Equity deal structure with investors
April 11, 2023
by a searcher from University of Applied Sciences in Hamburg, Deutschland
I enjoyed reading this article last weekend. It answered a lot of my pending questions about how to structure preferred equity structures. It gives better examples than the standard literature around profit sharing and some interesting personal thoughts from the author about governance.
https://bigdealsmallbusiness.substack.com/p/equity-deal-structure-updated
from The University of Chicago in Chicago, IL, USA
In the PE world the LP gets return of capital + the hurdle rate. and then the GP/LP split is 20/80.
In the SF world, the Searcher gives PG (no PG in PE) and hence there should be some compensation for that.
There are other arguments on both sides:
a) PE has experience; most searchers are first time buyers
b) PE managers are subject to massive personal DD by 3rd parties engaged by the LPs; the Searcher is not subject to that.
c) the investors in SF do not have investment opportunities like LPs do,
d) SF investors, many of them, are value-added investors, whereas LPs are capital providers.
e) PE has bench strength; searcher does not.
I have been subject to personal DD by LP while forming a $150 M fund. I am also an investor; in one deal (P=$15 M) all equity providers (no LP) had proportional equity. The main person (Searcher/CEO with deep PE experience) put up 30% equity had 10% kicker on waterfall. It was 28x return in 8 years.
from Dartmouth College in Los Angeles, CA, USA