- Debt, equity and a third thing that might work better | Seth Godin
"Instead, you pay a royalty on income. … It could even run on a sliding scale, with early royalties to the investor being lower, or with a buyout once a certain amount was earned back…" [DCT NOTE: Royalty offers might still have to comply with securities laws.]
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Seth doesn’t allow comments, so I’ll congratulate him here on his invention of… preferred stock. *yawn* Nice marketing, I guess, but he’s just using different words for an existing, not-uncommon structure.
I guess you could issue preferred stock that carries a percentage royalty on revenue.
Most of the preferred stock I’ve ever encountered, though, has carried a dividend preference — meaning among other things that the stockholder doesn’t get paid unless the board declares a dividend.
Seth’s royalty-on-revenue proposal seems qualitatively different in that regard.
(I hasten to add that corporate finance is not an area where I have a lot of experience, apart from what resulted as a by-product of being general counsel of a public company.)
Yes, as a corporate matter it’s set up as a dividend, but the rate is defined in the charter documents as a function of revenues. It often comes with a PIK feature (pay in kind) so the board can decide, in certain situations, that the company needs the cash. But otherwise, the dividend is “pre-approved” and goes out regularly.