How did you determine Equity Step-up?
Hello all. If you offered an equity step-up for investors to finance a deal, how did you determine a multiple to use?
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by an member
from University of Washington
in Mount Vernon, WA, USA
in Mount Vernon, WA, USA
1yr ago
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by an investor
1yr ago
from McGill University in San Diego, CA, USA
from McGill University in San Diego, CA, USA
Sam Rosati has done a number of excellent teach ins (redacted). You might want to give them a watch.
From the investor's perspective, (as a general matter) investing in self funded deals is riskier than investing in traditional search funds. The deals are smaller, there is more leverage, there is no way to get a majority stake in the deal, the CEO has fewer professional investors around them, less money is spent on diligence, and the list goes on. Investors will want to be compensated for that added risk. As Jonah mentioned, an investor in a traditional search will see a 50% step up. It's common for the step up to be at least 50%, for the annual preferred rate to be 8-12%, and for the valuations to be lower than in a traditional SF deal. Those are some of the ways to equilibrate the two opportunity sets.
From the investor's perspective, (as a general matter) investing in self funded deals is riskier than investing in traditional search funds. The deals are smaller, there is more leverage, there is no way to get a majority stake in the deal, the CEO has fewer professional investors around them, less money is spent on diligence, and the list goes on. Investors will want to be compensated for that added risk. As Jonah mentioned, an investor in a traditional search will see a 50% step up. It's common for the step up to be at least 50%, for the annual preferred rate to be 8-12%, and for the valuations to be lower than in a traditional SF deal. Those are some of the ways to equilibrate the two opportunity sets.
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by a searcher
1yr ago
from Harvard University in Manhattan, New York, NY, USA
from Harvard University in Manhattan, New York, NY, USA
I've seen 2.0x mark-ups, and historically there have beenredacted0x ranges... at 2.0x it also seemed to be landing in the high ranges of IRR as well, and the return profiles made sense / were attractive at least anecdotally in the deals I've seen, i.e. it wasn't necessary to give more.
I think 2.5x and something like 3.0x should be replaced with better capital searching, I think trending towards 3.0x feels high....
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