Latest / The Series A Show with Fexingo: Early-Stage Funding, Pitch Decks, and Startup Milestones / Why Startups Are Offering Revenue Share Agreements Instead of Equity
Transcript
- Lucas: We are seeing a quiet but meaningful migration in early-stage deal structures. More startups are skipping equity, skipping interest, and instead offering investors a cut of their top-line revenue. Luna: Revenue share agreements. I have seen them pop up in a few pitch decks lately. How do they actually work, in practical terms? Lucas: Think of it as the simplest possible deal. An investor gives you, say, $500,000. In return, the startup agrees to pay back a fixed multiple — often 1.5x to 3x — by handing over a set percentage of monthly revenue, typically three to eight percent. Luna: So no valuation conversation, no board seat, no interest compounding. Just a revenue stream until the cap is hit. Lucas: Exactly. And that simplicity is a big part of the appeal. A founder I spoke with last week closed a $300,000 RSA at 6% of monthly revenue, with a 2x cap. She projects it will be paid off in about 18 months. No dilution, no personal guarantee. Luna: But the investor is betting the startup can generate revenue quickly. That rules out a lot of deep tech or pre-revenue biotech. Lucas: Right. RSAs work best when you have high gross margins and predictable recurring revenue — SaaS, marketplaces, digital services. If you are pre-revenue, you are still looking at SAFEs or priced rounds. Luna: So who is actually issuing these? Is it a niche, or is it scaling? Lucas: It is scaling. According to data from a revenue-based financing platform, RSA volume in the US grew roughly 40% year-over-year in Q1 2026. We are seeing dedicated RSA funds, and some traditional angel syndicates are adding RSAs as a standard option. Luna: That makes sense given the macro environment. With interest rates still elevated and venture dollars more selective, founders are looking for capital that does not force a down round or excessive dilution. Lucas: Exactly. We are seeing this especially in startups that are post-revenue but not yet ready for a Series A. They might be doing $20,000 to $100,000 in monthly recurring revenue and need growth capital without giving up a big chunk of equity. Luna: And for investors, the upside is capped — but so is the downside. If the startup fails, the RSA typically has no recourse beyond the revenue stream. It is not a personal guarantee. Lucas: That is a key difference from a traditional loan. There is no personal liability, no collateral. The investor is purely betting on the revenue engine. If revenue dries up, the payments stop. Luna: So it is riskier than debt but less dilutive than equity. Sounds like it fills a gap. Lucas: It absolutely does. And we are starting to see some interesting hybrids — RSAs with a conversion option if the startup hits certain milestones, or RSAs that include a warrant for a small equity stake. Luna: Let us talk about the downsides. The obvious one is cash flow. If you are paying six percent of revenue every month, that is money you cannot reinvest in sales or product. Lucas: It is a real tradeoff. Founders need to model out whether the accelerated growth from the capital more than compensates for the revenue drag. For a SaaS company with 80% gross margins, giving up 5% of revenue for two years might be a smart bet if you can double your customer base. Luna: But if your margins are thinner, or if growth stalls, that payment becomes a real burden. Lucas: Exactly. That is why RSAs are best suited for companies with strong unit economics and a clear path to higher revenue. Investors are increasingly doing diligence on churn rates and expansion revenue before signing an RSA. Luna: Are there any notable examples of startups that have used RSAs successfully? Lucas: One that comes to mind is a B2B SaaS company called Relay — not a household name, but they raised $2 million through a combination of RSAs and a small equity round. They used the capital to hire a sales team and grew ARR from $1.2 million to $4 million in 18 months. The RSA was fully paid off in 22 months. Luna: So the investor got their 2x return in under two years, and the founders kept 100% of their equity. That is a compelling story. Lucas: It is. And it is not just small rounds. We are seeing RSAs used as bridge financing between rounds, sometimes in the millions. The key is alignment — the investor only makes money when the startup is generating revenue, so both parties are focused on growth. Luna: This ties back to something we have talked about before: the democratization of startup finance. More options means founders can choose the structure that fits their business, not the other way around. Lucas: Exactly. And that is a thread we try to keep pulling on this show — practical tools for founders. We deliberately do not run ads on these episodes because we want the information to be as direct and uncluttered as possible. Luna: And if you find that useful, there is a simple way to support that choice. It is buy me a coffee dot com slash fexingo. No pressure, just if the show adds value to what you are building. Lucas: Yeah. It helps us keep the signal clean. So back to RSAs — one nuance I want to get into is how they interact with future equity rounds. Luna: Because if you have an RSA outstanding, future investors might see that as a liability. Lucas: Right. The RSA payments reduce free cash flow, which can affect valuation. Some founders structure RSAs to convert into equity at a discount in a future round, effectively merging the RSA with a SAFE. But that gets complex. Luna: So the cleanest use case is probably a standalone growth capital injection with a clear payback timeline. Lucas: Agreed. And if you are a founder considering this, the math matters. Model out three scenarios: base case, best case, and worst case. Make sure you can still operate if revenue dips for a quarter. Luna: What about the investor side? Are there any red flags you look for before writing an RSA? Lucas: The big one is revenue concentration. If more than 30% of revenue comes from a single customer, that is a risk. Also, check gross margins — below 60% and the RSA starts to eat into profitability too much. Luna: And churn. High churn means the revenue stream is unstable, and the payback period extends unpredictably. Lucas: Exactly. So the investors doing RSAs well are almost acting like mini private credit analysts. They are looking at revenue quality, not just growth rate. Luna: It is a different skill set from traditional VC. More quantitative, less narrative driven. Lucas: That is a great way to put it. And I think as more data becomes available, we will see RSAs become a standard part of the fundraising toolkit for revenue-generating startups. Luna: It feels like a natural evolution. The market is maturing, and founders have more leverage to choose the right instrument. Lucas: Right. And that is ultimately good for innovation. Capital should be a tool, not a trap.