Revenue Participation Notes: What are they, and why are they an innovative social finance tool?

August 10, 2009

By Terri Spath

Traditionally, enterprises receive capital in one of two ways: they get a loan, or they sell equity in the enterprise. Sometimes, however, neither of these options provides the right fit for an enterprise’s needs and goals, which is where revenue participation notes can provide an innovative solution. But before diving into what revenue participation means, let’s look at the benefits and drawbacks of traditional loans and equity financing.

Traditional loan

With a loan, an enterprise receives cash, and enters into an agreement to repay that cash with interest. The tradeoffs for a loan:

Less Expensive Financing: It is generally less risky for someone to lend money than to extend equity. With a loan, there is usually a valuable asset (a guarantee, a piece of land, or machinery, etc) that the lender could legally take if the loan isn’t paid back. Since lending is less risky, it usually carries a lower price than equity, thus being a less expensive choice for financing.

Promise to Pay: With a loan, there is a legal obligation to pay the money back with interest. Also, lenders will only provide so much – at some point there aren’t enough assets to secure the loan and/or the ability to pay the interest.

Equity financing

By selling equity, an enterprise can raise cash by offering the investor some ownership of the enterprise. There are tradeoffs with equity financing, too:

No Short Term Cash Flow Constraints: In exchange for a cash investment, the investor owns some of the enterprise and the investor’s return is expected to come through the growth of the enterprise. Generally, there are no cash interest payments, and no legal obligation to ever give the money back.

Ceding Some Control: Since the investor now owns part of the enterprise, they have a right to some amount of control over the investment – and, therefore, a voice and frequently a vote about business decisions. The investor’s point of view may or may not align with the founder’s. This ownership gives the investor control over the enterprise that a lender does not have.

“Exit” Requirement: The new owner will want their money back plus handsome profits. This generally involves selling the enterprise to a new party, who will want to run the show (usually without the original founder).

An alternative – Note (i.e. loan) plus “Revenue Participation”

The traditional options don’t always fit for emerging social enterprises, entities built to grow profitably around an important social vision.

Case study: A Great Beverage Enterprise (GBE) that has created a healthy beverage to sell in the U.S. that supports sustainability in the Amazon rainforest.

GBE could sell more product if they had more money to spend on marketing (sales people to get into more stores, creating more products to put on more trucks for delivery, free products at sporting events, etc). However, the founders’ vision does not include the eventual transfer of ownership to a Big Giant Corporation that may dilute GBE’s mission in a drive for high profits (e.g. by creating cheaper formulations that no longer support the indigenous farmers of the Amazon).

Equity providers don’t have a clear way to recoup their original investment (no “exit strategy”), and are therefore hard to attract. GBE can try to borrow money, but the risk for the loan is high – many lenders are unwilling to lend as much money as GBE needs. What should GBE do?

One great solution is a note (typical loan with a coupon) plus revenue participation. With this structure, GBE gets a loan and is responsible for the interest and repayment of that loan. Revenue participation is attached to the loan, and defined as a percentage of the sales. As the revenues of the enterprise grow, it is in a stronger position and its revenue participation payments increase (the percentage stays the same, but the total dollars grow). The note plus revenue participation structure gets capital to the enterprise without affecting its ownership, goals or mission. At the same time, the lender/investor is properly compensated for the risks involved.

The RSF Mezzanine Fund is using this innovative tool to meet the needs of social enterprises, while earning a solid return for its investors. Ensuring that mission-driven companies can retain ownership and continue to have a high level of social impact while expanding their business was the key consideration for RSF in creating the Mezzanine Fund. We hope to see this type of financing become more common as an alternative for triple-bottom-line social enterprises whose priorities are not just profits, but people and the planet as well.

To learn more about the RSF Mezzanine Fund, click here. To find out how you can apply for financing from the RSF Mezzanine Fund, click here.

Terri Spath is the Managing Director of RSF Capital Management.


  1. Thank you for bringing this innovative financing tool to my attention. As more socially-responsible, triple-bottom-line ventures are established, and move into growth stages, it will be so important to have options like revenue participation notes to preserve missions.

    I have a couple questions that I am hoping you can answer, either hear or via email.

    (1) Are the terms of the note similar to debt financing?

    (2) Can you give a range on the revenue share percentage typical of revenue participation notes?

    (3) Is there any sort of cap (or expiration) on the payouts to the lender?

    (4) Who should interested entrepreneurs/ventures contact to learn more?


    Rob Smart
    Founder, Every Kitchen Table

    Comment by Rob Smart — September 2, 2009 @ 9:59 am

  2. […] liquidity event is when they would see their return as well. (See Terri Spath’s recent blog post:, which outlines the benefits and drawbacks of traditional loans and equity financing, and what RSF […]

    Pingback by Social Enterprise, Exits, and Liquidity Events | RSF Social Finance — September 7, 2009 @ 7:08 am

  3. […] and revenue participation designed exclusively for mission driven enterprises like Pleasant Valley, click here to read a blog post that I wrote on the topic earlier this […]

    Pingback by How Pickles Are Preserving the Skagit Valley | RSF Social Finance — October 8, 2009 @ 4:52 pm

  4. […] might the venture capital model introduce for the social entrepreneurs seeking capital? (See this post on the limitations of various financing options, which prompted the launch of the RSF Mezzanine […]

    Pingback by Ag 2.0 Presents the Spectrum of Sustainable Ag Investing | RSF Social Finance — February 8, 2010 @ 2:23 pm

  5. Lengthening the maturity of outstanding fixed interest US debt will increase inflation fears. A longer average maturity allows the US to inflate its debt away. Debt holders will not trust the Fed to keep inflation low while the US has a very high debt level.

    Comment by Noxaewr — April 19, 2010 @ 1:19 am

  6. Did someone answer Rob Smart’s questions on this? If possible, I’d be keen to see the answers.

    Best wishes,


    Comment by Tom Black — September 13, 2011 @ 5:37 am

  7. Hi Rob and Tom,

    Apologies for the late response, but Terri Spath, the blog author, left RSF in September 2009 and unfortunately your questions fell through the cracks.

    Anyway, I am the Managing Director of the RSF Mezzanine Fund, L.P. (or the “Fund”) and will answer the questions raised in Comment 1 above:

    The terms of the Fund’s underlying senior subordinated term note to the borrower are typical of other senior subordinated financing transactions with regard to tenor, amortization, origination fees and interest rate. The Revenue Participation Agreement (or “RPA”) payments are additive and help to achieve the overall targeted return on RSF’s investment.

    The range of RSF’s quarterly RPA payments have been as low as 0.15% and as high as 1.00%, depending on the other return factors involved (e.g., origination fees; interest rate and amortization schedule) for the particular transaction.

    We typically do not cap the RPA payments, just as we don’t cap the amount payable under a common stock warrant position (which is obtained in lieu of an RPA payment stream); however, we consider each transaction individually and tailor the structure and required return accordingly.

    Feel free to have interested entrepreneurs contact me by email at with any questions on RPAs or RSF mezzanine financing in general.


    Comment by Joe Avenatti — February 6, 2012 @ 6:50 pm

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