Revenue-based funding provides a return from the revenue rather than from equity ownership. It works well for businesses where there’s no anticipated sale of the business and investors receive a return in the form of a revenue share.
It works well for companies with uneven revenue as it provides a payout based on a monthly or quarterly revenues. It requires ongoing operations to calculate the revenue for payouts and monitor the business for progress.
To reduce the cost of revenue-based funding, TEN Capital uses a 3X in 3 year redemption right at “Investor only discretion”. The redemption right gives the investor the right to ask the company to buy them out at 3X their original investment at the 3 year mark. The investor can choose the redemption right or forego the right and become an equity investor and wait for the IPO or acquisition exit.
It removes the burden of ongoing monitoring and cash collections and leaves more cash in the business to help it grow.
Hall T. Martin is the founder of TEN Capital and a builder of entrepreneur ecosystems by startup funding through angel networks, funding portals, syndicates, and more. Connect with him about fundraising, business growth, and emerging technologies
