Revenue Participation/Royalty Financing Revenue participation or royalty financing occurs when an investor buys a percentage of a future revenue stream of the company. This type of financing can be risky for the investor if there are no sales revenues or revenues do not occur for a time. When sales do occur, payment to the investor comes before any other expenses of the company, regardless of profitability.
In the current market of hybrid securities, a revenue or royalty compo- nent, coupled with some equity participation by way of warrants, can be an attractive option to investors seeking both cash flow and equity participa- tion. A version of royalty or revenue participation can be structured within a class of preferred stock or LLC membership units. The tax and legal aspects of this creative form of financing are complex, and careful planning with your legal and accounting team is advised.
Merchant Banking Historically, merchant banks have not been commercial banks that accept deposits, but private banks with access to private equity funds. That said, many of the traditional lending banks have ventured into the private equity market in the past few years. With a little research, you may be able to uncover a source of equity financing from your bank. Larger banks have been investing in private equities for quite a while, and now small banks are getting in the game with some banks syndicating the investments with other small banks. It is unlikely your local branch officer will know much about these programs, and you may need to do a bit of digging to get to the right person in the bank. If you have a preexisting relationship with the bank, you will probably get answers a lot quicker.In addition to the private equity groups of commercial banks, there are other private equity nonbanking groups, such as insurance companies, hedge funds, large and small angels, private equity funds, and other institu- tional investors who invest in early stage companies. Like an entre?e into venture capital, an introduction to the group, especially from a person who has previously raised money from that sector, is extremely helpful.