What is Royalty Financing?

Royalty financing is a funding model for growing companies that provides investment capital in exchange for a percentage of future revenue. One of the biggest benefits is that royalty financing is non-dilutive, which means a company does not have to give up equity or take on debt in exchange for capital.

How Royalty Financing Works

With royalty financing, a company is given a lump sum investment of capital or a series of payments over time. This money is typically used as growth capital that is invested in infrastructure, new product offerings or expansion.

In exchange for providing growth capital, the investor receives a percentage of the company’s future revenues over a period of time as a return on that investment.

How Royalty Financing Fits in a Company’s Capital Stack

When a growing company goes in search of external funding, there are typically a few options to pursue, which all come with pros and cons for entrepreneurs:

  • A bank loan
    Entrepreneurs may not be able to borrow large amounts of capital quickly enough to hit growth goals with traditional bank loans. Collateral or security — like land or physical assets — is also often required to take a loan. Plus, in the cannabis industry, banks do not provide loans to entrepreneurs as cannabis still remains federally illegal in the United States.
  • Take the company public
    Going public and selling shares can provide a cash infusion, however, public companies are governed by a regulatory framework that can become an administrative challenge. For many entrepreneurs, this is not an ideal path to capital as it can distract from growing the company.  

  • Equity investment
    A business can raise capital privately by giving up shares — or ownership entirely — to an investor, venture capital firm or institutional investor. Equity investments are common in every industry, but require an entrepreneur to dilute his or her stake in the company in order to raise capital.

  • Royalty investment
    Royalty financing is typically best suited for companies that are already generating revenue. With royalty financing, entrepreneurs and company owners do not have to give up an ownership position to investors. Royalty financing is also different than taking on debt, as it often provides more convenient payback terms and carries less severe penalties than defaulting on a loan.

Royalty Financing and U.S. Cannabis

Royalty financing has emerged as an attractive funding option for companies operating in the U.S. cannabis market because of three main factors:

  1. Operators require significant capital up front to grow a successful business.
  2. Traditional paths to capital — like bank loans — are currently inaccessible to cannabis entrepreneurs. Banks or larger institutional capital providers will not invest in cannabis companies because the plant remains federally illegal.
  3. Equity investments are more challenging to navigate because in today’s cannabis industry the unknown regulatory and market risks make it challenging to determine a valuation both the investor and operator can agree on.

Royalty financing for cannabis circumvents these existing roadblocks in the market. For example, Tidal Royalty makes large capital investments, typically starting at $10 million, and determining a valuation of a company is not required to complete a deal.

How Tidal Royalty works with U.S. Cannabis Operators

Trusting that outstanding cannabis operators know how to run their business and bring in substantial returns, investors like Tidal Royalty provide funding and expert advice in exchange for a percentage of top-line revenue earned down the road.

The team at Tidal Royalty are pioneers in the Canadian cannabis industry, and can draw on years of expertise as both entrepreneurs and investors to support U.S. operators on their growth journey. Operators benefit because they get the funding they need, they retain their equity position, and they don’t have to give up control of operations.

Royalty financing for cannabis operators is the clearest path to raising meaningful amounts of expansion capital without issuing shares or giving up control of the company.

When Tidal Royalty invests in an operator, it only does well when the operator succeeds. Tidal Royalty won't exit or sell their shares when challenges arise. Tidal Royalty stands shoulder-to-shoulder with operators and are making sincere long-term bets on the economic prospects of their portfolio companies and the cannabis industry.

If you want insights on the legal U.S. cannabis industry, financing for cannabis companies and more, sign up for Tidal Royalty’s bi-weekly newsletter.

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