12 factors that can help independent sponsors negotiate above-market terms with their equity investors:
1. A low valuation. Creates value on the frontend that translates directly into the base case projection and also lowers the equity need.
2. Skin in the game. You're not only on the ground, but you're investing meaningful cash.
3. Track record. You've done deals, you've had good exits.
4. Operational involvement. Dedicate a lot of your own time, on the ground.
5. Retail investors. People with less access and involvement may accept higher fees (or not know any better).
6. High leverage. Then you just need a small sliver of equity.
7. Small deals. The capital raises are smaller, which makes retail financing more viable. If you are raising $2m, you can get ~millionaires nextdoor. If you're raising $15-20m, that's going to be harder to do whenyou only have 90 days under LOI.
8. Assets with cash yield. Early, stable dividends and quick paybacks are highly valued (as opposed to most base cases which show no dividends & exit/liquidity after 5 years). Upside less important if investor gets their money back quickly.
9. Add-on strategy. If you're doing add-ons once or twice a year, every time could be an opportunity to revisit the balance sheet & investor terms.
10. Investor relationships. Ideal if relationships are in place, trust is already there.
11. Backload sponsor economics. No closing fee, small management fee, steeply tiered carry can help justify a high upside scenario compensation.
12. Solid target company. Stable revenue and effectively a low downside carry lower risk. Hey, what's the worst case that can happen? Well, I'm not going to lose my money at least, right? And that's always easier for an investor to get into even if the upside isn't that strong.
Check today's new episode of the Minds Capital Podcast (YouTube, Spotify, Apple Podcast) with Nick Haschka.
