Revenue Share and Profit Share

For companies

Raising money in exchange for equity isn’t the right model for all companies. That’s why we’re introducing the Revenue Share instrument. It empowers you in two key ways:

It lets you raise money while protecting your equity share, and
It lets you base your repayment plan on the success of your company: the loan gets paid back at the rate the company grows, not by a predetermined schedule.

The Revenue Share is a debt security (loan) fundraising instrument that provides lenders recurring payments based on the company’s financial results. These are commonly known as “revenue share” or "profit share" deals.

Companies can offer a set percentage of sales revenue or a percentage of a well-defined net profit metric from their business and pay it to lenders as a form of interest payment on the loan on a quarterly or annual basis.

How it works

For example, a company might offer $1M worth of debt. To repay that debt, a crowd of lenders will receive 20% of the company’s net profit every year, once the gross revenue exceeds a certain amount (tipping amount), until the loan and a premium are repaid. For their combined $1M investment, each lender will get a pro-rata share of the to be distributed profits. This annuity will continue until a set return is met, as defined by the investment contract.

The time it takes to repay the loan and the set return can either be a set amount of time or be a series of payments over the course of many years — as long as the company continues to produce net profits over the tipping amount.

Example: The Three Broomsticks

Let’s say The Three Broomsticks pub wants to raise $1M for their new expansion. They like the freedom that revenue sharing offers, and are excited about tapping into the support of their customers and community.

They set the terms:

Instrument: Revenue Share
Loan amount: $1,000,000
Tipping point: $100,000 gross revenue Per Year
Revenue sharing percentage: 20% of their net profits
The set return: 2.5x principal.
The time it takes to repay the loan: 72 months (6 years).

If and when they reach $100,000 in gross revenue in a fiscal year, they start paying 20% of that gross profit ($20,000) every year to their lenders, pro-rata, until the payout equals the set return, in this case 2.5x the principal ($2.5M). This amount gets paid out over 72 months; depending on the terms of the agreement, if the set return isn’t paid out by that time, the difference is made up in a last payment.

There is no guarantee that any company will hit their tipping point. Investors may have to wait for the full term of the loan to receive a return, and if the company fails, will not receive any.

Buy out clauses give you even more options

Companies using a profit or revenue sharing contract can also structure a clause that allows them to buy out a lender’s interest at any time with a set payment amount. For example, the company in the previous example could, at any time, pay the crowd of lenders enough money to provide an aggregate $3M cash repayment for the initial $1M investment as a buy-out, and cease any further revenue / profit sharing payments.

Download: Revenue-Profit-Share - Republic.docx

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For lenders

The Revenue Share gives non-accredited investors a chance to diversify their portfolios with recurring payout investments.

As a debt security fundraising instrument (loan), the Revenue Share provides lenders recurring payments based on the company’s financial results in exchange for their loan. Companies can offer a set percentage of sales revenue or a percentage of a well-defined net profit metric from their business and pay it to the lenders on a quarterly or annual basis as a form of interest payment on the loan.

Why should lenders participate in a Revenue Share?

As a lender, you get to bet on the success of the company, while receiving a defined payment when the company takes in revenue or profit. This differs from equity-based agreements like the Crowd SAFE, where a return only occurs when the company exits via an IPO or acquisition. The tradeoff for reduced risk is a fixed upside: unlike in a Crowd SAFE equity agreement, here once the payback multiplier is reached, the loan expires and no further returns are paid out.

Pro	Con
Cash payments	May take years to come
Fixed return	Upside limited
Higher priority than equity in the event of dissolution	Unsecured loans
No need to wait for a liquidity event	No ability to own part of the company

How it works: an example

For example, a company can offer $1M worth of debt in the company, and to repay that debt, a crowd of lenders will receive 20% of the company’s net profit every year, once the gross profit exceeds a certain amount (tipping amount), until the loan and a premium are repaid. For their combined $1M investment, each lender will get a pro-rata share of the to be distributed profits. This annuity will continue until a set return is met, as defined by the investment contract. The time it takes to repay the loan and the set return can either be a set amount of time or be a series of payments over the course of many years-as long as the company continues to produce net profits over the tipping amount.

Example: Hooli

Let’s say you lend Hooli $1,000 as part of their $100,000 raise for an expansion program. You like the company, and you see a great investment opportunity.

Let’s say these are the terms of the Revenue Share: (For example)

Tipping point: $100,000 gross revenue per fiscal year
Revenue sharing percentage: 20% of their gross revenue per fiscal year
The set return: 2.5x
The time it takes to repay the loan: 72 months (6 years)

If and when they reach $100,000 in gross revenue, they start paying 20 % of their gross revenue every year to their lenders. Since you invested $1,000 of $100,000, you receive $200 as your annual return for the first year (1% of the $20,000 owed to lenders). The payments continue as long as Hooli maintains gross revenue above $100,000 per fiscal year, and will vary depending on what Hooli’s annual gross revenue is. If the annual return does not provide a 2.5x return by the end of the 72nd month, Hooli will pay you the remainder of your return to ensure you were paid $2,500 over the 72 month period. This amount gets paid out over the 72 month period; depending on the terms of the agreement, if the set return isn’t paid out by that time, the difference is made up in a last payment.

There is no guarantee that any company will hit their tipping point. Investors may have to wait for the full term of the loan to receive a return, and if the company fails, will not receive any.

Risks for lenders

Lenders find recurring cash payments an attractive investment. However they should be conscious that no payments will be made if the terms of the security are not met. Additionally, lenders should look to the security to see what will happen to the loan in the event of the company having a change of control or going public. Generally, profit sharing agreements take the form of an unsecured loan, meaning in the event the issuing company fails, lenders will have no guarantee of a return of capital. Like all investments, lenders should do their own research into the company and determine whether the investment is appropriate for them.

FAQ

What's the difference between a revenue share agreement and the Crowd SAFE?

The Revenue Share agreement is a type of term loan with a variable payout schedule. It does not convert to an equity stake and comes with no voting rights, tax information rights or liquidity rights. The Crowd SAFE is a financial interest for a future equity stake if the company has a subsequent equity financing (whereby the company can convert the Crowd Safe into a type of shadow stock) or a liquidity event, where investors can earn a return in cash or common stock. While Crowd SAFE holders do not initially have voting rights, tax information rights or ownership in the company, they may earn these eventually. Note, there is no guarantee of a return with either the revenue share or conversion with a Crowd SAFE.

Do I get equity in the company?

No. The a revenue share agreement, unlike a SAFE or convertible note, can never and will never convert to an ownership stake in the company issuing it.

What if the company doesn't hit its tipping point?

The company will not have to make any payments on the debt until the tipping point is met. If it never hits the tipping point, the principal plus any multiplier will be due at the end of the term of the note issued to the investors. This means investors may have to wait until the maturity date to receive any payments, or never receive payments.

What's the minimum return on investment I can expect on my loan?

Early stage startups are risky investments. You should only invest if you can sustain a total loss of your principal. If the company is unable to exceed the tipping point, but has cash on hand at the end of the term of the note issued, investors may receive the multiplier back, which would be a set return on investment, reduced by the time period investors waited for it. If the company runs out of cash, investors could see a partial repayment of the principal and possibly part of the multiplier.

Glossary of terms

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