A revenue sharing note (RSN) is a debt-based investment vehicle, in which a company borrows money from investors and agrees to pay back a certain Revenue Share Percent of any revenue it may generate every quarter until all principal and interest is repaid.
Four key features to consider in every Revenue Sharing Note (RSN):
This figure is expressed as a multiple (e.g. 1.8x) and indicates the total amount owed to an investor in a revenue sharing note. From the investor standpoint, it is the total amount the company will owe you including principal and interest.
In finance, Investment Multiple is commonly also referred to as Return on Invested Capital (ROIC).
The Maturity Date is the date by which all monies are owed back to investors. It is possible that a RSN will have paid back the total payment before the Maturity Date, in which case no amount would be due. However, if any amount is still due by the Maturity Date, then investors would be owed a repayment of the remainder due at that time.
Revenue Share Percent
This is the percent of revenue that a business agrees to pay to investors. For example, if a Revenue Share Percent if 5% and a business earns $100,000 of revenue in a given quarter, then that business will owe $5,000 to all investors. If a business makes a payment in quarter, your share of that payment would be the proportional amount that you invested compared to the overall amount invested.
Important note: On MainVest, the Revenue Share Percent is commonly listed as a range (e.g. 5%-10%). The reason it is listed as a range is that the total raise amount is also on a range, so the final revenue share percent won’t be known until the total raise amount is set.
For example, if a business lists a 5%-10% Revenue Share Percent on a $100,000 to $200,000 raise and ultimately raises $150,000, then their Final Revenue Share Percent will be set at 7.5%. The reason we use this convention is so investors are receiving the same rate of repayment regardless of the total amount raised.
(Internal Rate of Return) IRR
While it sounds complicated, IRR is a simple concept. IRR is the annual rate of growth an investment is expected to generate.
Unfortunately, we can’t list projected IRRs for our investments, due to strict regulations that disallow Funding Portals to predict or project investment performance. Nonetheless, when evaluating different investment opportunities professional investment analysts often perform calculations of IRR to do so. In the case of a Revenue Sharing Note, one could estimate IRR by modeling the terms of the RSN with the revenue projections provided by management and applying the IRR or XIRR functions in excel to calculate IRR. This would not create a guarantee of anything, but would illustrate the potential of a particular investment.
Another way to estimate a proxy for return would be to look at the Investment Multiple and Maturity Date, to linearly calculate a potential return.