What is the Equity Kicker?

Explanation

Equity kickers is an arrangements by lending companies in which a lender provides a lower interest rate and exchange ownership position in the borrower’s company. This concept also applies to the warrantsWarrantsA Stock Warrant gives the holder the right to buy the company’s stock at a predetermined price in a specific time period, and when the holder exercises the right, the holder buys the company’s stock and the company receives the money as its source of capital.read more attached to the bondsBondsBonds refer to the debt instruments issued by governments or corporations to acquire investors’ funds for a certain period.read more already issued, allowing investors to buy a certain number of the shares at a fixed price of the issuer.

These are the incentives designed to make it feasible for a business to secure funds through a borrowing system. A subordinated lender that distinguishes a high probability level from the proposed arrangement demands this instrument named an equity kicker. These arrangements are common in start-up projects to manage their finance. These are generally used with MBOs, LBOsLBOsLBO is the short form for Leverage buyout, which means that the other company is acquired by borrowing a large amount of money to meet the acquisition cost, and the purpose of these buyouts is primarily made larger acquisitions without blocking a huge capital and providing assets of the acquiring and the acquired company for collaterals for loans.read more, and equity recapitalizationsRecapitalizationsA recapitalization is a method of restructuring the ratios of various capital-generating modes, such as debt, equity, and preference shares, based on WACC and other company requirements, such as desired control level.read more.

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How Does it Work?

Companies use equity kickers to boost the growth of the company. It is organized where the lender has the right over equity ownership. It is specified to be paid at a future date or time when the company will accomplish its goal or get a sure profit to fulfill the lenders’ obligation. An equity kicker is majorly famous for start-up companies to manage monetary funds through it. In this equityEquityEquity refers to investor’s ownership of a company representing the amount they would receive after liquidating assets and paying off the liabilities and debts. It is the difference between the assets and liabilities shown on a company’s balance sheet.read more arrangement, the company will get funds for its growth at lower rates, and despite giving interest, they must give ownership in the equity fund to the lenders.

Example

Warrants are one example of equity kickers: Let us assume the debt is arranged as a warrant, where the lenders can purchase a certain number of securities for a future date at a specified price. The borrower can provide 12% warrant coverage on the lenders’ amount to the borrowing company.

Lenders Option

Lenders always play a vital role in the equity kicker. They provide financing to the borrowing company to help them achieve targets and specific performance. Hence, it will increase its value more than its fair market value. Lenders will get ownership in equity capital in terms of the exchange that only can be paid if liquidity arises. If liquidityLiquidityLiquidity is the ease of converting assets or securities into cash.read more does not occur, the lenders will continue as an equity position in the company. When the financial results are declared, they will get dividendDividendDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more benefits. Also, the lender will get their earnings to share proportionately to their equity ownership.

Seller Options

Generally, this arrangement has a similar effect as a takeback note: both provide to expand the sale price above the fair market price level. However, they can only be paid if a liquidity event occurs. For instance, a seller may receive an equity kicker when he sells the company in the preferred scenario. Perhaps an even more feasible option is for the seller to preserve an equity position in the traded company. That said position could be considered participating preferred, giving the seller access to regular dividends as a common dividend or proportion of earningsEarningsEarnings are usually defined as the net income of the company obtained after reducing the cost of sales, operating expenses, interest, and taxes from all the sales revenue for a specific time period. In the case of an individual, it comprises wages or salaries or other payments.read more, allowing the seller to access the organization’s upside potential post-deal. These arrangements are helpful for both sellers and buyers to meet in the middle.

Uses of Equity Kicker

An equity kicker is the easiest way to get credit from the lender at a shallow rate for its development. The borrowing company does not afford funding at higher interest rates, so it uses such kickers as a tool for fund management. It is used in start-up companies to manage early fund requirements for a successful business. It is also beneficial for the lenders to get ownership of their equity fund instead of interest. An equity kicker is used in real estate companies as a creative financial tool for investment purposes.

Equity Kicker in Real Estate

Real estate companies need more funds for investment purposes, so equity kicker is the best way to get funding through debt financing with the liquidity of funds. When the investor does not have the funds required for the investment purposes and completes the transactions related to businessTransactions Related To BusinessA business transaction is the exchange of goods or services for cash with third parties (such as customers, vendors, etc.). The goods involved have monetary and tangible economic value, which may be recorded and presented in the company’s financial statements.read more, they will choose this fund as a financing investment tool to ease the fund’s requirement. With equity kickers’ help, the lender will get ownership in debt and equity position specified in the particular property. In the case of a mortgage, the contact lender is guaranteed a share of the income retained through the property. So, this method is beneficial for lenders as well as borrowers.

Benefits

  • This arrangement of funds is beneficial for the early stage and start-up companies.This method attracts investors to invest in the company by making securities attractive from the investors’ perspective.This method is also beneficial for real estate businesses to create liquidity and meet loan requirements.An equity kicker is a traditional incentive to boost the industry by the term kicker. It can easily enhance the marketability of the borrower company.

Conclusion

An equity kicker is a traditional way of providing credit at a reduced rate to the borrower company; it will get ownership of the equity. Early-stage companies use it as a tool to access funds to manage their operations. It will also help investors earn trust through the lender’s company.

These kickers are used with MBOs, equity recapitalizations, and LBOs. Such types of transactions are considered risky to entice conventional forms of debt. However, subordinate lenders use the kickers to counterbalance them from the expanded risk of lending to companies with inadequate loan collateral. The kickers use this convertible feature for warrants or shares at a specified future date and can be prompted by liquidity events.

This article is a guide to what Equity Kicker is and its definition. Here, we discuss how it works, examples, uses, and benefits. You can learn more about it from the following articles: –

  • Growth EquityEquity MultipleDebt/Equity SwapEquity Interest