That’s a lot of hypotheticals rolled into one.

Most of that needs to be worked out before anyone subscribes and hands over cash.

Only the people putting cash to work with you can know what they expect in return, how long an appropriate lock up is, and how they value you as a risk.

Financed entirely with equity?

Something like 3% simple hurdle that kicks in on the third anniversary of the close.

2 classes of shares. 3% only applies to outstanding invested capital at 3rd anniversary. Return all the invested capital by year 3 and everyone converts to class B and you begin to realize your performance carry. etc.


There are an infinite # of ways to cut it. Find a good deal, work out the expectations with your family and friends up front and then go to work.

The way it works is that you commit to paying investors a guaranteed or "preferred" annual return typically in the 8-10% range. Whether this return is paid in cash or accrues is up to negotiations. That being said, most investors are looking for returns in the 20-35% per year range. To successfully raise money from search fund investors, you will need to show a reasonable financial model that shows returns in that range, however these returns are not guaranteed. When you exit or re-cap the company in the future, the investors will get their money back plus the preferred return before you get anything. In traditional search deals, there are also additional IRR based hurdle tiers, so you don't participate in the gains unless the investor first gets a 15-25% return (this is not market for self-funded deals). If there is not enough money left to make investors whole then you get nothing, but investors don't have any recourse beyond payment preference in the waterfall.

For simplicity, most capital stacks, in order of seniority, look something like (1) senior debt of up to 50% of EV from below 5% to 8%, depending on your lender and terms, (2) a seller's note of up to 30% of EV at 6-10%, (3) preferred equity of up to 30% of EV from 8% to 12%, often PIKd at first then cash pay later, (4) investor (and searcher) paid-in common equity of 10-50% of EV targeting 20+% returns, and (5) "sweat" equity to the searcher if hurdles (multiple to money- or IRR-based) that can go up to 25% of the business. There are so many different combinations in just the above simple format, showing the importance of negotiations and discussions with all stakeholders involved in the sale.

Search fund investors will look for a searcher and opportunity that can generate upwards of 25% annual return for them, and a typical search fund structure (preferred stock, IRR hurdles, etc). However, if your source of funds are friends and family, you have infinite ways of presenting a potential deal to them and in VERY different terms to what the search fund community are used to. It all depends on what's appealing to your network of friends and family and what their motivations are for inveting in you (is it because they think you can double their money in 3 years, or is it becasue they want to support you in your endeavor?). The answer to that question - and to your expectations about what type of growth you can generate in that business (steady slow growth vs rapid growth) - should guide your proposition to your invetors: they may want to have equity in the company or they may be more comfortable giving you a loan and expecting a fixed amount check every month.