RBI Financial Model Instructions

This model was originally released with

THIS MEDIUM POST.

It was created by Kiah Hochstetler, COO of Goodworks

Ventures, and Stephon Smith, founder of Modulus
Financial.

DOWNLOAD THE FINANCIAL MODEL HERE

Getting Oriented With This Model
The modeling spreadsheet contains two copies of the same financial model - showing a revenue share paired
with an equity redemption. It is meant to show the feasibility of making this type of investment, focusing on the
serviceability of the revenue-based portion of the investment. It can be used by founders to model a potential RBI
investment, or by investors looking at a prospective RBI investment. Though it is best used as a collaboration
between investors and founders to determine the plausible terms of the investment.

Notes

● These instructions rely upon this vocabulary (also included in the appendix) and match the “RBI” tab of the
document. Reading through this vocabulary first will make understanding this model easier.
● The “Indie VC V3” tab is the same model as the “RBI” tab, but uses terms according to the Indie VC term
sheet instead of the aforementioned vocabulary.
● The “More Info” tab contains more definitions and explanations. Check it out.
● Enable Macros to be able to use the “Sensitivity Analysis” on lines 50-58.
 Getting Oriented With This Model
Revenue Share + Redemption

With the Indie VC structure used in this model, the investor is purchasing both a) the right to a percentage of the
company’s gross revenue up to the Return Cap and b) a portion of the company’s equity, which is then
repurchased/redeemed from the investor with each revenue share payment until the Return Cap is reached.

With a Redemption, if the Return Cap is 3x, and the investor has received 1x back through the revenue share, the
investor’s initial equity ownership is reduced by ⅓. At 3x, the investor’s ownership is reduced to zero, unless
there is a Residual Stake included. The Residual Stake is a portion of the investor’s ownership that is not subject
to redemption. The Indie VC agreement template sets this as 1/10 of the initial equity stake (which Indie VC calls
the Percentage). This is an optional term and can be set to zero if all shares are subject to Redemption.

● If there is no Residual Stake included in the Redemption, set it (I5) to zero.

This model works for structures which do not utilize a redemption too.

● If there is no Redemption included in the investment (and therefore no Residual Stake either), set
the “Initial Equity Stake” (I4) to 0 and “Residual Stake” (I5) to 0.

Focus on Modeling the RBI

Investors and founders should prioritize modeling the financial consequences of the revenue share. The revenue
based instrument is effective upon signing and payments will begin once the Holiday Period is up. The equity side
of this structure is secondary and only a legitimate path to returns for investors if the conversion is triggered. These
instructions will focus on modeling the revenue share first, and the equity consequences secondarily (lines 45-48).
Getting Oriented With This Model
Criteria of an encouraging RBI model:

1. The company’s cash balance (line 34) remains above the company’s own minimum cash balance goal.

1.
2. The return metrics, “RBI + Redemption Terms - Outputs” (cells J1:L9), meet the investor(s) return goals for
the investment

1. The company’s cash balance (line 34) remains above the company’s own minimum cash balance goal.

2. return metrics (cells J1:L9) meet the investor(s) return goals for the investment
The

3. The model is believable.

a. This model is only as good as your own financial projections. If those are not sound, and you don’t
know your way around them, go back and do that first.
b. The “Return Analysis & KPIs” (lines 36-43) do not show any red flags for the company’s financial
health given its debt and RBI commitments.

Do not sign up for any structure that includes a Periodic Variable Return
Instrument, revenue based or other, unless the company can afford the PVR
payments.

This seems obvious, but we’ve seen a lot of investors and founders get attached to these investment structures
without actually doing the math of the revenue share.
1. Model The Co’s Growth With Investment
**Only touch the highlighted cells.**
**Refer to the “More Info” section for more details on this model**

You are aiming to build an income statement (rows 21:27) that 1) matches your own projections and 2) is a story
you believe you can achieve with this round of investment and no major business model or market changes.
Ignore the “RBI + Redemption Terms” section (G1:L9) for now.

1. Fill out the “Company Inputs” until the “Trailing 12 Mos. - Income Statement” (C21:27) matches
your actuals.

a. Starting cash balance - C2

b. Starting debt balance - C3
i. Avg. interest rate - C4
ii. Avg. debt term (years) - C5
c. Gross Revenue - trailing 12 mos. gross revenue - B7
d. COGS - as a % of trailing 12 mo revenue - B8
e. Expenses - B9

● If the company has a less than trailing twelve months operating history, set the trailing twelve month
numbers to reflect whatever the accurate partial year income statement is. You will then use the overrides
in the next step to make Y1 reflect the projected first full-year in business with investment.
● If the company has no operating history, set the initial income statement to nominal numbers (eg $10)
so that the model does not multiply by zero. You will then use the overrides in the next step to make Y1
reflect the projected first full-year in business with investment.
1. Model The Co’s Growth With Investment
1.

2. Create your base case assumptions for growth and cost structure (C7:E9).

1.

a. “Multiplier” (C7:9) - this allows you to run a sensitivity analysis with each line item. Leave this at
100% to start. Later, you can play with these percentages to see what happens if Revenue, COGS,
or Expenses assumptions don’t hold true.

1.

a.

b. Escalator - this is your assumed rate of change with investment for each line item.
i. Revenue - What is the rate of gross revenue growth the company is aiming to reach and
sustain?
ii. COGS - At what rate will COGS change? Remember, COGS are listed as a percentage of
Revenue, so this is automatically inflating in proportion to revenue growth. Assuming you
achieve economies of scale, this should actually be a negative percentage (COGS/Revenue
decreases over time).
1. Floor - As a percentage of revenue, what is lowest COGS could ever go? This is
when there are no more economies of scale to be had.
iii. Expenses - At what rate do expenses grow? Think staff, office space, legal, etc.
1. Model The Co’s Growth With Investment
1.
2.

3. Use the “Override” columns within the income statement (rows 14,16, and 18) to make the next few
years match your bottoms-up projections.

The first few years of a startup rarely look like a perfect set of lines up and to the right. The “base-case
assumptions” that you filled in with Step 2 don’t have the flexibility to account for short-term, lumpy
changes to the projections that founders usually know are coming. You are overriding the “Escalator”
assumptions above to make the first few years of the model match your actual projected income statement.

a. Revenue Growth Rate Override (Row 14) - adjust this growth rate (between the trailing 12 months
revenue and Y1 revenue) to match you actual projected y1 revenue (D21). Repeat this for as many
years (E21, F21, etc) as you can reasonably predict in this bottoms-up manner.
b. COGS Override (Row 16) - adjust this growth (or shrinkage) rate (between the trailing 12 months
COGS and Y1 COGS) to match you actual projected Y1 COGS (D22). Repeat this for as many
years (E22, F22, etc) as you can reasonably predict in this bottoms up manner. Since COGS are a
variable cost, relative to revenue, often the only overrides necessary account for better
supplier/vendor pricing being unlocked.
c. Expense Growth Rate Override (Row 18) - adjust this growth rate (between the trailing 12 months
Expenses and Y1 Expenses) to match your actual projected Y1 Expenses (D24). Repeat this for as
many years (E24, F24, etc) as you can reasonably predict in this bottoms up manner.
1. Model The Co’s Growth With Investment
1.
2.
3.

4. Review the Income Statement (Rows 20-27) and adjust accordingly.

These are projections, so we can confidently say it is all wrong. However, it should tell a story that founders
and investors can be confident enough to use as the basis for investment.
a. Does this model match your own projected income statement?
b. Can you actually reach this growth?
c. Is your cost structure going to hold true for the foreseeable life of the business?
d. Do you need to account for anything else beyond the assumptions with additional overrides?

Repeat steps 1-4 for as long as it takes to be able to answer the steps above
with a confident, “yes.”
2. Add in the Revenue Share

1. Enter the “Investment Amount” (I3).

a. Use the total round amount, not an individual investor’s investment size. If the company needs
$300k and three investors each want to invest $100k, put $300k in cell I3. First and foremost, we’re
modeling whether or not the RBI investment is financially sound for the company, not individual
investors. The investment metrics will looks the same for any individual investor anyways,
assuming they’re all on the same terms.
b. Reaching the ideal RBI investment amount is a compromise between two competing criteria. On
one hand, founders should aim to raise enough funds to confidently unlock the next few years of
growth ambitions. Having to stack later investment on top of an RBI is messy and offers many
opportunities for misalignment. In contrast, RBI tends to be expensive capital. If a company is able
to raise less expensive funds for part of its capital needs (eg debt to purchase equipment), it will aid
the company’s financial health and make the RBI investment much more workable. Put simply,
paying back 3x on $250k is a lot easier than 3x on $500k.
2. Enter the “Holiday Period” (I6)..
a. How long does the company get to reinvest all of its free cash flows before the revenue share
payments begin?
b. Keep in mind any major growth periods that the company expects. For example, a DTC company
will likely need to invest in Q4 inventory, making the next Q1 a better time to start payments instead
of stacking on top of the upcoming Q3/Q4 inventory purchase.
c. Many investors will want to set this to at least twelve months to avoid disqualifying long-term capital
gains treatment on revenue share payments.
3. Enter the “Gross Revenue Share Percentage” (I7).
a. While it will vary for each business type, 2-8% is a common range. Enter a placeholder amount for
now, and then come back to fine tune the amount that works for both the company and investor
(next).
4. Enter the “Return Cap” (I8).
a. 2-4x is a common range here. The Indie VC template includes 3x as its default Return Cap. This is
our fund’s minimum Return Cap too. Negotiating the revenue share percentage later will be
much simpler later if founders and investors agree on an up-front Return Cap.

● Ignore the “Initial Equity Stake” (I4) and “Residual Equity Stake” (I5) terms for now. While these are
important terms, the revenue share should be the primary negotiation. If negotiations get stuck on these
terms, the underlying alignment behind the revenue share is likely unresolved.
3. Find the Revenue Share Boundaries
Feasibility is first and foremost determined on Line 34, “Ending Balance.”

This number should never go below the company’s minimum cash balance required. We won’t even dare advise
what this number should be. Just know that s**t happens, and the CEO’s #1 job is to keep cash in the bank.

The founder is incentivized to minimize the amount of the gross revenue share percentage. The investor is
incentivized to maximize the revenue share, so long as the company can afford it. If the terms of an investment
puts the company out of the business, it’s a lose-lose.

Cash Available to Win

Win
the Company

Lose
Lose
Win
Lose

Investor Returns
0%

Revenue Share Percentage

Investors and founders should start by determining whether or not their range of acceptable terms for the
revenue share overlap (as above).

To help both partings in ‘guestimating’ the revenue share amount, use use the “Sensitivity Analysis” Lines 50-58).
As you adjust the “Gross Revenue Share Percentage” (I7) and “Return Cap” (I8), click the “Click Here” button (L8).
This will update the “Sensitivity Analysis” to show the years you are projecting for the revenue share to reach the
Return Cap.
3. Find the Revenue Share Boundaries

● Founders - Determine the maximum revenue share percentage (I7) that the company can afford.
Reaching a win-win with investors should supersede the founder’s financial incentives to minimize the
revenue share percentage.

1. Adjust the “Gross Revenue Share Percentage” (I7) to determine the highest revenue share
percentage that still allows the company to sustain the company’s ending cash balance (line 34) at
an acceptable level. Ideally, you know the investor’s intended Return Cap by this point too.

Interpreting IRR: The “IRR” metric (L3) is effectively the projected interest rate of this investment if
it were a simple loan. Remember, if you can get a cheaper loan, do that!

The assumption behind using RBI is that you are unable to secure additional debt for the company,
but don’t want to sell equity to fuel growth. RBI is a form of risk capital where your investor’s
returns improve as your gross revenues (the Return Variable) improve. Both parties are
incentivized for this win-win scenario, but share in losses as well. Therefore, the projected IRR will
look like an aggressive loan, but that also means you’re projecting positive growth for the company
that is unreachable without RBI.

Interpreting “Time to Return Cap”: As a founder, how long are you comfortable having this
obligation outstanding to the investor(s)? You don’t want to sign up for an added line item of COGS
that will drag too far into the life of the company - essentially nullifying the path to eliminating this
investor expense. Ultimately, accelerating revenue growth can reduce this metric, but if you believe
in your financial projections, you should heed the warning offered by this time to repayment metric.
Use the “Sensitivity Analysis” (lines 50-58) to understand the timeline associated with the projected
revenue share percentage.
3. Find the Revenue Share Boundaries
● Investors - Determine the minimum revenue share percentage (I7) that provides a compelling
return. Ignore the temptation to compromise on return targets just to get the deal done. There is nothing
‘founder-friendly’ about setting both parties up for disappointment and disagreement in years to come. If
you truly value the relationship with the founder, you should come to the table with transparency about your
financial motivations for investing and be willing to simply remain friends if your financial goals are out of
reach for the company.

1. Adjust the “Gross Revenue Share Percentage” (I7) to determine the lowest revenue share
percentage that still provides compelling returns.

“Compelling Returns” are measured by:

● The Return Cap - Again, we suggest this is agreed upon up-front by both parties to simplify
negotiations. 2-4x is a normal range. Our fund prefers 3x.

● IRR - measure of how long it takes to reach the return cap. Think of this as the correlating interest
rate on a loan which would provide the same returns to the investor. Refer to the “Interpreting IRR”
section above to understand how this metric should compare to debt and why RBI should only be
used when cheaper debt is unavailable.

● “Time to Return Cap” - years projected to pay up to Return Cap. This is a good way to gut check
the underlying investment. Make sure that this period matches up with everyone’s time horizons to
avoid a ‘never-ending agreement.’ Again, use the “Sensitivity Analysis” (lines 50-58) to see how the
revenue share affects this timeline.

A note about Discretionary Payments

If the company is able to make Discretionary Payments (payments above the contractual revenue share
amount) you can account for these on line 48. For the sake of modeling an investment, it is probably best to
assume that only the minimum contractually required payments are what will occur, so leave this line alone for
now.
3. Find the Revenue Share Boundaries
Do the ranges of a workable revenue share overlap?

Is the founder’s maximum revenue share percentage higher than the investor’s minimum revenue share
percentage?
● If yes - great. You’re on your way to finalizing the terms of the RBI Instrument. Skip to “Is this a story you
actually believe?”

Cash Available to
Compelling for Investors Putting the company out of
the Company business

Investor Returns
0% >> Optimizing investor >> Beginning to cannibalize
returns the company’s growth

Revenue Share Percentage

● If no - revisit your underlying assumptions to see if you can find a workable investment. Try the
following levers to get to a “yes.” Otherwise, it may be best for both parties to shake hands and walk
away from the deal.
a. Can you make repaying up to the Return Cap more likely by reducing the “Investment Amount”
(I3) through other forms of capital?
b. Can you adjust the “Holiday Period” (I6) to boost IRR? Does a shorter Holiday Period allow the
same RBI payments to start earlier? Or, does a longer Holiday Period allow the company to
unlock higher revenue levels and therefore larger RBI payments?

Putting the company out of

Cash Available to business
the Company
Compelling for Investors

Investor Returns
0%
Revenue Share Percentage
3. Find the Revenue Share Boundaries
Is this a story you actually believe?

No model is perfect. These steps should help investors and founders determine if the economic alignment is there
for an investment. However, the story behind the numbers is where the real work happens.

1. Review the “Return Analysis and KPIs” (lines 36-43) to see if there are any red flags. Definitions for
each line item are provided in the “More Info” section.

1.

2. Do a sensitivity analysis using the “multiplier” column (C7:C9). Understand which variables have the
biggest effect on the company’s ability to service the RBI by adjusting the “Multiplier” percentages and
seeing the effects this has on the company’s health. You may need to adjust the terms of the RBI to
provide a larger margin of error for the company. Here are a few questions to help guide the sensitivity
analysis.
a. Between the gross revenue, COGS, and expenses, which of these is the most fragile part of the
business model?
b. Which variables of the business model are most affected if there is an economic downturn?

1.
2.

3. Gut Check.

Founders - does this model give you heartburn? What numbers do you believe in? What numbers feel
like the largest leaps of faith?

Investors - are you modeling an accurate picture of the company with terms you can stand behind? Or
are you modeling to ‘make it work?’ It’s easy to become rich in excel, but you can’t by beer with that.

Transparency is paramount for both sides of the table to find an RBI structure that fits. Once the docs are signed,
the payments are contractual obligations. The last thing you want is an obligation founded on differing
expectations.
 4. Adding in the Equity Redemption
We suggest doing this after the RBI terms are set to avoid undermining the incentive alignment created around
gross revenues through the RBI instrument first.

● If you are not including an equity redemption, set both I4 and I5 to zero and skip this section.

1. Set the “Initial Equity Stake” (I4)

a. Setting the investor’s Initial Equity Stake is a ‘quasi-valuation’ negotiation. If the company raises
$200k from investors, and the investors get an initial “Percentage” of 10%, then a $1.8M
post-money valuation is insinuated. However, because there is a Redemption, the company’s own
revenue growth can significantly affect the true equity ramifications of this investment. Founders
and investors should negotiate this “Percentage” to an agreeable ‘quasi-valuation’ for the company,
but don’t get too hung up. If it becomes a sticking point, that is a sign that you may not have
properly aligned around the exit-goals of the company. The company’s future revenues will have a
much more profound effect on the investor’s ownership.
2. Set the “Residual Stake” (I5)
a. This is the portion of the company’s ownership which is ‘unredeemable.’ After the RBI Instrument
has paid investors up to the Return Cap, this is the amount of ownership the investors still have
remaining in the company. The Indie VC Structure sets this amount to 1/10 of the initial equity
stake. For investors, the Residual Stake ensures they get to participate in equity returns that may
materialize after the revenue share has played out. For founders, this helps preserve the long-term
alignment that comes with equity investment. Many RBI Instruments with Equity Redemptions do
not include a Residual Stake too.

With the terms of the Equity Redemption set, you can see the pro-forma investor/founder cap table on lines 45-58.
Remember, this projection is only as good as the numbers feeding it, and most affected by the company’s gross
revenues.

If you look at these lines and start trying to calculate the value of your ownership over time, you likely missed the point
using the RBI Instrument in the first place – aligning around gross revenue.
 The End
Now talk it through some more. You’re tying your prospects together at the hip. Don’t take this partnership lightly.

And then sign, wire, and get back to building the business!

Hopefully, this model allows more founders and investors to explore revenue-based structures in a disciplined
manner, unlocking more RBI investment as a whole.

Let us know how the model (hopefully) supports your RBI experience.

We can not overstate our gratitude for Stephon and Kiah for making this model and being willing to share it
with the world. Here’s more info on them:

Stephon Smith is the founder of Modulus Financial. Modulus Financial empowers businesses to master
their missions through cold, hard analysis. We serve our clients by developing bespoke financial models and
analytics engines, using these as the basis for data-centric consultation, and finally providing training so our
clients can employ the assets using only internal resources on an ongoing basis. In this respect, we are
engineers first, consultants second, trainers third, and professionals through and through.

On the financial side, our services provide our clients insight into fundraising needs, cash flow timing, internal
resource demands, growth limitations, and projected returns. On the analytics side, we use statistics-based
reporting to highlight probable causes of customer attrition, lifetime value, loss centers, and other key
metrics. We have served clients in a wide variety of industries including real estate development, food
manufacturing, online marketing, solar photovoltaics, software-as-a-service, fitness, environmental
education, and merchandising, among others.

Kiah Hochstetler is the COO of Goodworks Ventures. Goodworks Ventures was formed in 2007 as a
Montana based and focused impact fund to support, nurture and empower visionary people and
organizations that are creating the world we want to live in.

Goodworks Ventures is pioneering a path forward for Montana’s baby-boomer businesses. A Goodworks
subsidiary, Goodworks Evergreen acquires stable, profitable small businesses that are often a community
cornerstone and helps them transition to the next generation ownership. This helps prevent business
closures, provides liquidity for lifetime business owners, and stewards a future of jobs and small businesses
in Montana.
The End
Let us know
● How you used this model?
● Where this model is helpful?
● Where it can be improved?

Join the conversation in the comments here.

This guide was created by...

The Greater Colorado Venture Fund - an
early stage venture capital fund investing in
Rural Colorado startups.

GreaterColorado.VC

More Alt Cap resources from GCVF:

● Vocabulary for the New Risk Capital Landscape
● Exploring Revenue-Based Investment? Read This First.

Contact:
Jamie@GreaterColorado.vc