Glossary - Quasi-equity
Quasi-equity financing is a type of investment that combines elements of debt and equity financing, typically structured to provide flexible repayment terms without direct ownership dilution. Investors receive returns that are contingent on the business's performance, resembling equity, and may include options or rights to convert into equity at a later stage.
Also known as
- Revenue-Based Financing
- Convertible Loans
- Mezzanine Financing
Use cases examples
- Convertible Note Agreement: This convertible note acts as a quasi-equity instrument, allowing conversion into shares at the next funding round under predetermined conditions.
- Revenue-Based Financing Agreement: The investor will receive a fixed percentage of monthly revenues up to a certain cap, functioning as quasi-equity with variable repayment terms based on the company's financial performance.
Considerations for investors
- Quasi-equity positions the investor for potential upside through performance-linked returns or conversion rights, but also bears higher risk if the company underperforms.
- Due diligence should assess the company's growth trajectory and revenue predictability to evaluate the risk-return profile adequately.
Considerations for founders
- Quasi-equity may not dilute ownership immediately but could potentially do so in the future, especially if conversion rights are involved.
- The cost of capital might be higher than traditional debt due to the flexible and performance-based repayment structure.
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