Get the most out of your Inc. online experience by registering and joining the Inc. community today. Get access to all Inc.com content and priority invites to free Inc. networking events in your area.

Login using:


Or login directly through Inc.com

Paying Investors Royalties

 

There's a middle ground between giving investors an equity share and treating theirmoney as a straight loan. When Andover Advanced Technologies, a sales and marketing company, in Westford, Mass., was two years old, it garnered a$100,000 investment by promising to pay investors royalties based on sales.

For companies like Andover Advanced, royalty arrangements postpone the question of valuation and allow the business to distribute cash based on actualsales, keeping decisions about the future in the hands of management (since royalty investors typically don't get formal management control or seats onboards). Investors, meanwhile, can make decisions based on the near-term prospects of products they can see for themselves.

Andover Advanced promised to pay investors between 8% and 12% of new product sales each month. How long it will make payments is contingent onsales. If things go well, the company gets to stop paying when investors have gotten five times their money back--or three times their initial investment, if themoney is paid in the first year. Clearly, president Bruce Twickler admits, this type of money can be expensive. But, he says, "If we're successful, we maynot need any additional money. And if we do, we think we'll sell stock at a price that's quite a bit higher than anything we could have obtained" before theroyalty deal was done.


Sign-up for our Innovation Newsletter