Cash Is King

Royalty financing keeps investors happy - and keeps your company in your own hands.

Terralink software Systems Inc., which developed and sells a PC-based software product that helps companies manage hazardous waste information and comply with environmental laws, enjoyed a flawless launch.

In its first year, the South Portland, Maine, company generated $175,000 in sales. The second year, which ended in March 1996, saw revenues more than double, with Terralink reporting $375,000 in sales, according to founder and CEO David Fernald.

Though satisfied with the growth, Fernald had loftier goals. "My feeling was we needed to get to $750,000 in sales before repeat and referral business would really kick in," he says. "And to get to that level, we needed funds to expand our marketing efforts."

But Fernald faced the typical dilemma of early-stage companies. With Terralink still in its formative stages, investors--whether venture capitalists or angels--would want a big piece of the company. Although Fernald was comfortable with the concept of giving up equity, he was reluctant to give up big chunks early on because he anticipated there might be other financing rounds down the road.

To help devise a solution, Fernald turned to his financial advisor, Peter Moore, a principal of South Portland, Maine-based Banking Dynamics Inc., a firm that helps high-tech companies raise capital. Moore suggested Fernald consider royalty-based funding.

The royalty structure avoids equity-based complications by removing them from the picture altogether. Instead of owning a piece of the company, investors get to own a piece of the company's revenue stream.


David R. Evanson, a writer and consultant, is a principal of Financial Communications Associates in Ardmore, Pennsylvania.

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This article was originally published in the December 1997 print edition of Entrepreneur with the headline: Cash Is King.

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