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Revenue-based financing panel discussion - for lawyers


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Revenue-based financing is a unique way for tech entrepreneurs to fund their business and preserve equity early on.

Presented and moderated by Joe Wallin, Principal at Carney Badley Spellman, this deck describes the details of the funding structure, key terms, and some examples on how founders and entrepreneurs use the capital to grow their business.

This presentation is specific to startup lawyers and is a CLE course that's approved by the Washington State Bar Association.

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Revenue-based financing panel discussion - for lawyers

  1. 1. Revenue-Based Financing PresenterandModerator: Joe Wallin, Carney Badley Spellman
  2. 2. Overview About Lighter Capital What is revenue-based financing? How it works How does it differ from other sources of capital? Key terms of revenue-based financing agreements 2
  3. 3. 3 Speaker Introduction Renwick Congdon CEO Jay Goyal CEO Molly Otter CIO
  4. 4. 4 $100M Debt Facility $15M Equity Investment $40M Under Management About Lighter Capital Our Leadership Team & Investors CEO: BJ Lackland CIO: Molly Otter
  5. 5. 5 Since 2010, provided 200+ financings across 150+ tech companies. Most active revenue-based finance lender in the country providing $50K to $2M in non-dilutive growth capital. About Lighter Capital Our Customers
  6. 6. Lender loans funds to a business, and receives payments based on a percentage of its ongoing gross revenue Loan proceeds are used for long-term growth capital Borrower’s payment amounts vary over time, increasing or decreasing according to business revenue What is Revenue-Based Financing?
  7. 7. 7 How it Works Repayment terms are different from typical bank loans. • Monthly payment amounts are a percentage of the prior month’s “Net Revenue” until a “Return Cap” is reached. • The “Return Cap” is usually a multiple of the amount loaned (e.g., 1.35-2x) • Thus, the definition of “Net Revenue” is important in a revenue loan. Because monthly payments vary, interest is also calculated differently. No equity required
  8. 8. 8 How it Works Repayment Cap =Total payback amount Royalty Rate =Monthly payment amount 8 (determined by term) (determined by loan amount) Repayment Cap 1.35X-2.2x Royalty Rate 1-10%
  9. 9. 9  Monthly repayment amount is determined by reference to the borrower’s revenues (net cash receipts in the month immediately preceding the month in which payment is due).  Similar to “royalty based financing” because the repayment schedule is similar to how a royalty payment would be calculated.  For example, the term sheet might describe loan repayment terms as: • “___ % of the borrower’s preceding month’s net cash receipts, due and payable on the 5th day of each month.”  In some cases, there may be tier structures that will change payments throughout the year. For example, initially at 8% until the lender has received a certain amount of repayment that year, then decline to a lower percentage for the remainder of the year. Monthly Payments
  10. 10. 10 Example: ABC Co. $100K Growth Funding 10 3 Month Avg. Revenue $60,000 Annualized Run Rate $720,000 Loan Requested $100,000 Maximum Loan Size $240,000 Repayment Cap 2 Total Obligation $200,000 Royalty Rate 4%
  11. 11. 11  Interests of borrower and lender are aligned  Monthly payments adjust to revenue cycles  Typically secured only against company assets  No personal guarantees  Borrower does not need to have hard assets or physical inventory (a benefit for tech companies)  Does not dilute Founder ownership  Lender does not take board seat or control business decisions  Quicker source of funding  Can repay loan early as revenue growth allows: if borrower grows fast, the loan will be paid back more quickly  No pressure to sell the company; lender doesn’t depend on sale or IPO to receive return Advantages of Revenue-Based Financing
  12. 12. 12 How Do We Compare?
  13. 13. 13  Credit: Banks require borrowers to have good credit ratings  Assets: Banks typically require hard assets as collateral  Guarantees: Banks may require personal guarantees, so the Founder’s own assets are on the line  Interest: Banks use fixed interest rate and may impose prepayment penalty  Repayment: Bank loans typically require fixed monthly payments that don’t adjust for the borrower’s ability to pay Revenue-Based Financing vs. Bank Loan
  14. 14. 14 Angel investment or venture capital investors buy equity in the company Dilutes Founder ownership Cost of capital may be high Investors may require a seat on the board of directors Investors control some business decisions Equity financing requires a valuation of the company May require substantial legal fees, and take time and attention away from running the business Revenue-Based Financing vs. Equity Financing
  15. 15. 15 Key Term 1: Net Cash Receipts  Typically akin to cash revenue (again think about how a royalty would be calculated).  When you move from “gross” to “net,” you are not typically netting a lot of items.  For example, you might net out the following items: customer returns and shipping charges.  This can vary based on the deal.
  16. 16. 16 Revenue loans have a “return cap” or a “repayment amount.” For example, the loan amount might be $200,000, but the loan won’t be paid in full until the borrower has paid the lender 2x the loan amount. (e.g. $400,000) Key Term 2: Return Cap
  17. 17. 17  A revenue loan will have a maturity date.  It might be 3, 4 or 5 years or more; or earlier if the lender has received the Return Cap.  If the company has not paid back all amounts borrowed before the maturity date, the remaining amounts will become due and owing on that date. Key Term 3: Maturity Date
  18. 18. 18  No predetermined interest rate or payment.  Each payment represents both interest and principal.  Determining the percentage of interest requires more complex calculations than a normal loan.  Interest rates are variable monthly Key Term 4: Interest
  19. 19. 19  Revenue loan lender will take security interest in all of the company’s assets  But, lender may subordinate to bank loans, and security interests relating to equipment and other hard assets  Revenue loan agreement may only allow certain “permitted liens” on the company or its assets Key Term 5: Security & Subordination
  20. 20. 20  Lenders will want the right to check on a borrower’s level of revenues  Review financial statements  Lender may obtain the right to view borrower’s bank accounts in real time Key Term 6: Access and audit rights
  21. 21. 21  Lender may impose some restrictions intended to protect revenue stream  For example, borrower may not take on additional debt or liens, loan its own capital, or dispose of material assets without lender’s consent Key Term 7: Restrictive Covenants
  22. 22. 22  Some states have usury limitations.  Default interest rate can’t exceed maximum rate allowed under state law.  Some states exclude a “profit share” from the definition of interest (see, e.g., Texas).  Choice of law and the physical location of the lender and borrower also impact whether usury restrictions apply. Key Term 8: Usury Limitations
  23. 23. 23 QUESTIONS? › Visit Our Website › ›
  24. 24. 24 APPENDIX
  25. 25. Licensing Information 25 › Lighter Capital is a direct originator of commercial loans in the United States. Lighter Capital may not be all toprovide loans in all states. We have funded companies in over 26 states and have licenses in the following states: › California › North Carolina › Tennessee
  26. 26. Standard Fees, Disclosure, and Terms 26 Legal Fees $3,500 Cost of Capital 15-30% APR Financial Covenants None, no personal guarantees Negative Covenants - Additional debt - Divesting major assets in which the loan isn’t being repaid - Making certain payments, loans and advances outside of the ordinary course of business - Bonuses and distribution
  27. 27. Standard Fees, Disclosure, and Terms 27 Standard Default Terms - Failure to make payments - Another person/entity becomes party to the collateral without prior consent - An event that materially changes the business - A key employee violates non-compete clause or leaves the company - Any event that causes the company to become insecure or insolvent Key Employee Insurance & Non- Compete - All key employees are required to sign a non- compete document for the life of the loan. - If the loan is $250K or higher, borrower is required to have key person life insurance for all key employees in the amount of the loan
  28. 28. Standard Fees, Disclosure, and Terms 28 Affirmative Covenants - Monthly reconciliation of Net Cash Receipts (completed within our secure portal) - Monthly P&L and Balance Sheet - Annual Tax Returns - Other standard business operating covenants