Is payback of preferred stock interest/investment deferred or non-deferred?

by a searcher from Cornell University - SC Johnson College of Business

Feb 03,2023

When offering preferred stock to investors as a self-funded searcher, which of the following is the most common?

1) Defer preferred stock interest payments and investment payback until sale of company
2) Pay back as cash becomes available 
3) Pay just the interest as cash becomes available and defer paying back the investment portion until the company is sold

Also, in any of these cases, if the interest and investment are paid back, does the stock usually convert to common at that time? Are  future dividends then split according to common equity %?  

Looking for some examples of this or for lawyers who have created term sheets for self-funded search investors. Thank you.

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searcher from University of Pennsylvania - The Wharton School

There are many ways to structure this but i would suggest you keep the following points in mind. As stated previously the Preferred dividends have priority on payout. if your cashflows allow It is to your benefit to pay rather than accumulate these dividends to avoid compounding . The same applies to the principal which will act as debt on exit as far as the common equity is concerned. Once converted to common, assuming it is not extinguished, the sharing is as per common equity split.

02/05/2023 | like reply | 1 like

searcher from University of Virginia-Darden - Darden School of Business

Lots of ways to do it; speak with a lawyer experienced in the SF space and they will give you the basic waterfall plus the variations that might be beneficial

02/04/2023 | like reply | 1 like

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