The Agreement Between a Company and a Consultant that Grants the Consultant the Right to a Revenue Royalty
What it is: This agreement template is one of the various forms of Sweat Equity that is built into our app. It is incorporated into the Sweat Equity Agreement and a specific SOW that calls for all or part of the compensation for a specific deliverable by a Consultant to be compensated in the form of a revenue royalty. A royalty agreement pays the Consultant a percentage of revenue, rather than ownership in the Company, for their contributed effort.
How it is used:
A Company should use a Royalty Agreement as a form of Sweat Equity compensation to tie a Consultant's upside compensation directly to an app or product that the Consultant is developing. A Royalty Agreement allows the company not only to tie the quality of the deliverable to the success of the company, but also to avoid diluting the ownership of the company. However, since a royalty is paid out along the way, along with the revenue of the product the Consultant developed, there is an ongoing cash expense to pay down the royalty. Consultants will often prefer a royalty because they do not need to wait for an exit event in order to realize their compensation. A Royalty Agreement is non-taxable when issued, but is subject to personal income tax when paid. (Be sure to seek competent legal and tax advice when choosing the various forms of Sweat Equity to avoid any negative consequences).
Our app will walk you through the step-by-step process of filling in all blocks of information, along with all of the necessary tips, instructions, and examples
This agreement form will typically only take a couple of minutes to complete if you have the necessary inputs at hand
Once you've completed the form, you can download and send it to your attorney and/or tax advisor to review and/or sign online and send it to the Consultant to review and sign
All completed forms for all Sweat Equity Consultants that you complete are logged in your subscriber dashboard
Complete one overall Sweat Equity Agreement for each Consultant
Complete a separate Statement of Work (SOW) for each phase of work
Issue the Sweat Equity upon acceptance of the deliverables
Compare this table with the other forms of Sweat Equity on our Sweat Equity 101 page.
Degree of Flexibility
Very flexible – can issue multiple royalty agreements or update a previous one to compensate for additional deliverables over the life of the Company
Potential Tax Consequences
Taxable at personal income tax rates whenever a royalty payment is made
Type of Upside
A percentage of revenue
Basis of Sweat Equity Value
The revenue of the Company or one or more of its offerings
Realizing the Value of Sweat Equity
Paid along the way, typically on a monthly or quarterly or annual basis
Current Valuation of the Company
No valuation is required
The Consultant does not have to wait for an exit to realize the value of their contribution. The Company does not have to pay any royalty if the app doesn’t get completed or produce any revenue
What it contains: Our Royalty Agreement template is a 6-page agreement that is incorporated into the overall Sweat Equity Agreement and SOW and includes the following items:
Basis and Amount of the Royalty - this template contains specific information for how the Royalty is paid: the revenue it is tied to (all revenue, specific product revenue, the definition of net revenue, etc.), and the percentage of revenue that is paid (e.g. 5%).
Term and Timing of Payments - the agreement form includes all of the necessary language on the effective date, expiration date (no royalty should be committed to in perpetuity), and how often the payments will be calculated and paid (monthly, quarterly, or annually).
Payment Cap and Buyout - the agreement also contains provisions on the maximum payout cap (we strongly recommend that all royalties be capped at typical venture capital return rates - the average caps we've seen are 3x the Consultant contribution amount) and provisions for a buyout. We also recommend the ability to buyout the royalty with a payoff amount that is fair to both sides. That gives the Consultant a nice upside in the event the Company needs to eliminate the royalty such as in an exit event.
General Provisions - the Royalty Agreement includes the other required details regarding audit, inspection, and review rights that are common in royalty arrangements.
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