Venture Investors: Optimal Deal Structure



Venture Investors have been investing more speculatively than necessary — not based upon their selected investee companies or projects — but in terms of their “all or nothing” deal structure, which usually is based upon the occurrence of an event (such as an acquisition, going public or some other exit) which provides capital recovery as well as gain, if any. While waiting for this event, the investor either doesn’t receive cash flow at all, or receives some debt service payments if the deal was structured as a loan of some sort, plus equity. Most important to note is that most investors are not truly looking at the investee’s fundamentals and inherent profitability as a free-standing entity. This not only affects the deals selected (i.e., flash versus fundamentals), but it puts the investor into an uncertain period of little or no income and limited liquidity.

I am proposing a less speculative and more liquid deal structure based upon the use of Revenue-Based Royalties as capital recovery devices (to reduce risk over time) and as a means of generating a stream of positive cash flow to the investor. And this cash flow, if sufficient, can be re-invested to maximize total portfolio return.

The method is simple. Regardless whatever the other particular details of the deal structure, add a net revenue-based royalty (as set forth in the illustration below). This approach can also have the effect of making many a less-than-glamorous early-stage enterprise look considerably more attractive. I believe it would make more money available to small businesses and middle-sized enterprises that are less than revolutionary in measuring their intellectual property or market capitalization potential.

Sample Investment Recovery Chart Template - Douglas E. Castle

This approach is much “cleaner” than profit-sharing in that it does not permit subjectivity or manipulation of the numbers. It’s simply elegant: The investor takes a look at the investee’s bank statement, multiplies the non-investment, non-loan, cleared deposits (ostensibly the proceeds from sales activity), multiplies that number by the applicable royalty percentage expressed as a decimal, and is paid appropriately.

Douglas E. Castle



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This site is the Management Consultants' and Chief Reconstruction Officers' best all-industry guide to analyzing, diagnosing, devising a strategy, creating either an Action Plan or an Emergence Plan and overseeing and monitoring the successful implementation of either in order to ensure the client organization's optimal, sustainable profitability. These plans are always made scalable to accommodate the size and needs of the client, whether it is fast-growing young company with an aggressive and ambitious agenda, or whether it is an older, larger, well-established business which is experiencing problems or which is at a crucial decision making point in its evolution as an entity, and which requires sound advice (and often implementation oversight and assertive "hands-on" assistance in the form of a powerful third-party representative agent or a an expert in the art of negotiation as its appointed "point person") regarding its next steps. In the alternative, Douglas E. Castle is expert at helping fast-track, rapidly emerging companies to growth through acquisitions, mergers, licensing, branding and both domestic and international strategic joint ventures to access better, more efficient supply chain sourcing and to open up wider global markets to dramatically increase the scope of possible new revenue opportunities.