is the investor's investment considered debt?

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July 01, 2021

by a searcher from IE Business School in Madrid, España

Good afternoon,

I have a question maybe someone could answer.

Imagine a 2 million search fund company acquisition with the following structure: - 50% bank debt - 50% investors
From my knowledge, this 1 million given by investors is considered as equity in exchange for shares, not as a debt to be repaid in the future to the investors + shares.

Is this correct? Thank you!




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Reply by an intermediary
from The University of Chicago in Radnor, PA 19087, USA
As you described it, the investor's investment would typically be structured as equity so that the debt:equity ratio of the company is 50:50 at the time of the acquisition. However, as Seth said, it depends on the structure of the investor's investment. If they receive stock for their $1M, then it is equity. If the structure is, however, a structure such as convertible notes, then it would be booked as debt until it is converted into equity.
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Reply by a searcher
from Northwestern University in Evanston, IL, USA
In most cases it would be equity, but it all depends on the terms of the investors' investments. Their investments could be debt, equity, convertible debt that converts to equity after a certain time period or performance criteria are achieved, etc.
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