John Landry Suggests Changing Angel Investor Term Sheets
John Landy, veteran angel investor and entrepreneur, is arguing that the angel investor-entrepreneur term sheet needs to be reexamined and changed. His idea that he has been floating lately is a variation of the typical structure in the energy business. Landry proposes a structure called revenue ro
yalty in which the investor has no equity stake in the start up but rather is paid a percentage of income until a certain pre-arranged limit.
Landry proposes a term sheet for a revenue-producing startup that generates five percent to 30 percent royalties for the investors, until the company has returned three to five times the capital put in. “The first kneejerk reaction is, ‘Holy [expletive], 3 to 5 times?’” Landry said. “The alternative is, by the time you’re done, the venture guy in a similar financing probably owns 70 percent of your business. Whereas in my deal, when you’re done, you own 100 percent. I have no equity.”
It’s old hat in the energy business, where private equity investors and, increasingly, pension funds and strategic investors, have used revenue royalty to turn large chunks of capital into steady streams of long-term returns from natural gas, coal and solar resources projects. Investors in resource-producing regions are also looking for ways to extend the model to IP-based energy startups, said Jenny Hui, vice president of Canasia Power Corp. of Toronto.
“There’s a lot of talk around here on how to emulate the success of companies that have been able to raise money to explore the resources on a plot of land,” she said. “How do we take that to areas like cleantech and VC, where entrepreneurs are having a hard time raising capital?” Source
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