How does the 1.5x step up on investor capital at acquisition work?

Hi, This is a great post. One thing that i'm not super clear about. So you buy a 20m company (enterprise value) but you have 20.75m in equity value in the company? (because of the 750k step up), how does that work out?

From what I've seen most commonly, the search-stage investor gets equity at that value. If one invests $10K and 'rolls' it into the deal, they'll get $15K in equity value (usually preferred). If you raised $500K for search and buy a company for $20m cash/all equity (for simplicity), your cap table would have $20m of preferred from acquisition round investors + $750K of preferred from rolled search capital (all else equal, all search capital spent, nobody redeems/sells search capital at acquisition). That $10K roll gets 15K/20.75m ($ or some multiple in shares), then that $15K worth of shares grows at the preferred rate until repaid, and has claim on its share of the common. In reality, something this small would likely be 'cleaned up' or bought out at close and you'd write a $15K check to that investor and have one less investor in your cap table. Keep scaling!