Cateus Investment Group

Royalty financing is an alternative to regular debt financing and equity financing.

A royalty fund falls in the category of private equity fund that specializes in purchasing consistent revenue streams deriving from the payment of royalties. One growing subset of this category is the healthcare royalty fund, in which a private equity fund manager purchases a royalty stream paid by a pharmaceutical company to a patent holder. The patent holder can be another company, an individual inventor, or some sort of institution, such as a research university.^[1]

Royalties are a usage-based payment from one individual or entity to another individual or entity, giving the right to the use of an asset, product, service or idea. In a royalty financing arrangement, a business receives a specific amount of money from an investor or group of investors. In exchange, the investor receives a percentage of the company's future revenues over an agreed period of time to equal an agreed ROI amount. The investment is considered an "advance" to the company, and the periodic percentage payments are considered "royalties" to the investors.

The founders of the company are able to preserve their equity position and prevent dilution of their stock value. Royalty financing arrangements—since they most resemble loans—are not subject to state and federal securities laws as most equity financing deals are. Royalty financing increases a company's ability to structure deals with individual investors, who may be attracted to the idea of receiving a monthly or quarterly yield over the life of their investment. In contrast, equity financing arrangements often show no yield until the stock is sold. Compared to debt financing, royalty financing provides more convenient & flexible percentage payback terms and less severe penalties for default. Ultimately, royalty financing enables a business to keep its options open for later financing rounds. Contrary most businesses that incur significant debt or sells a great deal of its equity in its early stages may later stage investors more difficult to attract.

Intellectual Property Funding: An Intangible Asset Finance Tool; IP Funding is a branch of finance that deals with intangible assets such as patents (legal intangible) and reputation (competitive intangible). Like other areas of finance, intangible asset finance is concerned with the interdependence of value, risk, and time. The investor securitizes the future royalty revenues of the intellectual property through its operating channels such as licensing or sale of its usage.