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.