You’ve heard of crowdfunding, right? Where a group of individuals (often just members of the public i.e. not professional investors) fund a business venture by contributing a small amount of capital each, typically via the internet. Well, Initial License Offerings (also known as ILOs) are similar to crowdfunding in that they help revenue-ready businesses raise funds quickly from multiple sources.
However, ILOs differ from normal crowdfunding in a number of ways and we’re here to explain how.
So what are ILOs, how exactly do they work and what benefits do they afford?
Here’s the lowdown on this unique fundraising mechanism, so you can make an informed decision about whether an ILO is right for you (as a buyer) or your company (as a way to raise capital).
How do ILOs work?
First and foremost, ILOs differ from traditional crowdfunding in that they are not considered an “investment”, rather a “license purchase” (for the buyer). When a business that is scalable and revenue ready wants to raise money, it can do so via an ILO by selling licenses. Interested parties purchase these licenses and are rewarded by securing entitlement to a percentage of the company’s gross revenue.
However, to “validate” the license they have purchased and secure their revenue entitlement, buyers are obliged to promote said company by sharing posts about them and their products/services (usually online).
Once a license buyer has qualified themselves through such sharing activities, they will secure their inclusion in the company’s royalty pool.
Sharing activities might involve posting on social media, spreading the word face-to-face or even via referral codes.
ILOs are carefully structured and include x number of licenses in any one offering. For example, a company that wants to raise $3m could offer an ILO comprising 100,000 licenses at $30 each. Providing all licenses are sold, the company not only secures the $3m it needs, but also benefits from having 100,000 individuals all subsequently promoting it.
Companies typically start paying out quarterly royalties (usually 10% of gross revenue) to license buyers a year after the ILO offering. These royalties are paid into a pool and then divided equally between the license buyers.
After 18 months, the licenses become tradable and their holders can cash out their initial stakes (if they choose to). After three years, the license buyer has a choice: sell the license(s) back to the company for the same price they paid (cash out), or convert the license(s) into shares in the business if it gets listed on the stock exchange.
ILO benefits for companies
ILOs can reap a number of benefits for revenue-ready companies. The most obvious is that they (ILOs) enable a company to raise money in a short space of time, without sacrificing any equity in the process.
Furthermore, the company offering the ILO also benefits from having potentially thousands of advocates all promoting its products/services online. As we’ve all come to realise in recent times, this kind of grassroots, social proof can be worth its weight in gold.
ILO benefits for buyers
ILOs are relatively low-cost purchases, with licenses starting from as little as $5. In other words, the financial barriers to entry are pretty low. Then there’s the fact that businesses pay royalties based on their revenue, not profits. So even if a company isn’t profitable, the license holder will still receive the royalties they are entitled to.
The value of each license should also, in theory, increase over time as the business grows. License holders can trade their licenses on bespoke platforms (like ILOCX.com) and potentially make money in the process.
As mentioned already, at the end of the three-year ILO period, holders can either sell their license(s) back to the company for face value, or convert them into shares. This means ILO buyers can recuperate their initial outlay, making ILOs a particularly low-risk purchase.
Finally, if a buyer purchases licenses from a company that they genuinely love and/or believe in the products/services, promoting said company won’t even feel like a chore. This, plus everything else we’ve talked about above, makes ILOs a win-win for both business and buyer.
***
Interested in learning more about ILOs or want to see what companies are currently offering one? Check out all the companies looking for people just like you to support them here: https://ilocx.com/ex-ilos/
If you’re a company considering offering an ILO, learn more about creating one here:
https://iloquote.com/about
