Equity vs Royalty in a Company: The latest season of Shark Tank is now live and in the very first episodes, the viewers got to know about a new term called ‘royalty’. Ever since its inception, Shark Tank has enlightened Indian viewers with business terms like valuation, debt, EBITDA, and many others. This time, viewers were left their head scratching for a minute, when Sharks asked for ‘Royalty’ in the very first pitch of the season. So, let’s dive deeper and know what it is and how it is different from Equity.
How is Royalty Different From Equity
When a pitch is made for raising investment, most of the time, entrepreneurs offer Equity shares of their company. When Sharks accept the deal, they receive a percentage ownership in the company, in exchange for their money, which varies from deal to deal.
An equity shareholder earns dividends when a company makes profits or gets a share when it is sold or is going for IPO. But, to cut the risks, many investors for Royalty.
When an investor asks for Royalty in exchange for their investments, it means they will be receiving a part of the company’s revenue every month/every year, depending on the deal. In this case, investors don’t own any stake in the company and will not be involved in any decisions or business interests.
Pros and Cons of Royalty
- For investors, Royalty is like a safe bet, which ensures that the money invested in the company will return. So, sharks mostly give a royalty offer only when they feel the money at stake might not be recovered.
- For entrepreneurs, giving a royalty can be both positive and negative. The positive side has the benefit of not diluting their shares and at the same time, they have received the money needed. However, the negative side is that they will have to pay money to the investors, even if the company is not profitable.
The Home Company Raises Money in Shark Tank in Exchange of ‘Royalty’
The first pitch of Season 3 was made by the ‘The Home Company’ which sells sustainable products and aims to reduce the use of plastic in households. The company’s founder Mayank Sisodia, asked 1 cr for 2% equity but had to settle at a lesser valuation of the company.
Although four sharks, except Namita Thapar, were interested in investing in the company, Mayank decided to join hands with Amit Jain, who offered him 1 crore for 3% equity and 1.5 royalty until 1.5 crore.
Notably, the other company that successfully raised money on the 1st day of Shark Tank India season 3, Adil Qadri perfumes, also raised 1 crore for 1% equity and 1% royalty until 1 crore by Vineeta Singh.
Read More:Â All You Need To Know About Shark Tank Season 3 2024: Sharks, Where To Watch, Investments and More
