Royalty financing, explained for founders who have only ever heard of equity

Royalty financing, also called revenue-based financing, works on one rule: you receive capital today and repay a fixed percentage of monthly revenue until you reach an agreed cap. There is no interest rate in the conventional sense, no fixed instalment and no equity.

The structure suits companies with recurring or highly predictable revenue, gross margins above a level that leaves room for the payment, and at least twelve months of billing history. It does not suit pre-revenue companies, project businesses with lumpy invoicing, or companies whose growth depends on a step change in scale rather than on more of the same motion.

The comparison that matters is not cost of capital in the abstract. It is what you own in three years. An equity round is permanent: the shares you sell today keep compounding away from you. A royalty facility ends when the cap is paid. If the company works, the facility becomes the cheapest capital you ever took. If it does not, the payment falls with revenue, which is exactly when a bank instalment would not.

The honest downsides: the cap is real money, the percentage is a claim on cash you might want for hiring, and a facility is not a substitute for a lead investor when what you actually need is a partner around the table. We say so when that is the case.

The right question is not equity or royalty. It is which part of the next eighteen months needs permanent capital and which part only needs cash flow brought forward.