Glossary - Equity Kicker
An equity kicker is a feature of a debt instrument that provides the lender with an option to purchase equity in the borrower at a later date, often at a discount. This feature is used as an incentive for the lender, combining the potential high returns of equity investment with the lower risk of debt instruments. Equity kickers are commonly found in real estate financing, venture debt deals, or in restructuring scenarios to add additional value for lenders and incentivize them to provide financing.
Also known as
- Warrant Coverage
- Equity Participation
- Convertible Option
Use cases examples
- Loan Agreement: The lender shall have the right, but not the obligation, to convert up to 20% of the outstanding loan balance into shares of the borrower's common stock at a 15% discount to the market price at the time of conversion, acting as an equity kicker.
- Venture Debt Agreement: In addition to the interest rate specified in the Agreement, the Lender shall receive warrants equal to 5% of the loan amount, exercisable at any time during the term of the loan, serving as an equity kicker.
Considerations for investors
- Risk and reward balance - Investors should assess the risk of the underlying loan against the potential reward from the equity kicker, including the likelihood of conversion.
- Valuation implications - The valuation at which equity kicker options can be exercised impacts the attractiveness of the deal. A lower conversion price increases the potential upside for investors.
Considerations for founders
- Potential dilution of equity - Founders should consider the impact of equity kickers on their ownership percentages, especially in scenarios where lenders exercise their options.
- Negotiating terms - It's critical to negotiate the terms of the equity kicker, such as the discount rate and the cap on the amount of equity a lender can acquire, to protect founders' interests.
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