For founders exploring alternatives to a traditional IPO, revenue-linked securities are emerging as a pragmatic “silent IPO” that converts predictable future revenue into immediate liquidity without surrendering control or embracing the costs of public markets. This article explains how these instruments work, the deal math behind them, real-world use cases, and practical steps founders and their advisors should take to structure a private exit that feels like a soft landing rather than a full surrender.
What is a Silent IPO—and why revenue-linked securities fit the bill?
A “silent IPO” describes any path that gives founders IPO-like liquidity and visibility without going public. Revenue-linked securities (RLS) accomplish this by tying investor returns directly to a company’s revenue stream—typically a fraction of top-line receipts over a defined period—rather than a fixed interest rate or equity upside. The structure is designed to preserve governance, avoid quarterly market scrutiny, and transfer risk in a way that aligns both parties around predictable cash flows.
How revenue-linked securities work: a primer
Basic mechanics
- Issuer: The company issues a security promising investors a share of future revenue (for example, 3% of gross revenue) for a defined period or until a capped repayment.
- Cap and term: The instrument usually specifies a repayment cap (e.g., 1.5x to 3x the principal) and a term (e.g., 3–7 years).
- Payments: As revenue flows in, a proportional payment is remitted to investors; during slow months payouts shrink, protecting cash flow.
- Control: Founders retain equity and board control because the instrument is debt-like or structured as a revenue interest rather than new voting shares.
Variations and legal wrappers
RLS can appear as revenue participation notes, royalty agreements, or specially drafted convertible revenue notes that include optional conversion triggers (e.g., on a later sale or IPO). Legal structures vary by jurisdiction and investor preferences, but the economic core—payout tied to revenue—remains consistent.
Why founders choose revenue-linked securities
- Control retention: No dilution of voting power or board composition, in contrast to traditional equity financing.
- No public-market obligations: Avoids SEC reporting, investor relations, and volatility tied to public valuations.
- Flexible cash flow matching: Payments scale with revenue, reducing strain during slow periods.
- Faster and cheaper execution: Negotiations often take weeks, not months, and underwriting or listing costs are avoided.
Why investors participate
Investors (including specialized funds, family offices, and institutional buyers) are attracted by predictable cash flows, downside protection relative to equity, and attractive risk-adjusted returns when the underlying revenue stream is durable—e.g., subscription SaaS, recurring consumer payments, or infrastructure tolling. The alignment arises because both parties benefit from higher revenue: founders retain upside while investors get faster payback if performance is strong.
Deal design: crucial terms founders should negotiate
- Revenue definition: Precisely define what counts as revenue (gross vs. net, exclusions for refunds/chargebacks, intercompany sales).
- Capped multiple: Set a fair cap on total repayments, balancing investor return expectations and founder affordability (commonly 1.5x–3x).
- Payment floor/ceiling: Consider minimum/maximum monthly remittances to smooth investor returns and preserve runway.
- Duration and step-downs: Use staged step-downs (higher revenue share early, lower later) to align near-term investor recovery with long-term growth.
- Covenants and carve-outs: Limit restrictive covenants—avoid tying up liquidity with overly burdensome restrictions.
Practical examples and use cases
SaaS founder seeking partial liquidity
A B2B SaaS company with $8M ARR uses RLS to monetize 12 months of predictable subscription revenue at a 1.8x cap. The company issues a revenue participation note promising 4% of gross revenue for up to five years or until the cap is reached, giving the founder meaningful personal liquidity while leaving the equity upside intact.
Consumer subscription business smoothing founder transition
A consumer-subscription founder negotiating an executive transition sells a royalty interest equal to 2% of sales for three years with a floor to ensure ongoing marketing spend. This creates near-term cash for the founder and gives the incoming CEO runway without changing ownership.
Tax, accounting, and governance considerations
- Tax treatment: Depending on jurisdiction, payouts may be deductible to the company as interest-like expense or treated differently—early tax planning is essential.
- Accounting: RLS may be recorded as a liability or as a hybrid instrument; auditors should be engaged to avoid surprise restatements.
- Governance: Maintain clear board disclosure and investor communications to preserve credibility and avoid future disputes.
Risks and mitigations
- Revenue volatility: Mitigate by setting payment floors or indexing payments to trailing averages.
- Misaligned incentives: Include covenants that prohibit aggressive revenue-recognition or one-off sales that game the metric.
- Refinancing risk: If revenue dries up, repayments may extend—plan conservative models and stress-test scenarios.
- Legal complexity: Use experienced counsel to craft clear definitions and avoid inadvertent equity-like treatment.
How to prepare: a founder checklist
- Model 3–5 year revenue scenarios and cash flow under different payout rates.
- Decide desired liquidity amount and acceptable repayment cap.
- Define precise revenue metrics with finance and legal teams.
- Solicit term sheets from specialized RLS investors and compare effective IRR and covenant burden.
- Engage tax and accounting advisors to confirm treatment and disclosure implications.
When revenue-linked securities are not the right fit
RLS work best when revenue is predictable, margins are stable, and founders want to retain control. They are less suitable for early-stage businesses with volatile top-lines, companies needing large capital for rapid scale (where equity remains preferred), or scenarios where investors demand conversion that would dilute control.
Revenue-linked securities are a compelling silent IPO alternative when structured thoughtfully: they deliver liquidity, preserve governance, and align incentives around sustainable revenue growth. For founders who value control and predictability, RLS can be the bridge between bootstrapped independence and the benefits of an exit.
Ready to explore a silent IPO for your company? Talk to a specialist advisor to model a revenue-linked deal tailored to your business and goals.
