How do self-funded equity distributions work?

by a searcher from University of Florida

7 months ago

Hi all,

I’ve reviewed a-lot of content on equity distributions on this platform, watched live oak’s webinar, and looked at other resources but I’m still having trouble understanding exactly how equity distributions work. 

I think a concrete example would help. Can someone please breakdown how distributions would typically work using these simple, illustrative parameters?

- Total equity investment: $500k, of which $100k is invested by searcher. All of this is treated as preferred equity with a 10% annual coupon 
- Investors require 30% IRR over 5 years 
- Searcher has 70% common equity 
- Annual cash available for distribution after debt payment is $500k
Searchfunder member

1 like
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7 comments

professional from Dartmouth College

The Preferred interest and capital value will be paid back first out of cash available for distributions (whether this is required or at the board's discretion is laid out in the operating agreement). This is after the company has satisfied its debt obligations, and it depends on whether the lender permits distributions under the loan agreement (usually ok if the debt ratio isn't triggered). So in your example it is the $500k plus the coupon. Typically the "common" you refer to is better expressed as a "carry" since it usually is preferable for tax reasons. If there is no catch up, after the preferred is returned, further distributions will be made 70/30 based on your split. Meaning the preferred participate alongside the carried interest. But as others suggest, this can be configured however you want in the operating agreement, which is one of the reasons why people use the LLC structure since it gies you maximum flexibility.

7 months ago | like reply | 1 like

searcher from Columbia University - Columbia Business School

I recommend watching the acquiring minds webinar on LBOs

7 months ago | like reply | 0 likes

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