In November 2024, we hosted a webinar in conjunction with Acquiring Minds. We gave a short presentation on cap tables in acquisitions and then answered questions from the audience.
Question Timestamps
- 05:23: What are the common situations, and what kind of market terms are we seeing out there for these types of situations?
- 13:51: So, in this case, they put in $1 million, which is 10% of the total deal value, but they’re actually getting 20% of the equity. This 2x step-up is the terminology used. You might ask, why does this happen? Why is this structure in place?
- 29:35: Is the cap table an abstraction, or is it something we can actually see? Does it look like a list of who owns equity in the business? People often say, “Can you show me a cap table, please?”
- 31:08: James David, I heard you mention some tools, but I got distracted by the questions. Did you name any of them?
- 32:28: What are you seeing in terms of industry norms or standards around certain figures, specifically the liquidation preference rate and step-up?
- 34:29: Regarding negotiating these figures with investors, someone asked, what are the negotiation levers that favor the searcher? I assume a strong deal is key; if you have a great deal, you have a stronger negotiating position. Anything else not as obvious?
- 39:06: Are the preferred return, pre-money valuation, and step-up offered to friends and family, or not really? Bill, I think you said they’re often grouped into the common equity with the primary investor. Are they usually okay with that, or do they get different terms? How do you handle it if they later learn about different terms?
- 42:15: For professional investors, leaving aside friends and family, say I have a great deal with a step-up set at X. During the fundraising, if demand surges, can I raise or lower the step-up for subsequent investors so they don’t receive the same terms as early investors? What are the norms and ethical considerations around this?
- 44:40: What’s the best way to structure a partnered search to avoid doubling up on the loan personal guarantee, side agreements between partners, different types of ownership vesting, stock redemption, etc.?
- 47:58: With a step-up—taking your example, Bill—if it’s a $1 million investment in a $10 million deal with a 2x step-up, my $1 million gives me 20% of the economic value. Does that trigger a personal guarantee for the investor?
- 50:09: Could you give a quick 60-second review of what it is? I think there’s some confusion about whether it’s the step-up or IRR used in the deal’s marketing. Could you clarify in 60 seconds?
- 53:42: Why don’t investors like that, James David? From an investor’s perspective, why wouldn’t I want to get all my money back as soon as possible?
- 55:42: So, I know there’s a way for me to get my money out; I just know that I have that as a backstop. But is there a call option where searchers can require me, as an investor, to sell my stock back?
- 58:36: Does any of the preferred return paid contribute to the principal investment balance?
- 1:00:16: Do investors like to see a specific percentage of the searcher’s own money in the deal? If I’m buying a business with a $5 million enterprise value and raising $500,000 to $1 million for the down payment, what’s typically expected for “skin in the game” from the searcher?
- 1:05:08: Can you explain the Phantom equity story? What happened, and why wasn’t it triggered?
- 1:07:03: I’m about to acquire a business where a key employee owns 3%. What are some ways to structure the acquisition to ensure this employee stays engaged and incentivized?
- 1:09:12: This might only apply to successful search businesses, but how does the cap table change if a second round of investors enters at a different valuation? This would be a recapitalization, correct? Let’s assume it’s been two years since the initial fundraising.
- 1:11:19: How often do you see general partner-limited partner (GP-LP) structures in small business acquisitions? Could you provide some context for this structure, typically seen in private equity or real estate?
Workshop Handout
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