the RSA Equity-Based instruments include a predetermined liquidation mechanism in the form of an equity redemptionbased exit.

The self-liquidating structure allows the investors to obtain a return on the investment without having to sell the shares to other investors or relying on subsequent rounds of financing to exit their investment. At the same time, the control of the company is maintained by the entrepreneur and the enterprise performance is matched with the return needs of the investors.

Purpose/Fit

Enabling for equity-like terms without the need for an exit (share sale

Can replace

Equity

Risk/Return Profile

Medium Risk/Average Return

Enterprise Lifecyle

Early-growth stage (post-revenue)

Maturity

Agreed between investors and borrowers, or upon achievement of a pre-defined milestone

Defining Criteria

Revenue share:

It represents the percentage of 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.

Payments:

Revenue Share Agreement (Equity-Based) requires ongoing payments (e.g. annually) based on a pre-determined percentage of revenues (or other financial metrics).

Multiple/Cap:

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

Profit distribution:

Redemption of equity and or revenue sharing often replaces the right to participate in profit distribution.

Self-liquidating:

Higher potential upside return from an exit is traded for more certain repayment terms and less risk (risk-adjusted return shift)

Interesting Variants and Options

The cap for redemptions can be predetermined at inception as a specific multiple of the original investment price (most common).

Instead of sharing revenues, it can be agreed to share positive cash flow or profits (Profit Share Agreement – quite similar to traditional equity).

A redemption pool can be created by setting aside a percentage of revenue over time (similar to a sinking fund 24). The redemption pool would allow the investors to receive a stable cashflow over the investment period and provide an even greater level of flexibility to the enterprise, enabling it to retain precious resources when it needs them the most. In fact, when revenues are high, the repayment will still scale with the increasing revenues (and the redemption pool will be filled in), whereas when revenues are low, the repayment will come partially or fully from the pool of money set aside.

A redemption can also be carried out through recapitalization. Once the company is able to obtain traditional financing, conventional instruments (e.g. debt) can be used to buy back shares and reduce the company’s outstanding position.

Being the repayments linked to the financial health of the company and until reaching a specified multiple, the overall return is usually capped. Nevertheless, it could be introduced the possibility for the investor to participate in higher return in the case of a successful traditional exit before maturity.

A clause can be included in the term sheet to account for higher flexibility in the event that the enterprise does not have adequate cash at its disposal to satisfy the repayments.

A straight equity conversion option could be included to allow for participation in subsequent equity fund raisings (see convertible note or SAFE).

Event of default clauses could be implemented if the enterprise does not reach predetermined levels of growth or impact metrics. In order to incentivize the focus on the impact mission, a clause could state that failing to meet specific impact metrics, could translate into a breach of the contract and therefore terminate the relationship. In that case, the firm obligation would be considered as “defaulted” and the subsequent claim on the paid-in capital would arise. Similarly, if the company fails to grow at a predefined rate, then the clause could oblige the company to terminate the relationship and repay back the invested capital. This variant enables to maximize the utility coming from the allocation of capital, in fact since investments are constraint and the number of needy enterprises is high, the clause allows the investor to hedge against the risk that a company fails to perform adequately (both in terms of growth and in terms of impact generated).

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