One of the investment products we offer on NextSeed is a revenue sharing note. Each month, a business shares a percentage of gross monthly revenues with investors. That’s why it’s called “revenue sharing.” The way it works is like this:
1) People invest in a revenue sharing note issued by a business.
2) The business agrees to pay investors monthly until a predetermined total amount is paid.
Here’s an example of how this would play out:
The business idea
Let’s imagine that there’s a popular coffee shop called Bean Me Up, Coffee. This hotspot is owned by two long-time friends, Sam and Sara. They regularly sold out of their limited lunch menu, and the savvy entrepreneurs recognized that people really want a nice lunch spot in the area.
They hunted down a perfect location and started drawing up the design and plans for their new restaurant. At the same time, Sam and Sara pulled together funding from various sources to secure the lease, buy inventory and finance operational costs.
Why a business would choose revenue sharing
They needed another $100,000 that will help pay for the final buildout, and they applied to launch an offering on NextSeed. Sam and Sara think it’s a great idea to get people involved by making them investors – they’ll be an army of advocates!
Offering a revenue sharing note makes sense to Sam and Sara because it gives them the flexibility of making payments based on their revenues. So, if their revenues are lower starting out, they can just pay a percentage of their lower revenues. They like the idea that their investors would also benefit in the upside if they crush it in the next month, getting a larger monthly payment from their higher revenues. The total amount they pay to investors is capped, so if they pay everyone off sooner, they’re done with payments sooner.
Putting the offering together
NextSeed uses standardized metrics to evaluate the new business and proposes investment terms for Sam and Sara to choose from. These are the terms that Sam and Sara would offer to potential investors on NextSeed. They choose revenue sharing with the following terms:
Revenue Sharing Percentage: 5%
Investment Multiple: 2X
Maturity: 48 months
This means that the business agrees to share 5% of monthly revenues until investors are paid 2X their investment. If investors are not paid in full by 48 months, the business will need to make one final payment to make up the difference. Since it’s a new place and they need construction time, they may have a period of time where no revenues are generated and no payments are made.
NextSeed does legal due diligence on the company and its owners. Sam and Sara provide their financials, business plan and renderings of their new space. NextSeed helps them put together their offering page, and they’re ready to launch an offering for their new lunch cafe: Samsara Cafe.
The investment and getting paid
Let’s say that Lily invested $1,000 into Samsara Cafe, and it successfully raises the $100,000 from investors. Everyone’s excited and construction begins. Samsara does not make any payments during this period since the business is not open and is not generating revenues. After a few months, Samsara Cafe is open for business!
After Samsara’s first month of operations, Lily gets an email saying, “Hooray! You received a payment today.” It notifies her that she’s been paid $100!
Here’s how Lily’s payment was determined:
Samsara raised $100,000 from NextSeed investors and agreed to share 5% of its monthly revenues.
NextSeed reviews the business’s revenues and has determined that Samsara generated $200,000 in its first month of operations. So, Samsara will share 5% of the $200,000 with all NextSeed investors. This means Samsara’s total payment for that month is $10,000 (200,000 x .05 = 10,000).
Since Lily invested $1,000 out of the total $100,000 raised by Samsara (in other words, 1% of the total), she is entitled to receive 1% of the total $10,000 payment by Samsara (0.01 x 10,000 = 100). Thus, Lily’s payment for that month is $100. NextSeed will take 1% of this payment as an administrative fee. Now Lily can withdraw it, save it or reinvest in another NextSeed campaign!
The end of the investment
The 2X investment multiple means the business agrees to pay Lily every month until she gets 2 times her investment of $1,000 back. The total amount Samsara has agreed to pay Lily is $2,000 (2 x 1,000 = 2,000).
Samsara has 48 months to pay Lily in full. If she haven’t received the full $2,000 by 48 months, Samsara is required to make one final payment to make up the difference. If she get $2,000 in full before the 48 months is up, Samsara does not make any more payments.
That’s how Samsara Cafe gets off the ground with the help of a NextSeed revenue sharing note!
Disclaimer: This example is for illustrative purposes only and does not reflect an actual deal or performance. The terms of each deal differ. The exact length of time that it will take a business to pay each investor in full cannot be known in advance. Payments are not guaranteed or insured and investors may lose some or all of the principal invested if the business cannot make its payments.