How does the 1.5x step up on investor capital at acquisition work?

searcher profile

January 09, 2020

by a searcher from INSEAD in Geneva, Switzerland

Hi Searchfunders,

Looking to understand what happens in practice when the search capital is rolled into the acquisition at 1.5x the value.
And who funds the 1.5x return if an investor decides to not invest in the acquisition (and just keep the 1.5x return)?

Thanks!

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commentor profile
Reply by a searcher
from Texas Tech University in Houston, TX, USA
Hypothetical example: A searcher raises $500K as search capital to identify and evaluate potential acquisition targets. The agreement with investors states that if the searcher successfully acquires a company, the search capital will be rolled into the acquisition at 1.5x the initial value.
Acquisition Details: The searcher identifies and buys a company with a purchase price of $20 million. The search capital of $500K is rolled into the acquisition at 1.5x, resulting in $750K (1.5 times the initial value).
Funding the 1.5x Return: If an investor decides not to participate in the acquisition and chooses to keep the 1.5x return, the $750K return would be funded from the overall deal value. The funds for this return could come from a combination of equity and debt financing used to acquire the company.
Outcome for the Investor: The investor who opts not to invest in the acquisition receives the agreed-upon 1.5x return, which could be structured as a fixed cash payout or a combination of cash and equity in the acquired company. Example Calculation: Initial investment: $500K 1.5x return: $750K Total value received by the investor: $1.25 million (if structured as equity, this might be in the form of preferred equity in the acquired company)
commentor profile
Reply by a searcher
from Northwestern University in Charlotte, NC, USA
From what I've seen most commonly, the search-stage investor gets equity at that value. If one invests $10K and 'rolls' it into the deal, they'll get $15K in equity value (usually preferred). If you raised $500K for search and buy a company for $20m cash/all equity (for simplicity), your cap table would have $20m of preferred from acquisition round investors + $750K of preferred from rolled search capital (all else equal, all search capital spent, nobody redeems/sells search capital at acquisition). That $10K roll gets 15K/20.75m ($ or some multiple in shares), then that $15K worth of shares grows at the preferred rate until repaid, and has claim on its share of the common. In reality, something this small would likely be 'cleaned up' or bought out at close and you'd write a $15K check to that investor and have one less investor in your cap table. Keep scaling!
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