Latest / The Series A Show with Fexingo: Early-Stage Funding, Pitch Decks, and Startup Milestones / Why Startups Are Using Rolling Revenue Shares
Transcript
- Lucas: You've heard of SAFEs, you've heard of convertible notes, you've heard of priced rounds. But there's a funding mechanism that's been quietly gaining traction in the last year — especially among startups with predictable revenue — and it's called a rolling revenue share. Luna: Rolling revenue share. I've seen the term pop up in a few pitch decks. How's it different from, say, a regular revenue-based financing deal? Lucas: Great question. The key difference is in the structure. A traditional revenue-based financing agreement typically has a fixed repayment term — you agree to pay back a multiple of the investment over a set period, say three to five years. A rolling revenue share, on the other hand, has no fixed term. Instead, the investor receives a percentage of the company's monthly revenue until a predetermined cap — usually one and a half to three times the original investment — is reached. Luna: So the repayment period floats based on how fast revenue grows. If you grow fast, you repay faster. If you hit a rough patch, payments shrink automatically. Lucas: Exactly. That's the selling point for founders. It aligns the cost of capital with actual business performance. No fixed monthly payments that can crush you in a downturn. And because it's structured as a purchase agreement for future revenue — not debt — there's no interest rate, no maturity date, no personal guarantee in most cases. Luna: Okay, so who's actually doing this? Give me a real example. Lucas: Well, take AegisAI — they just raised a $36 million Series A this week, according to TechCrunch. They're a cybersecurity startup founded by former Google security execs. Now, their round was a blend — they used a traditional priced equity component for lead investors, but they also included a revenue-share tranche for a group of smaller investors. That tranche is structured as a rolling revenue share, with a payment cap of two times the investment and a revenue percentage of 5 percent. Luna: So if they invest $1 million into the revenue-share tranche, AegisAI pays back up to $2 million over time, at 5 percent of monthly revenue. No dilution, no board seat. Lucas: Correct. And AegisAI is a good case because they have recurring revenue from enterprise contracts — predictable, high-margin. That's the sweet spot for this kind of instrument. You need to have unit economics that you trust, because you're essentially sharing your top line. Luna: Let me push back on that a bit. Isn't this just debt with a prettier name? I mean, you're still required to pay back more than you received. Lucas: It's a fair critique. And legally, a revenue share is not debt — it's a purchase and sale agreement. But economically, yes, it's similar to a loan in that you're expected to return capital plus a return. The difference is flexibility. If revenue drops by half, the payment drops by half. No default, no acceleration clause. That's a real distinction for early-stage companies with lumpy revenue. Luna: And for investors, what's the upside? They're capped at two times, so they're not getting the unicorn-style returns of equity. Lucas: Right. So investors in rolling revenue shares are typically looking for lower risk, shorter duration, and consistent cash-on-cash returns. They're often family offices, high-net-worth individuals, or dedicated revenue-based financing funds. They're not expecting a hundred-x. They want two to three times over two to four years, with a decent probability. Luna: And the downside protection? If the company fails, what happens? Lucas: That's the tricky part. In most rolling revenue share agreements, if the company goes under, the investor gets nothing — they're unsecured. There's no personal guarantee, no collateral. So the investor is taking real risk. That's why they underwrite the business model carefully, looking at gross margins, customer churn, revenue concentration. It's not for pre-revenue startups. Luna: So it's a fit for companies that have hit product-market fit and are growing predictably, but don't want to dilute further before a Series A or B. That makes sense for a lot of the SaaS startups I talk to. Lucas: Exactly. And we're seeing more adoption in Q3 2026 partly because the equity fundraising environment has gotten a bit tougher. Look at the public markets — the NASDAQ is down, growth stocks like Shopify are off 9 percent in the last five days, Tesla down 15 percent. That sentiment trickles down to private markets. VCs are being more selective. Rolling revenue shares offer a way to raise capital without a down round or massive dilution. Luna: It also avoids the valuation debate entirely. No need to argue over a pre-money number when you're still figuring out what the business is worth. Lucas: That's a huge advantage. In a priced round, you're locking in a valuation that might not reflect your trajectory six months later. With a revenue share, the return is purely based on performance. The investor gets paid when the company does well — and vice versa. Luna: I want to talk about the term sheet details. What are the key levers founders should negotiate? Lucas: There are three main variables. First, the revenue percentage — typically 2 to 8 percent of monthly revenue. Second, the payment cap — usually one and a half to three times the investment. And third, the payment period — some agreements have a sunset clause after, say, five years, even if the cap hasn't been reached. Founders should push for a lower revenue percentage and a longer sunset period. Luna: And what about the 'rolling' part? What makes it rolling versus a standard revenue share? Lucas: The rolling aspect refers to the fact that the revenue share is calculated on a continuous, rolling basis — typically monthly. Each month, you calculate the payment based on that month's revenue. There's no quarterly or annual reconciliation. And the investor's commitment is often structured as a rolling fund — they can invest in multiple companies over time, recycling capital from earlier exits. Luna: So it's like a subscription for capital. Investors commit to a fund, and they deploy into a portfolio of revenue-share deals. Lucas: Exactly. And that model is becoming more common. There are now dedicated rolling revenue share funds — firms like Revenue Capital and Flow Funding — that have raised hundreds of millions to deploy this way. They're essentially building a diversified portfolio of revenue-share agreements, targeting 15 to 20 percent internal rates of return. Luna: One concern I hear from founders: does taking a revenue share complicate future equity rounds? Will VCs view it as debt on the books? Lucas: It can, if not structured properly. Some VCs treat revenue shares as off-balance-sheet, because they're not debt. But others see the payment obligation as a drag on cash flow. The key is to disclose it early and show that the revenue share is a cheaper, more flexible alternative to equity. In practice, many VCs are fine with it — especially if the revenue share is small relative to revenue. Luna: What about the legal costs? Are these agreements simpler than a priced round? Lucas: They can be. A standard rolling revenue share agreement might be 10 to 15 pages, compared to 50-plus for a Series A. Legal fees are often under $10,000. That's attractive for smaller rounds — say, $500,000 to $5 million — where legal costs can eat into the raise. Luna: So it's faster and cheaper to close. In a market where speed matters, that's a real edge. Lucas: It is. And we're seeing it used not just for growth capital, but for specific projects — like hiring a sales team, launching a new product line, or investing in marketing. The investor gets a direct line of sight to the revenue that investment generates. Luna: Any downsides for founders besides the cap? Lucas: The main one is that you're sharing your top line for years. If revenue grows fast, you could end up paying back the cap quickly — but that means you're paying a high effective interest rate. For example, if you hit the cap in 18 months, your annualized return to the investor might be over 30 percent. That's expensive capital. But the trade-off is no dilution and no loss of control. Luna: Right. It's a bet on your own growth. You're saying, 'I'm confident enough in my revenue that I'll pay you back fast rather than give up equity.' Lucas: Exactly. And if you're not that confident, you probably shouldn't take a revenue share. It's a mechanism for founders who have strong unit economics and want to keep as much ownership as possible. Luna: I think a lot of our listeners are founders or operators who are thinking about their next round. What's the one thing you'd tell them about rolling revenue shares? Lucas: I'd say: model it out. Run the numbers on a few scenarios — conservative, base, optimistic — and see how the payments impact your cash flow. If the revenue percentage is 5 percent and your gross margin is 70 percent, you're effectively giving up about 7 percent of your gross profit. That's manageable. But if your margins are thin, it can hurt. Luna: That's solid advice. And Lucas, I know we've talked about how this show is ad-free and supported by listeners. If today's deep dive on rolling revenue shares was useful for what you're building or running, honestly, if it was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. Lucas: Yeah, that small gesture goes a long way in keeping this show independent and focused on the mechanics that actually matter. Appreciate it. Luna: Alright, so back to the revenue share model. Lucas, do you see this becoming a standard part of the fundraising toolkit, like SAFEs are now? Lucas: I think it's heading that way. We're seeing more law firms develop standardized templates, more funds dedicated to the strategy, and more founders aware of the option. It won't replace equity for big, high-growth rounds, but for the gap between seed and Series A — or for companies that want to stay bootstrapped but need a capital injection — it's a powerful tool. And in this environment, where every dollar of dilution matters, I expect to see more rolling revenue shares in Q4 and into 2027.