Equity Kicker

An equity kicker is an equity incentive scheme that helps an entity to encourage the investors (mainly privately placed investors) to improvise the return and purchase of debt securities such as bonds and preferred shares in combination with an equity (to attain ownership at a later date) instrument at a reduced rate of interest.

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.

• An equity kicker refers to an equity incentive scheme that aids an entity in encouraging the investors to improve the return and debt securities purchase like bonds and preferred shares with an equity instrument at a reduced interest rate.
• This concept also applies to the warrants attached to the already issued bonds, allowing investors to purchase a certain number of the shares at a fixed price from the issuer. 
• Equity kickers are the arrangements joined in start-up projects to manage their finance. Generally, one uses these with MBOs, LBOs, and equity recapitalizations.
• The borrowing company needs to manage funding at higher interest rates. Hence, it uses such kickers as a tool for fund management.

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 warrants attached to the bonds 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, LBOs, and equity recapitalizations.

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 equity 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.

Let us understand the concept of equity kicker venture debt with the help of some suitable examples as given below:

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 liquidity does not occur, the lenders will continue as an equity position in the company. When the financial results are declared, they will get dividend benefits. Also, the lender will get their earnings to share proportionately to their equity ownership.

Seller Options

Generally, this arrangement of equity kicker venture debt 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 earnings, 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.

The concept has a number of uses in the financial market as given below:

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.

Real estate companies need more funds for investment purposes, so equity kicker real estate 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 business, 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 of equity kicker real estate is beneficial for lenders as well as borrowers.

Let us look at some of the important benefits of the concept.

• 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. It also aligns the investor’s interest with the business. Investors. Investors who have equity stake will also have interest in the growth of the business.
• The investors can benefit from rise in the value of the asset leading to rise in investment value. This increases equity ownership and result in profits.
• It encourages investment for long term where investors will stay invested and patiently wait for the business to grow.
• It is also a compensation for taking risk. The riskier the investment, the higher is the possibility of profits.
• This concept is very useful during events like raising capital for company through Initial Public Offer (IPO) or sale of business. Equity investor can participate in such situations and get financial gains.
• It is a very good alternative to financing using debt. Debt financing puts the company under the obligation to pay back the loan to the investors and pay a fixed amount of interest on a regular basis. This method helps in case the business has less assets that can be used as collateral or is not so stable financially.

However, the process also has some disadvantages. It leads to the dilution of investors who are equity holders. There may also be some conflict of interest. So, investors need to invest in the pros and cons of the investment process before investing.

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.

This article is a guide to Equity Kicker and its definition. We explain it with example, its role in real estate, uses and its various benefits. You can learn more about it from the following articles: -

• Growth Equity
• Equity Multiple
• Debt/Equity Swap
• Equity Interest