Some family offices that invest directly in private companies ask for a small royalty on revenue in addition to an equity stake. The royalty pays cash from the start, while the equity provides the long-term upside.
Why families use it
Equity in a private company may not pay anything for years. A royalty gives the investor regular cash flow and a direct view of revenue. For the company, it can mean giving up less equity than a pure equity deal.
Questions to ask
- Can the company afford the royalty in a bad year?
- When does the royalty end: after a set multiple, a set date or never?
- How is revenue defined and reported?
- How does the royalty rank against lenders and other investors?
Structures like this need legal and tax advice for the specific deal. See why family offices prefer direct investing and what family offices look for before investing.
Educational only. Nothing on this site is investment, tax, legal, accounting or other professional advice, or a recommendation on any security, manager, structure or allocation. Speak with qualified professionals before acting.