How To Calculate A Royalty Crowdfunding Offer

By moss

Royalty Crowdfunding Offer

Start ups in need of capital commonly depart with 10% to 30% equity. Sundry factors determine where in this range a start-up falls, but the minority-majority dynamic almost always comes into play. For royalty crowdfunding, however, ownership is not much of a concern. Instead, projects calculate their royalty crowdfunding offer by tracking market averages as well as the product’s own life cycle.

Industry-Determined Royalty Based Crowdfunding Rates:

Before listing a royalty crowdfunding offer, know the market’s going rates. In other words, investigate past projects and read up on royalty distribution in your industry. For instance, through a major publishing house, an author stands to earn 5% to 10% on paperbacks and 10% to 15% on hardcovers (advance excluded). Similarly, musicians earn an average of $2 per CD or $0.25 per iTunes download. For creative projects, then, they can gauge royalty retention based on these averages.
Looking at both examples, a project’s royalty crowdfunding offer must consider the overhead expenses that major publishers and producers incur. Manufacturing costs, for example, could represent 50% of a product’s retail price-tag, so right-off-the-bat the project only has 50% to split with investors. Subtract the averages from above and now the project has 40% or so available. To determine how much of that to give away requires a life-cycle assessment.

Life cycle-Based Royalty Rates

From inception to distribution, the profitability of any endeavor changes greatly, so project creators must forecast the ups and downs in order to appropriately calculate a royalty crowdfunding offer. Generally, an overall valuation must take place before ironing out the final details because the more a project’s worth, the more valuable each percentile is to investors. For this reason, unique, non-competitive projects can depart with fewer royalties.
Understanding value change, however, means that royalty crowdfunding offers should be time-sensitive. Plotting where one phase ends and another begins ensures that a project maintains control of the revenue every step of the way. It also prevents dilution in the final phase. If not time-sensitive, projects can also make royalty crowdfunding offers specific to only one customer channel or circumstance (i.e digital downloads vs. CD sales).