Royalty, royalty, royalty (Sing in Kendrick Lamar’s voice)
The decision of whether to accept or not accept a royalty deal as a start-up is a very tricking one.
The problem with royalty deals is that they stifle the growth of a company and suck out cash that the organization needs to grow.
It can be even more detrimental if you take a royalty deal when still in the idea/concept stage.
How do explain to your investors in your early rounds or when you raising to fund your growth that someone else is already getting paid and taking money out of the company?
That’s not all, royalty deal can also go on in perpetuity, meaning you pay for as long the company lives. That’s a serious marriage early on.
But it’s not all doom and gloom, some royalty deals can end after a certain amount is recuperated.
While some get lower with each milestone until they end or convert into straight equity.
Personally, I say never take a royalty deal unless you really have to, and even then try to negotiate terms that give you freedom in the long run as you grow.