Thoughts on how investors think about personally guaranteed debt

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November 12, 2019

by an investor from Skidmore College in San Diego, CA, USA

Wondering if any investors or searchers have some thoughts on (or have run into situations where) by virtue of deal structure and/or who else is participating in the deal, specific investors are required to personally guarantee debt for a deal to get done. If so, would be curious how those investors are compensated for that additional capital at risk via preferred equity, distributions, or similar if they choose to participate.

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Reply by an investor
from Thomas A. Edison State College in Naples, FL, USA
If they want to own 20%+ based on what they're investing, just have them do a 10% equity grant with a penny rate option they can exercise any time down the road for the remaining stock they ideally want to own. You can have them exercise it a week after closing if you want. IE, they want to own 25%, you give them an equity grant for 10%, and a stock option for 15%. Email with any questions, I've done several SBA acquisitions myself. redacted
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Reply by an investor
from Thomas A. Edison State College in Naples, FL, USA
The easy way around this is with exerciseable options, ie they are granted 10% equity for their capital, with options to buy 10-15% more (for this example) at some nominal penny price/share. This get's around the 20% threshold that normally will require PGs. I've heard of Live Oak getting around it with some unique LLP structures where limited partners own greater than 20%, but you'd have to speak to them about that to learn more.
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