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."
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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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