How Does The Cost Of Litigation Funding Compare To An Apple Watch?

A brief look into the cost of plaintiff funding and how it compares to the cost of an Apple Watch.

I field a lot questions about litigation funding from the clients we serve and the attorneys who represent them. The one most commonly asked? You guessed it: why so expensive? The rhetorical answer is because everything is so expensive, but that response is neither illuminating nor professional, so let’s approach this mathematically. Before we do so, let’s first clear up a common misconception—litigation funders are not banks. While the two may appear similar, they have starkly different models. We’ll have more to say about that another time. For now, let’s just say that banks lend money while litigation funders sell money, much the way that Apple sells watches.

So let’s see how litigation funding stacks up against Apple’s Watch Sport 38MM. To simplify our comparison, let’s look at gross profit, which is defined as the profit a company makes after deducting the costs associated with making and selling its products. Accountants call this “cost of goods sold” or COGS. Refer to the adjacent graphic for the specific breakdown.

Now that we know the COGS, we can figure out the gross profit:

The price for a $1,000.00 advance from a litigation funder is $1,543.60(5) in year one. From that we subtract COGS amounting to $1,235.00 for a gross profit of $308.60. Stated as a percentage, the litigation funder’s annualized gross profit is 30.8%. But what if the litigation funder does not get paid until year three?

Let’s do the math.

If the money is out for three years, the litigation funder now has cost of funds (interest) amounting to $360.00. Taken together with the $115.00 for dilution, the litigation funder’s COGS is now at $1,475.00. At the end of year three, the litigation funder is owed

$2,561.64(6). That leaves a gross profit of $1,086.64 or 108%!

Sounds like a home run, right? Not exactly.

Let’s not forget that the money has been out for three years. Accordingly, the annualized rate of return is only 36.8%(7). That still sounds pretty solid, no? Yes, it does … until we factor in the “haircut” that inevitably comes with a funding that’s out for three years. If you work with funders and wonder why they resist your request for a 15% reduction, the numbers tell the story.

Now let’s take a look at Apple. It sells its Apple Watch Sport 38mm for $349.00. From that we subtract COGS amounting to $81.20 for a gross profit of $267.80. Stated as a percentage, Apple’s gross profit is 76.7%. That’s a home run!

I hope the takeaway from this article is that litigation funding is not overpriced. If the numbers don’t have you convinced, then ask yourself this question: if litigation funding is indeed overpriced, then why has no one sought to undercut the competition and pile up market share? So to answer "your" question, litigation funding is not so expensive. Nor is it inexpensive. Maybe it is simply priced accordingly.

1. Cost of funds or interest is considered a cost of goods sold for financial companies but not so for manufacturers.

2. An annualized rate of 12% is not uncommon in an industry heavily funded with private capital.

3. It is common within the industry for lit funders to lose from 10-13% of their fundings.

4. http://venturebeat.com/2015/04/30/ apple-watchs-components-cost-just-81-20- highest-markup-of-any-apple-product/

5. $1,000.00 from Covered Bridge Capital is comprised of the principal advanced, an origination fee of $195, a delivery fee of $30.00 and an APR of 27% (13.5% semiannually). Contact us for a “payoff calculator”.

6. The cost of a $1,000.00 advance from Covered Bridge Capital at year 3.

7. Use this online calculator to compute the IRR http://tools.financial-projections.com/ IRRInternalRateOfReturn.shtml

Dean Lipson - Owner, Covered Bridge Capital.