Revenue-based funding makes a startup investment and pays back the investor at the rate of top-line revenue.
This aligns the investor and founder to the same goal – to create a business and grow sales.
The higher the sales, the faster the payback to the investors and the higher the compensation to the founders.
Revenue-based funding typically sets the payback rate at 1-3% of top-line revenue.
In revenue-based funding, the investors receive a revenue share until they reach a predetermined payback amount.
This is different from a loan which sets the payout rate regardless of the seasons or cycles within the business.
Revenue-based funding keeps early-stage investors off the cap table so it’s clean for future investors.
Once the payback amount is reached, the investors are finished and are no longer in the picture.
It works well for businesses that have recurring revenue and healthy margins.
It’s a good way to reduce dilution for the founders.
Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.
Let’s go startup something today.
Thank you for joining your host Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing.
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Copyright (c) 2021, Hall Martin and investorconnect.org. All rights reserved.
Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.