Give Royalty to Offload Less Stake to Investors

I was watching Shark Tank yesterday and came across this. Some investments were done where the investor took less equity in the company and asked for a royalty instead. For example, an entrepreneur was wanting to raise a $100,000 investment and was willing to offload upto 15% in his company. The investor instead asked for 10% royalty on sales till the investment of 100K was received back and then a 1% royalty till perpetuity.

The benefits of investors taking a royalty are for both sides.

For Entrepreneurs: They don’t need to offload equity, and at the same time get support and  mentoring by the investor. Also royalties are generally structured keeping gross margins in mind, so that the business and it’s growth does not suffer because of it. The only downside is that royalties are generally till perpetuity and hence act as a permanent part of your cost structure.

For Investors: Rather than looking for a one time repayment (through a stake sale), royalties ensure that the investment put into a startup keeps coming back in small amounts, thereby reducing the risk. Also if the startup grows, the royalties will grow as well.

Royalties is an option we should consider, especially for a sales oriented startup, when we are dealing with investors.