ROOM FOR DEBATE
is a series of conversations Benji Taylor Jones and Jim Verdonik, are having about anything they feel like talking about.
is a series of conversations Benji Taylor Jones and Jim Verdonik, are having about anything they feel like talking about.
Today Jim and Benji discuss
Revenue Share Loans in three parts: the Good, the Bad and the Numbers.
Viewer discretion is
advised.
Jim Verdonik
Founder of Innovate Capital Law
Contact me at:
(919)616-3225
In this first session Benji and
Jim talk about: #ILOVERevShare
JIM: I'm here with
my partner in Crowdfunding Crime Benji Jones.
JIM: Benji recently returned from a speaking
engagement at a West Coast conference about Crowdfunding.
JIM: What's the hottest new type of security businesses
are using to raise growth capital?
BENJI: The conference was buzzing about Revenue
share loans. It's not an exaggeration to
say that the Crowdfunding world is falling in love with Rev Share loans.
JIM: I notice that you're wearing a button. What's the Button say?
BENJI: You know me.
I'm never half-hearted about anything.
My button screams: #ILOVERevShare
JIM: Can you tell us why people love Revenue Share
Loans?
BENJI: Revenue Share loans are attracting interest
from both accredited and non-accredited investors in Regulation CF and state
crowdfunding offerings.
JIM: I'll tell our audience what Rev Share is
about before you dive into the details. A
revenue share is a loan that is paid back over time by the borrower
"sharing" a percentage of its "revenue" at regular
intervals until it has returned to the lender a fixed multiple of the amount
loaned. Benji, how about giving us an
example?
BENJI: Let's say a local brewery or restaurant or
software company needs $500,000 to expand.
The business borrows $500,000 from investors with a promise to
return to them a fixed amount (say, 1.5x or 1.75x the amount loaned) over
time.
JIM: That sounds pretty simple.
BENJI: It really is. The business pays off the loan by paying
investors a percentage of its revenue
in installments until the fixed return (in this case $750,000) has been repaid. As an investor, you would receive your pro
rata share of such payments based on the amount of money you loaned the
business.
BENJI: The percentage of revenue the business pays
can vary widely based on projected revenue and operating profit. The business' repayment obligation could be
open ended (meaning the loan remains outstanding until the stated return is
met), but more often the payback amount must be repaid in full within a
specific time window (say 3 to 5 years).
Having a definite end date may require the business to make a
"balloon payment" at the end of that period if there is any shortfall.
BENJI: Tell us about risks to investors.
JIM: As with any investment in a
security, investors risk losing their investment – especially since many
issuers are small or new businesses. But
many retail investors
like an immediate monthly or quarterly investment return. They don't like waiting five to ten years for
an equity investment to hit a home run.
Every dollar an investor gets back in monthly payments reduces investor
risk. In some situations, investors can
make a profit even if the company later goes out of business.
BENJI: Are Revenue Share loans totally new?
JIM: Rev Share isn’t a new concept. It has been used in the oil and gas industry,
real estate and film and music industries for years. Franchising, and even share cropping, are
other forms of Rev Share that long preceded Crowdfunding.
JIM: So, Benji.
Can you tell us about the size of the Rev Share market and where the
most Revenue Share deals are being done?
BENJI: Crowdfund Capital Advisors recently released data focusing on the "small
but significant group" of companies utilizing Rev Share to raise capital under
Title III of the JOBS Act under Regulation Crowdfunding. The numbers they cite are impressive. Picking up on this trend, Startwise.com, the newest
FINRA approved Regulation Crowdfunding platform, is specifically targeting Rev
Share, allowing anyone (not just accredited investors) to invest in businesses
for as little as $100. LocalStake has been featuring Rev Share
for the small businesses it helps raise capital for several years.
JIM: That's exciting news.
JIM: I understand that in many situations Rev
Share loans can serve dual purposes. Can
you tell us how businesses can use Revenue Share loans both to raise capital and
attract and keep customers?
BENJI: You're right.
Rev share loans can be a great win-win for investors and small
businesses – particularly those businesses that are close to, or already have a
history of, producing revenue. Take our
brewery example, as an investor if you know that you basically get a penny (or
a quarter for expensive beers) for each beer the brewery sells each month, then
it's not hard to imagine where you will go for happy hour on Friday afternoons;
whether you might buy that extra round for your friends while you are there or
where you recommend your neighbor buy the keg for the next Labor Day
cookout.
JIM: So, are you
saying that Rev Share loans can be like a customer loyalty program?
BENJI: Exactly!
Rev Share creates an incentive for investors to buy a company's
products and services and to become marketing ambassadors for the business,
which in turn builds revenue the company needs to repay its loan. Getting repaid money when you buy a product
is a whole lot better than collecting airline points you can't ever use.
JIM: Please go on.
BENJI: Crowdfunding is mostly about giving ordinary
people the chance to invest in businesses (and products and services) they
love. Rev Share builds brand loyalty and
incentivizes customer-turned-investors (who are already committed to the
business) to buy more products and services and to encourage their friends, neighbors
and colleagues to do the same. This in
turn increases the company's revenue and, potentially, allows the
company to pay the loan faster and at a higher ROI for its investors. So, when all the stars align and things work as planned, Rev
Share is an optimal solution for companies seeking capital and
customers-tuned-investors looking to support the businesses they love while
having access to a relatively quick and decent ROI.
JIM: But I have to say Benji, that you seem to be one
of Rev Share's most enthusiastic supporters.
Tell us: WHY do #ULOVERevShare.
BENJI: As the poet said: "Let me
count the ways."
Here
are the top 10 reasons we LOVE Rev
Share for crowdfunding offerings:
- Rev Share is NOT equity. Investors are not buying any ownership interest in the business. Investors who purchase Rev Shares have no rights to vote or control management.
- Rev Share investors are creditors, not shareholders or owners. There is no "messy cap table" as a result of investment crowdfunding offerings. Once the promised return is paid, the obligation is cancelled and any contractual relationship between investor and the business is terminated.
- Rev Share is NOT dilutive. Rev Share doesn't dilute the ownership, control or economic interest that small business owners (and their core investors) have in the business.
- Rev Share avoids setting a "valuation" on the business. The company does not need to set or negotiate a valuation of its business to sell Rev Share.
- Rev Share offers investors liquidity and immediate ROI, assuming the business is close to or producing revenue. The quicker the obligation is paid, the higher the ROI.
- Rev Share does NOT require an exit strategy. Most small businesses considering investment crowdfunding are run by owners looking to grow the company long-term and stay true to their business' core mission. They usually aren't looking to have a near-term exit (by selling the company or going public). With Rev Share investors do not need to wait for an exit to earn ROI.
- Rev Share reduces default risk. With a Rev Share the amount a company owes each measurement period varies solely based on the amount of revenue it generates. This reduces the chance of default when compared to traditional loans where the borrower must find cash to service set interest payments on a regular basis or risk default (and the bad things that accompany missed payments) irrespective of how its business is doing.
- Rev Share is based on projected cash flow and is good for companies with seasonal or variable sales. Since Rev Share is based on projected cash flow, it's a really interesting alternative for companies that have wide seasonal cash flow swings. Extreme seasonal example would be Christmas tree farms and beach bars. During months with higher revenues, they can repay more of their debt. On the flip side, when sales are slower, their repayment would be less.
- Rev Share has benefits when compared to traditional bank financing. While it's true that the cost of this kind of loan can be more expensive than traditional bank financing (i.e., the implied interest rate paid to investors is higher than what a bank might charge), many small businesses that are good Rev Share candidates are not ideal candidates for bank financing. In addition, a business using a Rev Share typically avoids bank requirements for collateral, personal guarantees, security interests on assets and other financial covenants.
- Rev Share is stackable. You can combine Rev Share with other types of financings to fund a single project. For example, a business can raise capital through an accredited investor equity offering, a secured bank loan or equipment financing loan in addition to a Rev Share offering (if the other investors and bank permit).
This is Jim Verdonik and Benji Jones signing off until our next discussion on ROOM FOR DEBATE.
Benji's and Jim's other conversations about Revenue Share loans include:
PART 2: Why Some Businesses or Investors Don't Love Revenue Share
Loans
Part 3: Crunching Revenue Share Loan Numbers
If you would like to join in Benji's and Jim's conversations,
you can talk with Benji and Jim.
Jim Verdonik
Founder of Innovate Capital Law
Contact me at:
(919)616-3225
Here's what Benji and Jim most like to talk
about:
Modernizing
Venture Capital Services: We help Venture Capital Funds, Angel Investors and their
Portfolio Companies achieve their goals by blending their traditional practices
with new technology and business practices.
Building the Ecosystem: We are
"system integrators" combining business, technology and legal services
for turnkey capital raising solutions.
Dynamic Capital Raising System: We integrate Crowdfunding
and ICOs with traditional financing solutions to create dynamic capital raising
strategies for growing businesses.
Capital
Raising Diversity: We help underserved populations find their seats
at the capital raising table by taking advantage of the new opportunities
technology and legal reforms provide.
Blending
the For Profit and Non-Profit Worlds: We help non-profits leverage their resources by
partnering with investors who want to increase social and artistic returns on
their investments.
Our collective experience includes:
- Wrote Crowdfunding: A Legal Guide to Investment and Platform Regulation (Thomson Reuters 2016) analyzes securities laws through the prism of Crowdfunding capital raising practices.
- Write a column about business and legal issues for Triangle Business Journal
- Played a critical role in the passage of North Carolina’s intrastate crowdfunding exemption (NC PACES).
- Leaders of law firm's Securities practice.
- Leaders of law firm's Blockchain and Coins practice.
- Leaders of law firm's Technology practice.
The content contained on this article does not provide, and should not
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not convey an offer to represent you or an attorney-client relationship. All uses of the content contained in this
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