Structuring Seller Equity

Hey - I've seen a few of these. I think the simplest structure is to offer to buy less than 100% of the company, whatever is left, rolls forward. Also simple is to offer, as part if the consideration, stock in your newCo with the same value as the target, except that it will be bound to your new operating agreement. You can also get really complex, though I have found for the types of targets I like, that you run a high risk of the seller not understanding a complex structure and losing alignment on the outcomes.

I want to start off by saying that every deal is a unique case, and that the structure will need to be fine tuned to what you are trying to accomplish. In one actual deal, I put an earn-out in my offer(LOI) first. Only then, I "acknowledged" the founder's openness to keeping a small equity stake in the business. This dynamic is better as a "non-compete" because it allows you to play on the escalation of small commitment. In another deal, I did the exact opposite: the fact that co-founders stay invested (at around 1/3 of the stake they were putting out for sale) was a conditions precedent of my LOI, This was a high-growth deal, so the upside on that third was as high as what they were getting on the stake they were selling. Because it was important that they stayed active in the operation of the company (most of the IP was "secret" rather than "patents") If you "accept" the founder's preference from the get go on those aspects, you should accomplish your first two priorities in the process: valuation, critical risk mitigation... All the best, Amine