What are the community's thoughts on using shareholder loans to structure SMB acquisitions in the US? Functionally, I don't see significant differences compared with preferred equity. Both instruments serve to fill up the capital stack, while providing an additional return (usually PIK, but no less real). In my experience with acquisitions in Europe, shareholder loans are often used to avoid negative tax consequences of issuing options. Instead management or board members get to buy equity cheaper (sweet equity) than institutional investors, who in addition to equity are also funding the shareholder loans. The loans are subordinated, unsecured and only sit above common equity in the waterfall. Therefore, in the eyes of the bank shareholder loans are considered "equity" when looking at loan to value etc.

Are there different considerations in the US? Is there anything that I am missing? Let's discuss!

Below are some of the main pros and cons I can think of:

- No need for an additional class of equity as with preferred shares
- Allows incentivization of key managers with vested equity on day 1, providing a sense of real skin in the game
- Allows key managers (searchers!) to buy into deals at significantly cheaper cost and provides disproportionate upside participation

- Bad documentation in the shareholder agreement can lead to difficult, contentious and/or expensive situations for leavers
- ?