Deal Structuring

Question & Answer

What financial risk management strategies do you recommend when structuring deals?

As an investor, financial risk mangement when structuring a deal is crucial. The tools and strategies you use will depend on the specific type of deal you’re involved in. Here are some effective methods to manage financial risk:

Sell-Back Clauses (Put Options)
For cash-for-equity deals, consider incorporating a sell-back clause, also known as a put option. This clause allows you to sell your shares back to the seller or the company within a specified period if you are dissatisfied with how the company is being run. This option provides a predetermined exit strategy and price, safeguarding your investment.

Liens or Guarantees on Debt
When investing with debt or using debt as part of the deal structure, you can reduce financial risk by requiring additional collateral. This could be in the form of liens or guarantees from third parties. Another way to protect your investment is by securing seniority for your debt, giving it priority over other debts in case of default.

Preferred Stock
Investors can opt for preferred stock, which takes precedence over common stock regarding dividends and asset liquidation. Preferred equity often includes preferential treatment in liquidation or sale scenarios, offering an added layer of protection.

Anti-Dilution Provisions
Ratchets are anti-dilution provisions designed to protect investors from dilution in subsequent funding rounds. If new shares are issued at a lower price than the original investment, a ratchet adjusts the investor’s share count to maintain their ownership percentage or value.

Earn-Out Agreements
Earn-out agreements allow you to pay part of the purchase price upfront and the remainder based on the business’s performance after the acquisition. This structure aligns both parties’ interests and protects you from overpaying if the business underperforms.

Control Provisions
In certain situations, you might negotiate an option to gain control of the company if specific financial targets are not met. For example, if the company fails to generate a profit for three consecutive years, this could trigger a change of control, allowing you to take over the company.

Liquidation Preferences
Including liquidation preference clauses ensures that investors get their money back before common shareholders in the event of liquidation. This clause significantly reduces the potential for loss if the company fails.

Financial risk management is all about protecting your downside. By employing these strategies, you can structure your deals in a way that minimizes risk and maximizes your potential

Deal Structuring books

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