Advice on equity structuring with family & friends

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January 11, 2022

by a searcher from University of Pennsylvania - The Wharton School in Austin, TX, USA

Am considering a deal ~$5M enterprise value = ~$1M equity + ~$4M debt from SBA7(a) I would be putting up $200K while family/friends putting in $800K. In my opinion, I should own more than 20% of the company - how should I structure/ set this up? (I would be running the company as my full time day-to-day while others passive investors)

A few ideas I've heard: (a) there is some kind of ‘promote’ structure – perhaps ~~30% to the founder for deal generation and management (b) investors of the $800K get 50% preferred shares w/ an 8% PIK + 50% common shares (c) include a buyout clause for the ability to buyout existing equity investors at 2X within the first 36 months with 8% PIK

Thanks for any thoughts and/or resources! Just entering searchfund land so apologies if this is an elementary Q from a structuring POV

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commentor profile
Reply by a searcher
from University of Florida in Boynton Beach, FL, USA
Check out these two presentations from Steve Ressler & Alexander Mears. Great info on market terms and structuring that mirrors Jason's comment above. You're being paid for your role as sponsor, investor, CEO, and personal guarantor on the loan. My understanding is at this deal size, it would be market for you to keep majority ownership as long as your investors have the returns they want.

https://www.searchfunder.com/event/view/280
https://www.searchfunder.com/event/view/386
commentor profile
Reply by a professional
from Dartmouth College in Los Angeles, CA, USA
You can structure it as an LLC where you have profits interest that would reward you over time if the company is profitable to increase your take. If you're not an experienced operator I would stay away from management fees. If they are getting preferred units, you should also get the same since you are putting in real capital. Otherwise I would say don't make it too complicated early on since you'll incur unnecessary transaction costs.
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