Entrepreneur Plus - Short White
For Subscribers

The Reality of Royalties An expert explains why investors ask for them and what that means for you and your company.

By Joe Worth

This story appears in the November 2015 issue of Entrepreneur. Subscribe »

Why would an investor want royalties? Doesn't he believe in my business?

The straight answer is no, he doesn't believe in your business. Investors are all about risk and return. The more risk they see in a situation, the more return they must have. By asking for royalties in lieu of equity, the investor is telling you that your company involves more risk than he's willing to take. Here are four reasons an investor may choose to suggest this route.

  • The size of the investment is not in line with what the investor usually doles out. A royalty offer could be indicative of an outsize funding request (or the opposite).
  • The stage of your startup doesn't sync with the investment strategy. The investor may concentrate on angel and seed rounds, whereas your business has moved beyond that stage to selling product.
  • The investor loves the product but doesn't necessarily believe in the team behind it. Many investors will tell you they invest in people, not products or companies.
  • The investor sees potential for a profitable business, but not the kind of explosive, hockey-stick growth needed to justify taking an equity stake in your company.

This is a subscriber-only article. Join Entrepreneur+ today for access

Editor's Pick

Related Topics

Business News

People Are Eager to Go to Europe. But a 'Strange and Humiliating' Requirement Is Derailing Travel Plans.

There aren't enough resources to keep up with the demand — and it's causing major problems.

Business News

Tech CEO, 26, Found Dead in Suspected Murder

Pava LaPere founded EcoMap Technologies in December 2018.

Business News

Target Will Close 9 Stores Across 4 States Due to Ongoing Crime That's 'Threatening the Safety' of Customers and Employees

Target stated that it "invested heavily" in efforts to combat crime, but it just didn't work.

Business News

8 People Hospitalized on JetBlue Flight Headed to Florida Due to Turbulence

The turbulent conditions occurred near Jamaica on a flight coming from Ecuador.

Growing a Business

How to Navigate Ethical Considerations In Your Decision-Making

Business decisions often involve weighing ethics against profits. Find ways with a few tips to prioritize ethics and build trust with employees and customers.

Growing a Business

Innovation or Extinction — Why Complacency Is the Real Business Killer (and How to Foster an Innovative Culture)

Here are 10 ways to foster innovation in your company and why it's critical for your business's survival.