Question & Answer
What Are Some of the Ways a Deal Can Be Structured?
Structuring a deal isn’t just about setting a valuation and agreeing on ownership percentages. Deals can take many forms, each tailored to the specific needs of investors, founders, and stakeholders. Whether you’re looking to minimize risk, maximize control, or create a win-win scenario, the right structure can make all the difference.
Cash-for-Equity: The Simplest Model
One of the most common deal structures is the straightforward cash-for-equity model. Investors provide capital in exchange for a percentage of ownership in the company. It’s simple, transparent, and easy to execute.
Example: An investor provides $500,000 for a 20% stake in a startup. The money goes directly into the company, funding its growth and expansion.
While this structure is simple, it often results in founders giving up significant control, especially in later funding rounds.
Convertible Notes: Deferring the Valuation
Convertible notes allow investors to lend money to a company with the option to convert it into equity at a later stage, usually at a discounted rate during a future funding round. This is useful when valuation is uncertain.
Example: An investor lends $250,000 to a startup via a convertible note, which converts into equity during the next funding round at a 20% discount.
This structure allows startups to secure funding without immediately negotiating valuation, reducing early-stage friction.
Venture Debt: Maintaining Ownership
Not every investment needs to be structured as equity. Venture debt allows companies to raise capital while avoiding dilution – or at least very little of it. Investors provide loans with interest, often secured by company assets or future revenue.
Example: A company borrows $1M in venture debt, agreeing to pay back the loan with 8% interest over five years. In exchange, the investor may receive small equity warrants for additional upside.
Venture debt works well for companies with predictable revenue, allowing them to scale without giving up ownership.
Deferred Payment Deals: Pay Over Time
In a deferred payment deal, an investor agrees to buy shares but pays for them over a set period rather than upfront.
Example: An investor buys a 20% stake for $100,000 but pays in $10,000 installments over ten months.
This structure helps investors manage liquidity while securing a stake in a growing company.
Equity Kickers: Combining Debt and Equity
An equity kicker combines debt financing with an additional equity incentive, ensuring investors gain upside potential.
Example: An investor provides a $500,000 loan with a 10% interest rate but also receives 5% equity in the company.
This approach reduces risk for the investor while still offering long-term ownership potential.
Milestone-Based Investments: Performance-Linked Funding
Milestone-based deals release funding in stages, with each tranche tied to the company achieving key business objectives.
Example: An investor commits $2M but releases $500,000 at a time, contingent on the company reaching specific revenue targets.
This structure ensures accountability and aligns capital deployment with growth metrics.
Revenue-Based Financing: A Non-Dilutive Option
Instead of giving up equity, some companies use revenue-based financing to raise capital. Investors receive a percentage of revenue until a set return multiple is met.
Example: An investor provides $300,000 in exchange for 5% of monthly revenue until they receive a total of $600,000.
Unlike equity deals, this approach aligns investor returns with company performance without impacting ownership structure.
Guarantor Deals: Using Collateral Instead of Cash
Instead of direct investment, investors can act as guarantors for company loans, reducing dilution.
Example: An investor guarantees a $500,000 bank loan for a company in exchange for 10% equity and a commitment to be released from the guarantee within three years.
This approach helps companies secure funding while limiting dilution for both founders and investors.
Deal structuring is as much an art as a science. The best deals align incentives while managing risk, allowing companies to grow without unnecessary dilution or financial strain. Whether using equity, debt, or hybrid structures, the right approach depends on the specific goals of both investors and founders.
In Deal Structuring, I break down cases where different frameworks were used effectively. The best deals aren’t just about capital – they’re about creating structures that drive long-term success.
Deal Structuring
Buy the book today and dive into practical techniques that empower you to get started immediately, navigating transactions efficiently and maximizing your success in minimizing cash requirements.
In this book, you will:
- Be introduced to the fundamentals of deal structuring
- Learn 19 proven deal models for structuring deals
- Discover 39 key elements of deal nuances
- Access 32 actionable clauses for your term sheets
- Explore 9 specific deal structures
- Receive 257 pages of invaluable insights
- Gain the distilled expertise of 20 years