Minority Equity Investor Terms

March 17, 2026

by a searcher from University of Pennsylvania - The Wharton School in New York, New York, United States

Hi everyone, Wanted to get folk's thoughts on setting up the equity stack in an SBA-funded deal. For instance, say there is $1M of equity capital need. The searcher is planning on providing $900K of capital. For the remaining $100K, what would be marketplace terms for the equity waterfall? The $100K in this case would be filled with strategic investors who have industry or operational knowledge rather than just generic passive investors. I generally understand that a lot of structures could work and what's important is back-solving to a ~30-35% IRR for the minority investor, but curious about specific structures that people have found success with. One structure I've seen is the $1M of equity could be structured as preferred equity with a PIK interest rate and/or a 1.5x step-up (of which the searcher owns 90% of the instrument) and then the searcher shares in the equity upside 65-70% with the preferred equity getting the remainder. Are there other ideas that make sense for having an advisor invest a small portion of the capital in a deal?

Reply by an investor
from Columbia University in Fairfax, VA, USA

You're likely going to want to use a standard Participating Preferred structure with a 1x liquidation preference + 1.5-2.5x equity step-up multiple + 10-12% preferred equity rate. The kicker is going to be your decision to use the Project Cost Method (PCM) or the Equity Method (EM) to determine how the company ownership split is calculated. EM is standard. But PCM is unique to Self-funded Search deals, because the specific mechanics of Self-funded can support a 30-35% IRR (assuming you have a solid deal). PCM will likely result in the Searcher retaining more ownership. If you have any questions, feel free to DM me.

Reply by an investor
from American Military University in Jessup, MD, USA

Our model is a little different since we raise capital in our HoCo for shares (going public is the exit strategy), but for a few deals we are working on, we are going to offer 10-15% equity stake in that specific entity with a buyout option in 2-3 years at a multiple of their original investment. We negotiate that on a deal by deal basis.

+1 more reply.

Join the discussion