At its core, Demand Dividend provides two important advantages versus other traditional investment vehicles:
- A reliable promise of return and exit, and
- A structure that aligns investment repayment with actual cash generation.
Traditional debt, if available to a social entrepreneur (SE), is often a burden for small growing businesses. With Demand Dividend the financial structure is synchronized with the business model (honeymoon period, payments based on cash generated) and investor oversight and governance is improved. When compared to the usually long and uncertain holding periods for equity (or convertible debt that often defaults to equity), Demand Dividend:
- Provides capital return during the investment period and an explicit exit mechanism,
- Avoids the complexity of estimating company valuation, and
- Allows entrepreneurs to retain greater operational and financial control.
In addition, Demand Dividend, as part of the negotiation of the term sheet, forces an entrepreneur and investor to agree upon a cash flow definition and forecast. The parameters of the Demand Dividend can be tuned to the SE’s business model and the investor’s required return. From the outset the SE knows the amount required to retire the Demand Dividend and understands the necessity of creating positive cash flow. The investor gives the SE a chance to succeed, with a honeymoon period and payments based on business velocity, but retains a claim to cash as generated.