Redeemable Preferred Stock in Financing Structure

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August 16, 2021

by a searcher from Harvard University in Cambridge, MA, USA

Any searchers use Redeemable Preferred Stock in their Financing Structure?
Considering doing a deal (~$2mm EV) with Redeemable Preferred stock as part or all of the equity financing. Would love to connect with searchers who have used Redeemable Preferred in their financing structure.

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Reply by a searcher
from IE Business School in Seattle, WA, USA
Yes, I looked at a structure like this. I liked the benefit of essentially having a call option on buying out some or all of the investors over time and then keeping my equity without having to restructure or rollover. However options aren't free & your investors will probably make you pay for it in some way. I ultimately did not go this route because of some issues I ran into with my senior lender, but we had the shareholder documents all ready to go. It shouldn't be too complicated for an attorney that has done any securities work, i.e. startups. Feel free to send me an email redacted if you would like to discuss further.
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Reply by a searcher
from University of Pennsylvania in Seattle, WA, USA
I would also consider investor/searcher alignment in the discussion. With RP contracts, there is no incentive for the investor to hit a home run because they see no upside after the liquidation preference is met. Depending on any other terms, this can cause pressure to exit the business when they hit this number because any bigger exit will provide no additional return. I would consider looking at other ways to split the deal economics such as a waterfall where additional returns are provided to the searcher with bigger exits but investors are still participating in the upside and have incentives better aligned. Just my two cents.
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