At a high level, a revenue sharing note is an agreement between an investor and a business. The business agrees to share a percentage of any revenue they might generate in the future until their investors receive an agreed upon return on investment.
A Revenue Sharing Note is different from a typical loan as most loans typically follow a fixed repayment schedule -- a lender will expect to be repaid the amount they’ve provided plus some interest, according to a schedule, usually with a fixed repayment amount at set intervals. But with many businesses (especially small businesses), it can often be difficult to determine an appropriate schedule. There are many uncertainties that affect a small business, and having a fixed repayment schedule can sometimes be detrimental to their success as cash flow can vary, especially when starting or expanding, but the payments remain the same.
Alternatively, they could use a more flexible structure - this is where Revenue Sharing Notes come in. Instead of a set interest payment, businesses share a percentage of their overall revenue until the investment is repaid along with an investment multiple or the notes mature, i.e. become due. If the notes mature prior to full repayment, an investor has the right to seek the full repayment.
The rate of return is determined by the business’s gross revenue and the percentage of revenue they share. Investors receive a greater percentage of the business’s revenue by investing more.
With revenue sharing notes, incentives are often better aligned than other types of investments. The business may be able to use more of their early revenue to grow the business. Because investors receive a percentage of revenue, they can benefit from promoting the business in their community to help the business grow.