When raising money through crowdfunding, one of the most important decisions entrepreneurs need to make is how to structure the offering. The appropriate structure will depend on a lot of factors, including the business’ stage of development, its performance to date, growth plans and the targeted capital source. But the options generally fall into one of two buckets: equity or debt. At Localstake, we’ve had success with revenue-sharing agreements, which are a form of debt, like a loan, but with variable payments that rise or fall with the business’ monthly revenue.
In this article we’ll explain how revenue-sharing works and compare it to alternative structures.
The key issue to address when building an offering structure is striking a balance between a business’ expected cash flow and growth plans and the target return for investors given the risk profile of the business. For any small or early stage business (and particularly those that don’t fit the venture growth trajectory) understanding how investors will achieve a return from a private offering can be difficult.
With equity, investors are typically reliant on the savvy of the management team to build a product and company in a dynamic market to the point that the company is an attractive acquisition target (or can secure enough financing to get to a size where an IPO is viable). This is a very difficult thing to do and dependent on many known and unknown variables. This profile typically leads to a binary outcome scenario for investors—either the entire investment is lost or they see a 20-30x return or higher. […]
The full and original article can be viewed on Locavesting.com
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