Revenue Participation/Royalty Financing
Revenue participation or royalty financing occurs when an investor buys a percentage of a future revenue stream of the company. This type of financing can be risky for the investor if there are no sales revenues or revenues do not occur for a time. When sales do occur, payment to the investor comes before any other expenses of the company, regardless of profitability.
In the current market of hybrid securities, a revenue or royalty component, coupled with some equity participation by way of warrants, can be an attractive option to investors seeking both cash flow and equity participation. A version of royalty or revenue participation can be structured within a class of preferred stock or LLC membership units. The tax and legal aspects of this creative form of financing are complex, and careful planning with your legal and accounting team is advised.
