RevenueLoan Blog

July 20, 2011

On Personal Guarantees

Filed under: educational,investment philosophy — rlucas @ 4:46 pm

I. No Free Lunch.

“Unsecured Business Loans!”  “No Personal Guarantees!”  “Free Beer and Hot Girls!!”

Yeah, right.

Lots of folks are clearly interested in the question, “how can I get financing for my business without taking on a huge personal risk of ruin?”  And, just like any time there’s a lot of folks interested and highly motivated, in a complicated problem involving money, there’s a huge shitstorm of shady mofos ready to please — or so they claim.

The fact is: small businesses are hugely risky, and nobody is going to take that risk fully (or even mostly) away from the vast majority of entrepreneurs.  Up until a business has $20 M (or more) in revenue, it might as well be viewed as just an extension of the entrepreneur’s personal credit.

So, you can pretty much count out anyone who promises to give you an unsecured, unguaranteed business loan (unless your company happens to be rated by Moody’s and can issue your own bonds).

(Yeah, VC backed companies are different — but there have also been fewer than 30,000 VC backed companies ever in the history of the universe — vs. the 30,000,000 businesses currently in the US.)

II. No Free Lunch … Except for the banksters.

This is true for banks, credit card issuers, and specialty financiers all the same.  Seriously: go ask for an SBA loan … personal guarantee.  Try to get a credit card in the name of your business … no problem, with your own FICO score and personal guarantee.  Asset backed loan or merchant advance?  Betcha dollars to donuts, personal guarantee.

(In fact, it’s kind of a farce that these products hold themselves out as “business finance,” so as to avoid the laws and rules of usury and consumer protection.  After all — a business loan with a personal guarantee is kind of a mirror reflection of a consumer loan with a business as co-signer.)

So, here we are at Lighter Capital (nee RevenueLoan) with a quandary.  We kind of hate the idea of a personal guarantee on our RevenueLoans.  We find it farcical and repugnant that others advertise themselves as business financiers but fully expect that many of their businesses will default, and they’ll wind up going after ex-entrepreneurs who’ve schlepped back into day jobs to scrape back pennies from their paychecks.  We don’t want to do that.

III. Never say never?

But we’ve run into a few situations, especially in the last several weeks, where the word “… guarantee …” has cautiously, and none too enthusiastically, crossed our lips in conversations with entrepreneurs.  This has caused a few awkward moments, where a concerned and ticked-off entrepreneur wonders if we are trying to bait-and-switch him, and we wonder what we did to be so offensive.

So let me get this off my chest right here: We at RevenueLoan don’t /always/ ask for personal guarantees.  But we don’t /never/ ask for any form of guarantee.  Sometimes, we think a certain form of “Working Guarantee,” perhaps tweaked or limited, is the right thing to do for all concerned.  Here’s why.

Oftentimes, we want to find a way to fund a company, but we feel stuck around the “intellectual property [IP] collateral question.”  You see, the main reason we ask for a security interest in the IP of our customers’ companies is NOT because we figure we can sell the IP in a pinch and get our money back.  Instead, the IP is our guarantee of “stickwithitness.”

IV. Sticking with the business, NOT sticking it to the entrepreneur.

If you’ve got the recipe for the world’s best chocolate chip cookie (hi Michael!) or the world’s smoothest — and only — goat milk frozen yogurt (hi Laura!), then we trust you are motivated to USE that recipe.  And so we take a security interest in the recipe — not because we want to “repossess” the recipe, but because it’s what binds us together.  Keep using the recipe, please, and keep paying us our agreed % of revenue.  As long as we’ve both done the right math at the beginning, this should be totally doable and win-win.

However, if the secret to your business success is not in a recipe or a formula, nor in a patent or trademark or other form of “IP” that we can use as security — if it’s your personal Rolodex and know-how — then we’re in a bit of a bind.  Let’s say we’re promised 5% of Famous Joe’s fortune-telling practice revenue as repayment, with no security whatsoever (no IP).  Famous Joe uses our funds to market his services, etc., and he keeps 95% of the revenue he generates.  But if Famous Joe decides to quit his business, move across the street, and reopen his practice under a new company name, he’ll still be Famous Joe and keep his customers — but he’ll now keep 100% of the revenue he generates.

Needless to say, this is a troubling scenario for those of us who make the investments.  Not because we don’t trust Famous Joe to do the right thing — but hey, this is business, and we never like to set up scenarios that give incentive to do the wrong thing.

V. Names have been changed to protect the awesome.

So, if you’re still sticking with me, you can understand the role that an IP security interest plays, even if it doesn’t act like traditional collateral (repo and sell it).  But what about those cases where a company doesn’t have any IP to speak of?

(Note: this doesn’t mean the company isn’t “intellectual” or that it doesn’t have any value.  It just means that the IP isn’t in an external, recognizable, legally demarcated form like patents, trademarks, copyrights on software, etc.)

This could be know-how, relationships, golden Rolodex — let’s take for example a very savvy event promoter … let’s call him Fabio.  He may know the marketing techniques to get thousands of people to show up, the right people to get venues and attractions set up at cities around the country, and the skills to run the event smoothly, safely, and profitably.  Maybe he’s got a revenue track record in a few cities and wants to go nationally, good gross margins, and a good growth rate — but no hope of getting banks or VCs interested — in other words, Fabio’s a great RevenueLoan candidate.  But: without any IP, how are we to solve our “stickwithitness” structure problem?

Right now, we think the answer is this: we ask for a guarantee from the entrepreneur that he will stay working on the business; that he won’t throw in the towel early; and that he won’t go work for (or start) a competitor for a while if, for whatever reason, things go pear-shaped.  And since this is a money-based game we’re playing, we ask for the entrepreneur to stand behind that with, yes, money he personally guarantees.

VI. More than (just) words.

We call this a “Working Guarantee,” to differentiate it from a straight up, unconditional, “personal guarantee.”  But it’s not just “spin” B.S. on our part.

We typically will put some kind of limitation on the guarantee, that basically suggests that so long as the entrepreneur is in good faith putting in full time on the business, and the business is paying its RevenueLoan percentage (even if it’s only 5% of $1.00 a month), we will not come after him for any money personally.

Also, we are open to tweaking the amount that is covered by the working guarantee — or agreeing to milestones where that amount is reduced or eliminated.

VII. Complicated?

So now that we’ve just shown you all our negotiating cards … are we just plain nuts?  Is this too complicated and weird?

Hardly.  We think this is part of a natural evolution of business finance.  Keep in mind that our entire business financing infrastructure was build to help joint-stock corporations purchase looms and waterwheels and drill presses and big brick factories.  (OK, in fairness, the VC part of that infrastructure was basically created in the ’80s to fund Genentech, Max Headroom, and Starbucks.  It just happened to work for fiber-optic switches and enterprise software, too.)

So, when you see a bank using the same old forms from 1899, and just filling in the principal, interest, and description of collateral … it’s not really their fault.  It’s worked for a hundred years.  They don’t want to change, even if they could.

But as our economy evolves (for better or worse) into a post-industrial, knowledge-based system where small teams and individuals can survive and thrive on non-asset-intensive businesses … blah blah blah.  You get the picture.

New times call for new measures.  And we get to reinvent those measures, with help from our customers.  And since we have this new fancy thing called “COMPUTERS,” and we don’t have to rely on mimeographing a form that’s been around for a century, we’re not scared.  (In fact, we love creating product-market fit that resonates for our customers.  Nothing psyches us up more.)

VIII. Not for everyone, but a tool in the toolbox.

In sum, it remains to be seen whether folks like you, gentle reader, will agree with our point of view on Working Guarantees.  We might be full of shit on this one.  (We occasionally are.)

But if it works out, and if we can strike the right balance, we feel like this could be huge — a way to make a whole new category of businesses possible to finance.  In fact, we daresay that the Working Guarantee could usher in an era of Jeffersonian smallholding knowledge-farmers, prompting a new wave of entrepreneurialism, raising educational attainment rates, and thereby single-handedly conquering the recession and saving the economy.  But then we daresay a lot of stuff.

But long story short — please know that we promise not to bait-and-switch you, only to ask for a Working Guarantee if we think it’s the only way to get a deal done, and to be reasonable and flexible about how we do go about it.


February 7, 2011

HOWTO use Dropbox to organize your startup’s documents

Filed under: educational — rlucas @ 7:25 pm

(or, poor man’s document management system, on the cheap.)

This quick HOWTO is inspired by the trial-and-error learnings we’ve had at RevenueLoan over the last several months of getting into business.  I’m using the example of a new company called, uncreatively, “NewCo.”  (If your business has an absurdly long name, pick a nice abbreviation with no spaces or punctuation, e.g. “Consolidated Anglo-Sudanese Hamstertraps Company, GmbH” => “cashco”)

I. When you are 1-2 people (founders).

Use ONE Dropbox folder off of the root.  Put everything of note into it.  The first few folders will probably look like this:


Since the only people using it at this point are founders, don’t worry about who-can-see-what.  (DO, however, worry about general security; see below for “Paranoia.”)

However, one VERY important thing should be settled here: who will “own” the Dropbox folder setup.  In general, this should be someone very unlikely to leave.  If you’re a non-technical CEO, there may be a temptation to punt this to an early dev hire or such; I suggest you use this simple HOWTO to manage it yourself.

If you have significantly more than 2 founders, chances are you’re doing it wrong …  but nonetheless, move on to II. below because you’ll need to add some more structure soon.

II. When you hire your first non-founder employee(s).

Once you start actually hiring people, even contractors, you will want and need to keep certain things private.  This is not just for Machiavellian reasons; it’s a duty you owe people who must, by law, trust you with their personal information (like SSN, salary info, etc.).

The RIGHT WAY to do this is to create a new Dropbox folder off of the root, and call it “newco-everybody”.  (This creates a big screaming warning flag that “everybody” in the company can see this folder.)

Then, move ONLY those particular files and folders from your “newco” folder into the “newco-everybody” folder, which everybody (or nearly everybody) needs to see.  These include:

  • * Logos (do everyone a favor and make vector art easy to find!)
  • * Blank NDAs
  • * Marketing collateral / PDFs / handouts
  • * Letterhead / templates

The old “newco” folder is kept only accessible to executives.  I recommend only the CEO and CFO, in an early company, plus maybe a trusted admin or bookkeeper.  (Later, you might add a controller or inside counsel to this inner circle.) Obviously, at this point, you’ll need to start choosing where new documents go.  Our pattern has been to put the following ONLY in the executive / founder folder:

  • * Employment agreements
  • * Executed NDAs
  • * IRS forms (e.g. W-2 forms)
  • * Budgets (which include salary info)
  • * Insurance or other benefits info
  • * Articles of Incorporation, Cap Table, etc.
  • * Investor details

When you’re comfortable with how this is all set up, there’s one final important thing to do.  Go onto the Dropbox site, and under the “Account Info” tab in “Account,” sign up for “Packrat” unlimited undo history.  (Unless you’re planning on pulling a “full Enron” and being totally evil, I guarantee this feature will save your ass at some point.  Once you become a big enough company to install real document management, you will have expensive laywers to tell you not to do this, and you should listen to them then.)

III. When you start sharing GIANT files.

Dropbox has a great policy about disk use.  You get a lot for free.  But, their policy is subtlely nefarious, and you gotta love it: the free space limit applies to ALL the Dropbox folders on a given computer, and, you can only have ONE account per computer.  This means that the moment your “newco-everybody” folder reaches the free-account limit, EVERYBODY in your company now has to sign up for the paid account.

Now, I’m all for paying for Dropbox when you need it.  But, it’s silly if you have 20 people and only 3 of them need the paid account, to shell out for everyone.

So, make a THIRD folder off of the Dropbox root, and call it “newco-giant” (or something).  Chances are, unless you have a unique business model I haven’t thought of, the only stuff going in here will be .MPEG files of video to be edited, or large backups, or disk ISO images etc. — any of which are generally only used by a subset of your team (e.g., just the creatives, or just the IT ops guys).  Hence, only those folks should need to pay.

IV. When you start collaborating and partnering outside the firm.

With each partner or group of partners that you start working with on a particular project, create a “deal room” or “project” folder.  You should be loathe to permit any non-employee or non-contractor to access the “everybody” folder.

V. When people must leave the firm.

Alas, all good (and not so good) things come to an end.  So when a colleague leaves the company, it’s important to remind them to voluntarily return all originals and destroy all copies; your NDAs and agreements with these folks should have such clauses included.  However, you should also be sure to log into Dropbox, and for each “root” folder (e.g. “newco-everybody”,) ensure that their access is removed and that they are *not* permitted to retain a copy.

(If you do want to leave employees with copies of certain information, make a non-Dropbox folder to put the files in, and give them that in a zipfile … or in a dedicated, separate Dropbox folder 😉

VI. General tips, OCD, and paranoia.

Your mileage may vary, but I do recommend the following:

  • * Use ONLY letters, numbers, underscores (_), dashes (-), and periods in folder and filenames.  Other characters are unlikely to, but may potentially, cause trouble across the various platforms on which Dropbox works.  (Plus, if you ever use such a filename in a URL, you’re guaranteed it’ll come out legible and useable; not so if there are spaces and other metacharacters.)
  • * Require a signed NDA from each employee or contractor before granting first access; store the hard copy in a paper file and the digital copy in the “executive” folder.
  • * Define some level of secure information above which you do NOT trust even the “executive” folder.  For us, that means crypto keys, financial account credentials, and usernames/passwords to important services; these all go in separately encrypted files that never get written to disk without going through encryption.
  • * Define some level of secure information which MUST go ONLY in the “executive” folder.  For us, that’s social security numbers and similar.
  • * Have a founders’ agreement / vesting agreement in place and signed before doing anything else.  It should be crystal clear what happens if things turn sour between you and your cofounder(s).  (I know this isn’t a Dropbox item per se, but it’s crucial IMO for peer-founded startups; trust me, I’ve been there.)  This agreement should also specify that anyone who leaves must promptly turn over any credentials (such as Dropbox passwords) to prevent “foot dragging” from holding the company’s data hostage.
  • * Have at least one computer connected to all Dropbox folders with a physically secured “Time Machine” or other incremental backup.  Yes, I know this is overkill.  But if you ever have to restore your entire business’s file
  • sharing system from scratch, you’ll be glad A. to have it there at Firewire/SCSI speeds, and B. not to be reliant on Dropbox 100% if, Heavens forbid, they go under.
  • * Think hard about what to do with laptops and volume encryption.  If a laptop gets boosted, chances are the bad guy will just pawn it, but more and more these things get scanned for saleable information (credit card numbers, social security numbers, user profiles, etc.).  You may or may not have a big risk here; if it’s 5 employees’ payroll data, the risk is probably acceptable, but if it’s 50,000 customers’ payroll data, it’s proabaly not.  Seek disk volume encryption on each individual endpoint (laptop) if you judge it necessary.

Comments welcome, of course.

Business Credit from the Trenches: Forum Postings Indicate Loosening

Filed under: educational — rlucas @ 7:16 pm
Tags: , , , , ,

When you think of credit loosening or tightening, you might think of senior loan officer surveys, the Fed Open Market Committee, FHLB standards or likewise.

But I like to keep my ear to a more organic source: forum posts on the Web.

And to that end, may I reference a recent post on Credit Boards at

Astute observer of the ways of credit, “BobWang,” notes that he got two (!) offers for $100k business lines-of-credit in one day, unsolicited, in the mail.

(Now, to temper that, he also hints that these are part of financiers’ end-run around personal lending standards: the use of “business” lines with personal guarantees to essentially create credit cards that aren’t subject to consumer lending regulations.)

Nonetheless: glad to see that risk appetite is perking up and that the credit is starting to thaw.

November 13, 2010

How to find capital to grow your business

Filed under: educational,news — Christian @ 10:00 am

Many small businesses find themselves in a difficult situation through their own success.  They have some success, reach a certain size, and then struggle to find the investment required to take their business up to the next level.  In the current economic climate, bank loans are hard to come by – even for profitable companies – and many small business owners struggle to find the collateral to secure a bank loan.  Angel Investors aren’t interested if the company is too established, and Venture Capitalists usually won’t bother with anything that isn’t going to make them billions in the near future.

One way to finance growth is to trade an equity stake in the company for cash.  Usually this is achieved by handing over a portion of the shares in the company to the investors in return for the required investment, which then dilutes the value of stock held by the existing shareholders.  This form of investment leverages the long-term performance and growth of the company for a short-term capital investment.  Classically, equity investment is used to pay for the development of a new product and the desired sales strategy for it, and can be seen as trading one debt (development costs) for another (diluted equity).

The other method of getting finance is the non-dilutive revenue based financing, sometimes called royalty-based finance, or RBF.  RBF leverages a percentage of the increased profits to pay back the investment, so there is no dilution of the company stock or ownership.  This works best in a situation where a company has a product in market and sales strategy, but doesn’t have the capital to invest in that strategy.  By bringing in the necessary investment, the company uses the money to increase sales of the product and increases its revenues faster than it could without the investment.

Which of these financing options a business should pursue depends on many factors, but the bottom line is decision whether RBF – which costs a portion of the company revenue – or equity financing – which costs a part of the company – is the most expensive to the company, and which the management is most willing to give up.

November 12, 2010

Growing your Small Business with Revenue Based Finance

Filed under: educational,news — Christian @ 11:33 am

Sometimes a small business runs into a financing wall where it seems there are no more options available, and without a cash infusion there is no way to move the business to the next level.  A situation like this can cause real damage to a growing business.  Without the funds required to buy equipment, hire staff or expand the business, the wheels stop turning and the business can grind to a halt.

However there just may very well be a proverbial light shining at the end of the tunnel!  Before submitting to despair, take heart in the fact that there is a possible solution to this situation.  An innovative new financing model, Revenue Based Financing, may be able to turn things back to the positive.

Revenue Based Financing (sometimes called Royalty Based Financing or RBF), is a unique financing option that could be the solution for many businesses in need of capital to fund growth.  RBF offers a more flexible loan alternative by allowing businesses to borrow money using future revenues as collateral.  The loan terms will vary, and usually the payment is a percentage of the gross income of the businesses revenues up to a certain capped amount.  The RBF loan terms between the lender and the small business owner can vary a lot depending on many factors, but the investor and the business owner’s interests are aligned: Increased revenues pay the loan back faster, and increased revenues help the business to grow.

In addition to offering a life line for many small businesses, RBF is an attractive option as a loan in itself, mostly because it is non-dilutive in nature.  The investment is similar to a bank loan, in that no equity stake in the business is traded for the cash.  This differs greatly from a standard equity (dilutive) financing, where the money is traded for an ownership stake in the business.

Considering this, RBF is often best suited for young and newly established businesses that have an existing customer base and a solid plan for growth, but are unable to move forward due to lack of funding.  These businesses are often in the stage where the business is running at maximum capacity, but does not have the capital to invest in the infrastructure to grow further.  This is the time when RBF should be considered as a practical funding source, offering key advantages over conventional forms of financing.

November 10, 2010

An Introduction to Revenue Based Financing for Small Business Owners

Filed under: educational,news — Christian @ 10:00 am

In the new economy it can be very difficult or impossible for a small business owner or entrepreneur to find capital to fund small business growth.  Historically, small businesses and entrepreneurs have sought capital through “Angel’ investors and traditional lending institutions, however these options are increasingly unavailable even to well established businesses.  The revenue-based finance model, sometimes called the royalty-based finance model (RBF), is a financing plan that was introduced over 50 years ago and is gaining popularity today.  The RBF model provides unique benefits to both the small business and the investor.

The RBF model is called a “non-dilutive” form of finance since the small business owner does not trade an ownership in the company in exchange for cash.  Instead, the loan is structured so monthly payments are a percentage of increased revenues.  This factor tends to be the most important and desirable feature of the RBF funding system to small business owners.  Additionally, the investors payout is capped to a specific amount that is paid out of the revenue the company earns within a specified time period.

Business owners benefit by receiving investment dollars to build their business (without losing ownership) and investors benefit by receiving increasing payments as revenues increase.  The investor has purchased the rights to a portion of the revenue earned by the small business, but they have not purchased any other ownership of the business.  The terms of the RBF model are typically negotiated to allow some time for revenue to accrue before payouts need to be made, and typically there is a time period limitation and a payout limitation that is included in the negotiated terms.

This model is now used by many investment companies across the nation including even local and state government agencies.  Notably, not all small businesses or investors will benefit by using this model.  Investors who agree to RBF terms need to accept the ‘capped’ earning potential of the investment.  And, some businesses with low profit margins and limited flexibility on pricing may not be appropriate for an RBF loan.

The RBF model can provide capital now to help small businesses grow to that next level, without getting a second mortgage on mom’s house, or selling an ownership stake in the business. This kind of financing aligns the goals of the investor and the business owner, in a win-win situation!

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