Advanced Structuring of Investments
Equity isn’t the only way to structure a financing deal with an organization, you can also structure the debt in various different ways. Equity can certainly be part of the agreement, but part of the investment can also be accumulated by the business entity as debt.
Usually, if a deal is structured around debt, there would be a certain amount of money financed as debt-leveraged as the business entity. This is more risky, as there will be interest associated with this debt, and a payment needs to be drawn out. In the event that the business cannot make payments on time, the investor might be paid out with equity.
If the business is a product based business, there could be a royalty attached to all future sales, this type of financing is extremely risky for small to medium sized businesses because this type of financing will increase the cost of good sold on the product. It will also siphon the cash flow of the business especially when the business is still of a small or medium size, this can be extremely risky for the business owner.
However, there is no reason that the structure can’t be a mixture of equity, debt, and royalties. For example, suppose you have a business that is in need of 1,000,000 dollars, and the business has a market valuation of 2,000,000 dollars. You can raise 500,000 dollars as debt, with an attached interest rate and an attached royalty of 25 cents on every product sold, and 500,000 dollars could be raised by selling 25% equity share of the company.
Remember, all of the financing is just negotiating with the investor, try your best to get the highest valuation for your business and structure the best deal to ensure that your company will be able to grow and prosper.