Giving equity and Cash Flow

by a searcher from Georgia Institute of Technology

2 years ago

Greetings all -

I've got what is probably an extremely basic question that I've avoided asking because it seems like one of those things that "everybody knows" - and yet it's never spelled out directly anywhere.  As such, I'm just going to bite the bullet and admit my own ignorance by asking:

When you make a purchase and give equity as part of that purchase (either to the seller, to an investment group, to an advisory board, etc)... Will those equity holders receive payouts on some ongoing basis (as part of your net profits), or does that group not receive a return on that equity until you sell the company?

Thanks,
Jon

3 likes
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4 comments

searcher from Georgia Institute of Technology

Got it. So, sounds like the reason I don't see this one clearly defined is because it realistically isn't clearly defined. It ultimately boils out to whatever gets baked into the agreement.

Thanks all! Gives me something else to look into.

2 years ago | like reply | 1 like

searcher from Baylor University

I'll echo the other responses and add another component to consider. Look into preffered returns on investopedia etc. Some investors will want to be paid out prior to the search funder is paid any profits putting them second in the capital stack behind any senior note debt. This is called a preferred return and the percentage of payout above and beyond the initial investment is negotiable and usually has a time component. After the preferred return is fulfilled the profits will flow through what ever pro rata structure for common equity that is in place in the operating agreement of the LLC as Mike Adhikari pointed out.

2 years ago | like reply | 2 likes

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