Thursday, September 21, 2017

Room for Debate Revenue Share Loans Part 2: Why Some Investors or Businesess May Not Love Revenue Share Loans


ROOM FOR DEBATE

is a series of conversations Benji Taylor Jones and Jim Verdonik,  are having about anything they feel like talking about. 

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
http://InnovateCapitalLaw.com/
Contact me at:
JimV@InnovateCapitalLaw.com
(919)616-3225
In this session Benji and Jim talk about:

WHY INVESTORS OR BUSINESSES MAY NOT LOVE REVENUE SHARE LOANS
BENJI:  Jim, in our last discussion, we gave a pretty flattering description of Revenue Share Loans.  Two lawyers can't discuss this without also talking about the downside.  Go ahead.  Spoil the party.  What are the problems with Rev Share loans?
JIM:  Like anything that sounds too good to be true, sometimes it is.  Here are the issues you need to watch out for - reasons you might not to LOVE Rev Share:  
  1. Repayments can slow a business' ability to reinvest in long-term growth compared to equity.
  2. Slower revenue growth may mean a lower sale price at exit (if that's what the business owners are looking for).
  3. Paying investors is an ongoing expense and headache.
  4. Paying investors also requires sharing periodic revenue numbers with many people.  This info may leak to competitors and customers. 
  5. In an LLC or other pass through entity, owners will be taxed on phantom profits used to repay the loans.  That's not a problem with equity.
  6. Future lenders may be unwilling to make new loans to the company while the Rev Share debt is outstanding.
    JIM:  Benji, don't make me do all the hard stuff.  It's your turn. 
    BENJI:  OK, I still LOVE Rev Share, but raising capital through investment crowdfunding is complicated.  Businesses need to be prepared for added regulatory and compliance costs, as well as the distractions that accompany taking investments from a "crowd" of people.  Management still has a responsibility to provide information and respond to these investors, even if they are not "owners" of the business.  In addition, businesses raising capital through Rev Share will need to manage the payout process carefully. 
    JIM:  What about investors?
    BENJI:  Investors should recognize that there are always risks associated with any kind of investment, and particularly investments in small businesses and startups.  There is no guarantee that the business you love will actually continue to operate successfully or derive sufficient revenue to repay your loan. 
    JIM:  Can you talk some more about what investors should consider before investing?
    BENJI:  Many of the things that might be appealing for companies about Rev Share cut the other way for investors.  For instance, unlike equity, Rev Share investors don't have any voting, economic or management interest in the business.  Although they are creditors, they typically don't benefit from personal guarantees, security interests, financial covenants, or other restrictions that protect banks or institutional investors.  Rev Share loans are often junior to other loans the business has now or may obtain in the future.  That means that other lenders may get paid while Rev Share loans remain unpaid.  This risk of junior debt is why Revenue Share loans offer higher interest rates than banks typically charge. 
    JIM:  Are there any other reasons investors should be cautious?
    BENJI:  Although Rev Share loans offer the opportunity to support the businesses you care most about – investors should consider all of the terms being offered by the company and all the facts the company discloses, including whether the company is generating revenue, to minimize your risk of not getting paid back and maximize your expected return.  It is critical to understand the terms that govern an investment before you commit. 
    JIM:  What's the best way for investors to deal with these risks?
    BENJI:  Diversification.  Don't invest too much of your capital in any single business or in any single type of deal.
    JIM:  So, Are you advising investors to LOVE Rev Share loans in moderation?
    BENJI:  Yes.  Too much of anything can be bad for you.  Revenue Share loans are no different.
    JIM: What about taxes?
    BENJI:  Rev Share has a more complex tax impact than say, straight debt or equity, due to the variable nature of the installment payments.  Businesses and investors alike will need to understand how tax payments and paperwork will be handled post-closing.  (Many platforms, like Streetwise and LocalStake, offer post-closing payment services to help companies manage these hurdles.)  Before participating in a Rev Share for any business, you should consult your personal tax, accounting and legal advisors before making an investment.
    JIM:  Do you have any parting advice for potential Rev Share issuers and investors?
    BENJI:  I'll tell them the same thing my Mother told me growing up.  It always started like this: 
    Before you get "hitched" . . . and ended with a tragic story.
    Of course, LOVING Rev Share when you plan your deal is a lot like getting married.  Most people are in LOVE when it starts, but how long the LOVE lasts is what counts.  Having a long lasting LOVE of Rev Share depends on whether your projections were realistic and how you manage your business.  So, be careful your LOVE affair with Rev Share doesn't end in a messy divorce.  

     
    JIM:  Of course messy divorces are often caused by misunderstandings.  So, in our next conversation, we'll talk about crunching Revenue Share Loan numbers so that there are no unpleasant economic misunderstandings.



    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:
  8. If you would like to join in Benji's and Jim's conversations, you can talk with Benji and Jim at:


    Jim Verdonik
    Founder of Innovate Capital Law
    http://InnovateCapitalLaw.com/
    Contact me at:
    JimV@InnovateCapitalLaw.com
    (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 be relied upon as, legal advice.  It does not convey an offer to represent you or an attorney-client relationship.  All uses of the content contained in this article, other than for personal use, are prohibited.





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