Equity deal structure with investors

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by a searcher from University of Applied Sciences
in Hamburg, Deutschland

3yrs ago

Equity deal structure with investors

I enjoyed reading this article last weekend. It answered a lot of my pending questions about how to structure preferred equity structures. It gives better examples than the standard literature around profit sharing and some interesting personal thoughts from the author about governance.

redacted

6 Likes

345 Views

reply by an intermediary 3yrs ago
from The University of Chicago in Chicago, IL, USA

I think 60-70% is high but if a searcher can get that, all the kudos. Part of entrepreneurship is leveraging market inefficiencies.
In the PE world the LP gets return of capital + the hurdle rate. and then the GP/LP split is 20/80.
In the SF world, the Searcher gives PG (no PG in PE) and hence there should be some compensation for that.
There are other arguments on both sides:
a) PE has experience; most searchers are first time buyers
b) PE managers are subject to massive personal DD by 3rd parties engaged by the LPs; the Searcher is not subject to that.
c) the investors in SF do not have investment opportunities like LPs do,
d) SF investors, many of them, are value-added investors, whereas LPs are capital providers.
e) PE has bench strength; searcher does not.

I have been subject to personal DD by LP while forming a $150 M fund. I am also an investor; in one deal (P=$15 M) all equity providers (no LP) had proportional equity. The main person (Searcher/CEO with deep PE experience) put up 30% equity had 10% kicker on waterfall. It was 28x return in 8 years.

reply by a searcher 3yrs ago
from The University of Texas at Austin in Chicago, IL, USA

I found that asking potential investors upfront about their investment duration profile is especially important. The private equity type investor that is described in the article usually demands some sort of liquidity event in a few years.