Photo by Giorgio Trovato on Unsplash

For some startups, revenue share financing can make more sense than traditional equity financing.

Startup founders should expand the solution set in their minds as they look at financing options.

Bret Waters
3 min readJan 26, 2022


I had a call last week with a young entrepreneur (let’s call her Betsy) who has a pretty cool new consumer app that she’d like to raise a little money for. I think the business could easily get to maybe $5M/year in revenue, so if it generates a 20% net margin that would put $1M/year in her pocket. Most of us would be very pleased to own that business. But there’s no way Betsy can get a venture capitalist to invest because those numbers are too small for them and there is no realistic chance of an IPO or a big acquirer.

The Silicon Valley venture capital industry (and, by extension, the angel capital ecosystem that feeds into it), is stuck in one model. They invest large amounts of capital in return for a chunk of equity, and then wait for that equity to be worth 100x when the company sells to the public (IPO) or to Google (M&A). Any perfectly good business that doesn’t fit that specific mold won’t be able to raise venture capital.

Also, it’s very expensive to be venture-funded business. You’ll need to be a C-Corp registered in Delaware (much more costly than a simple LLC), plus selling equity gets into high-regulated territory so the legal fees on a Series A venture financing are typically $50K-$100K, plus there’s lots of cumbersome quarterly governance to comply with. For a nice little business like Betsy’s, none of that makes sense.

So I suggested to her that she pitch individual investors on the notion of a revenue-share investment. Rather than owning equity they simply get a percentage of her revenue every quarter until the investment is paid back (plus a reasonable rate of return). This aligns interests well — what she wants to do is build an efficient business around her app, and what an investor wants is for the capital to come back over time with a nice return on the original investment.

Here is an example term sheet on a financing of this sort. The key things to define are the percentage of revenue to be paid to the investor, capped at a certain amount, the financial reporting the investor can expect, the right to convert to equity if the company suddenly raises a big round of venture capital, and the use of proceeds.

One of the great things about starting a business in 2022 is that there are many ways to create an awesome “capital light” business like Betsy’s. And increasingly there are ways to structure a startup financing that makes sense for businesses of this type. For startups like Airbnb and Uber, traditional venture capital remains a great choice. But for many other sorts of ventures, there are other structures that better align the interests of the founders with the interests of the investors.

This article was merged into my new book, The Launch Path, now available on Amazon.



Bret Waters

Silicon Valley guy. Teaches at Stanford. Eats fish tacos.