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Revenue Sharing

A Comprehensive Guide for Businesses and Investors

1

Intro

2

What is it?

3

Agreements

4

Understanding it

5

FAQ

Introduction
In the ever-evolving world of finance, innovative ways to invest and raise capital have emerged, allowing both businesses and individuals to thrive. One such innovation is Revenue Sharing Crowdfunding. If you're new to the concept, this guide will walk you through everything you need to know about this exciting opportunity.

What is Revenue Sharing?

In a revenue sharing model, investors provide capital to a company and, in return, receive a predetermined percentage of the company's revenue until a certain amount (a cap) has been paid back. The percentage of revenue shared and the cap are determined to create a mutually beneficial arrangement that supports both the investor's return expectations and the business's financial sustainability. This model can be a flexible alternative to traditional debt or equity financing.

Types of Revenue Sharing

Revenue sharing models can be structured in various ways, depending on the specific needs of the company and the investors. Some common types include:

Percentage of Gross Revenue

Investors receive a fixed percentage of the company's total revenue.

Percentage of Net Profit

Investors receive a percentage of the company's profits after deducting expenses. This model aligns investor returns with the company's profitability.

Tiered Revenue Sharing

The percentage of revenue shared changes based on the company's revenue performance. For instance, investors might receive a different percentage once the company reaches a certain revenue milestone.

Revenue-sharing agreements or notes

A revenue share can be structured through a detailed agreement or a note. A note is a flexible financial instrument that outlines all the terms of the revenue-sharing model, addressing various scenarios. It is typically incorporated as a schedule or annex to a standard investment agreement.Revenue-sharing agreements or notes typically include the following:
Investment Amount

The total capital raised by the business from investors.

Return Amount

The maximum total amount investors are entitled to receive as part of the revenue-sharing agreement.

Security

Whether the investment is secured or unsecured. This includes any guarantees or collateral provided by the business to protect the investment.

Revenue Sharing Percentage

The portion of the company's gross or net revenue allocated for payments to investors.

Payment Schedule

The frequency of revenue-sharing payments made by the business to investors (e.g., monthly, quarterly, or annually).

Understanding Revenue Sharing in Crowdfunding

A revenue share can be structured through a detailed agreement or a note. A note is a flexible financial instrument that outlines all the terms of the revenue-sharing model, addressing various scenarios. It is typically incorporated as a schedule or annex to a standard investment agreement.To meet regulatory standards, businesses are required to provide comprehensive Offering Documents that include financial projections, risk factors, and operational details.Investors can explore active campaigns, commit funds to businesses they wish to support, and contribute to their funding goals. Once a campaign is successfully funded and the notes are issued to investors, Togetherise facilitates the transfer of raised capital to the business. The business then begins making revenue-sharing payments to investors based on the agreed terms.The Subscription Agreement between the investor and the business guarantees investors' rights to timely disclosures, access to offering documents, and clear investment terms. This transparency empowers investors to make informed decisions while safeguarding their interests.It is important for investors to note that repayments are tied directly to the business's ability to generate revenue. As such, investors should review offering documents and promissory notes carefully, understand the associated risks, and diversify their investments to mitigate the potential impact of underperformance.

Business Example:

Artisan Furniture Co.

Scenario

Artisan Furniture Co. plans to expand its production facility to meet growing demand and requires $200,000 in funding. The company opts for revenue-sharing crowdfunding and sets the following terms:

Revenue Sharing Percentage

10% of monthly gross revenue

Repayment Amount

$230,000, meaning the company will distribute $230,000 to investors before the agreement ends

Estimated Repayment Term

24 months (2 years)

Security

The principal investment of $200,000 is secured by personal guarantees from the company's shareholders, ensuring repayment even if the business underperforms.

How it Works

Artisan Furniture Co. raises $200,000 from investors through the crowdfunding platform. The company begins sharing 10% of its monthly gross revenue with investors:

In a month where gross revenue is $100,000, the company distributes $10,000 (10%) among its investors.
Payments continue monthly, fluctuating with revenue performance, until the total of $230,000 is reached.
The repayment term is estimated by the business based on its current revenue projections. However, the actual repayment time may vary depending on performance. For example, it could take 22 months if revenue exceeds expectations or 28 months if revenue falls short.
If the business is unable to meet its repayment obligations due to unforeseen circumstances, the shareholders' personal guarantees ensure the principal investment is repaid.

Benefits of Revenue Sharing for Companies

Preserve equity

Raise capital without giving up ownership

Flexible repayment

Payments adjust to revenue, so during low-revenue months, businesses aren't forced to cover fixed repayments like with traditional financing.

Align interests

Investors and founders are both motivated to drive revenue growth.

Attract a wider investor base

Reach investors who are seeking alternatives to equity or debt financing.

Maintain autonomy

Founders retain control of their company and decision-making.

Brand Advocacy

Investors may also support the business as customers, aligning their interests with its success.

Comparison of Revenue Sharing with Other Financing Models

Revenue Sharing

Equity Financing

Debt Financing

Ownership Dilution

No

Yes

No

Repayment Structure

Based on revenue

Dividends or sale of shares

Fixed payments with interest

Investor Control

Limited

Potentially significant

Limited unless debt covenants are breached

Risk

Shared between company and investors

Higher for investors

Lower for investors

Return Potential

Capped, based on revenue performance

Uncapped, potential for significant gains

Limited to interest rate

Risks of Revenue Sharing for Companies

Revenue-sharing offers flexibility, but businesses should carefully evaluate its risks to ensure long-term sustainability. Below are key risks associated with revenue-sharing models:
Potentially Expensive
One of the risks of revenue sharing is that it can become costly, especially if the business performs better than expected. For example, if the repayment term shortens due to higher-than-anticipated revenue, the fixed repayment amount will be paid back sooner, resulting in an effective rate that may be significantly higher than traditional financing options. However, this higher cost only applies if the business is highly successful and generates larger profits. Essentially, this is the cost of sharing the risk with investors in case the business underperforms. Companies should weigh whether the trade-off is worth the flexibility and risk mitigation offered by revenue sharing.
Liability from Secured Repayments
Unlike equity financing, where founders may lose little to nothing in the event of failure, revenue-sharing agreements with specified security expose founders to personal liabilities. For instance, if the repayment is secured by personal guarantees or collateral, founders risk losing other assets if the business fails to generate sufficient revenue. Businesses should only use the revenue sharing model if they have a steady revenue stream capable of supporting the proposed repayments. This ensures they can meet obligations without jeopardizing personal or business assets.
Impact on Future Revenue
One of the risks of revenue sharing is that it can become costly, especially if the business performs better than expected. For example, if the repayment term shortens due to higher-than-anticipated revenue, the fixed repayment amount will be paid back sooner, resulting in an effective rate that may be significantly higher than traditional financing options. However, this higher cost only applies if the business is highly successful and generates larger profits. Essentially, this is the cost of sharing the risk with investors in case the business underperforms. Companies should weigh whether the trade-off is worth the flexibility and risk mitigation offered by revenue sharing.

Frequently Asked Questions

Togetherise (Togetherise Inc.) is a revenue-sharing crowdfunding portal operating under the framework of National Instrument 45-110 (NI 45-110) in Canada.

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Important Legal Notice and Disclosure: Togetherise Inc., operating under the name Togetherise, is a funding portal operating under the registration exemption provided by National Instrument 45-110 (NI 45-110). No securities regulatory authority or regulator has approved or reviewed the securities offered on this platform. By using this site, you agree to be bound by its Terms of Use and Privacy Policy.

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