Give Royalty to Offload Less Stake to Investors

I was watching Shark Tank yesterday and came across this. Some investments were done where the investor took less equity in the company and asked for a royalty instead. For example, an entrepreneur was wanting to raise a $100,000 investment and was willing to offload upto 15% in his company. The investor instead asked for 10% royalty on sales till the investment of 100K was received back and then a 1% royalty till perpetuity.

The benefits of investors taking a royalty are for both sides.

For Entrepreneurs: They don’t need to offload equity, and at the same time get support and  mentoring by the investor. Also royalties are generally structured keeping gross margins in mind, so that the business and it’s growth does not suffer because of it. The only downside is that royalties are generally till perpetuity and hence act as a permanent part of your cost structure.

For Investors: Rather than looking for a one time repayment (through a stake sale), royalties ensure that the investment put into a startup keeps coming back in small amounts, thereby reducing the risk. Also if the startup grows, the royalties will grow as well.

Royalties is an option we should consider, especially for a sales oriented startup, when we are dealing with investors.

The 4 'Investments' Required in a Startup

How much investment do we need to startup? A lot is required but not necessarily in monetary terms. Investment in a startup can be done in many ways.

Time: This is the biggest investment required. The more the number of people investing their time, the better the chances of the business taking off.

Skills: Investing time is good. If the invested time can carry a better weight, i.e. the time is from people having great skills, the better it is. The more the skills backing the time invested, the bigger the investment.

Passion: The passion is what keeps all other investments going. Investing your passion into you startup ensures that the other investments will keep getting co-invested along with it.

Money: Money is required in any business.

So the first investment an entrepreneur makes is Passion, which is followed by Time, Skills & Money. Even if you do not have very many skills or much money as of now, investing passion and time can ensure that you keep moving and can take you to a stage where the other two investments will automatically start coming in.