Cash Is King

Way To Grow

Moore believes the royalty financing structure delivers a number of benefits to companies seeking capital:

1. Royalty financing can be easily structured with individual investors. Although Terralink secured its royalty advance from institutions, "there's no reason individual investors can't be tapped as well," says Moore. He speculates that a monthly or quarterly return--which would be generated as long as sales occur--would be more preferable to individual investors than the total absence of a yield and zero liquidity that is typical of early-stage venture deals.

2. State and federal securities laws do not apply. Because the royalty advance is essentially a loan, it is not subject to the web of regulations that affect other types of financing. In contrast, many equity financings require complex filings that generate significant legal fees and are heavily monitored by regulatory agencies.

3. Investors taste the fruits of success earlier. "In traditional private equity deals," says Moore, "the payday for the investors comes only if the company goes public or is acquired."

4. A company funded by royalty payments increases its financing ability down the road. Specifically, says Moore, if the funds help increase sales, the company becomes a more attractive candidate for additional financing. Also, sometimes the presence of one kind of equity investor precludes the participation of other kinds. For instance, a company financed with institutional venture capital funds does not, in most cases, ever go back to raising money from individuals. But by "saving" itself for a later round of financing with outside investors, a company keeps its options wide open.

5. The royalty structure preserves the equity positions of the founders. This is the most important issue for many business owners. Remember, there are only 100 percentage points to go around, and they begin to disappear with alarming ease once a company begins to raise outside capital. In addition, Moore feels that companies with founders who are able to hold on to a significant portion of ownership may be more motivated to make the company successful than entrepreneurs who have given away most of the store.

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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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