7 Benefits of Revenue Sharing Agreements for Founders – Crunchbase News
Through Guillaume Stringer
You may be familiar with Revenue Sharing Agreements, or ISAs, as an alternative to student loans. But what about revenue sharing agreements for contractors?
An ISA is a financial arrangement in which a provider of capital offers something of value (such as money or an education) in exchange for a percentage of future income. It is a flexible form of capital designed for situations that traditional forms of financing are not designed to handle.
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At Chisos, our first innovation was to modify ISAs to meet the needs of entrepreneurs. We call this a Convertible Revenue Sharing Agreement, or CISA. It is a hybrid ISA for entrepreneurs that combines:
- A revenue sharing agreement (ISA) with the founder; and
- A SAFE agreement which grants a small share of capital in the startup.
With CISA, we write checks for $15,000 to $50,000 to idea and start-up founders.
In this article, I will explain seven important advantages of ISAs for founders, as well as four disadvantages.
7 Benefits of ISAs
- An option when the others do not exist: Most banks won’t extend credit in the early stages of your business, and less than 2% of startups get venture or angel investments. The few remaining options — personal savings, high-interest credit cards, or money from wealthy connections — aren’t available to many founders. In this environment, the biggest advantage of ISAs for founders is that they are available when other good options simply aren’t.
- Quick Cash: With ISAs, you can get capital fast. Most ISA providers offer a simple online application process.
Instead of spending months on pitch decks and VC meetings, entrepreneurs can apply for a convertible revenue-sharing deal in line. Once approved, they will receive a check and can start growing their business in their own way.
- Different from traditional debt: Traditional debt typically looks at credit scores to set an interest rate. ISAs generally take a different approach to interest and consider credit rating in combination with other factors. Additionally, CISA does not charge compound interest. Unlike traditional bank loans, ISAs generally have flexible repayment terms. Chisos offers $0 payment periods for times of hardship when income is affected.
- Designed to fit your lifestyle: Most ISAs also include a salary floor; as long as your salary is below this threshold, you will not make any payments. The CISA salary floor is $40,000.
- Scales to fit: With an ISA, you will repay a small percentage of your income (the revenue share rate) to the ISA provider. When you earn less, you pay back less.
- Alignment of interests: To be frank, ISA providers make more money when their ISA recipients are financially successful, so they are motivated to offer professional support. Many ISAs, including ours, include access to a community of founders, resources, and advisors.
- Retain your decision-making power: When you accept venture capital funding, you also accept that investors have a say in how you launch and grow your startup. On the other hand, CISAs allow you to retain full decision-making power.
4 Disadvantages of ISAs
While there are advantages to ISAs, there are also disadvantages:
- ISAs survive even if your career plans change, so you’ll still have to make ISA payments if you decide to go out of business.
- ISAs are based on a percentage of your income. If you earn more during your repayment period, you will repay more. Most ISAs include a repayment cap, which is the maximum you will pay. (Ours is 2x.)
- Every ISA is different. There is no universal standard, so you will need to make sure you understand the terms.
- There is little regulation governing ISAs.
As a founder, you will need to weigh the pros and cons of different funding options for your startup. Remember: you have options. CISA is one of them.
William Stringer is the co-founder and CEO of Chisos Capital, a company that invests in ideas and the founders who have the potential to bring them to life. Through exclusive investment terms, CISA, Chisos sends checks to idea and start-up entrepreneurs.
Drawing: Li Anne Dias
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