Equity KickerDefined along with Examples

Lisa Borga
Last Updated: May 10, 2022
Date Published: May 10, 2022

What is an Equity Kicker?

An equity kicker, also known as a kicker or equity sweetener, is an equity incentive scheme in which a lender will give credit at a lower rate of interest and, in return, obtains an equity position in the business borrowing the money.

The equity sweetener will be set up as a conditional reward; the lender will receive equity ownership, but it will be given some time in the future when the business has attained the specified performance goals.

Equity Kicker

equity kicker

Equity kickers are useful for early-stage companies trying to obtain financing.

It can be hard for these companies to obtain investors due to the fact that they are new and, therefore, might have difficulty getting investors to trust them.

Equity kickers are generally used with MBOs, LBOs, as well as equity recapitalizations.

This occurs because these transactions are thought to be risky and, therefore, unlikely to be able to obtain traditional forms of debt.

Because of the increased risk of lending to a business that does not have sufficient collateral for traditional loans, subordinated and mezzanine lenders use equity sweeteners as a way to get compensated for the increased risk.

These equity kickers can be exercised at some point in the future when a liquidity event or a sale occurs.

How Do Equity Sweeteners Work?

Businesses will use an equity sweetener in order to encourage lenders to buy preferred shares or bonds from the business for reduced interest rates.

The lender could potentially obtain an equity sweetener of anywhere from 10% to 90%. The kicker will depend on the level of risk for the portfolio.

If a borrower includes an equity incentive as part of the terms of the debt provided by the lenders, the incentive would be called a kicker.

This agreement would give the company a low-interest rate, but the lenders would obtain equity in the company, which they could exercise in the future whenever a liquidity event happens.

Equity Kicker Uses

Generally, companies that choose to offer an equity sweetener option as part of a debt agreement are not able to obtain credit from more conventional lenders.

Most lenders want to lend money to businesses with sufficient cash flows to pay the loan along with adequate assets to work as security to back the loan.

Therefore, typically companies that offer equity sweeteners are early-stage companies or start-ups that have not yet accumulated sufficient assets.

So, they offer an equity kicker to attract investors that would normally be unlikely to lend money to their business.

Equity Ownership Example 

Suppose Company A has a start-up company that makes handcrafted wooden storage chests.

The company wants to open a new facility to increase its production.

However, the business cannot obtain a traditional loan due to being considered high risk.

The company wants to raise $500,000 for the new facility.

However, it can only raise $200,000 from retained earnings.

So, Company A intends to offer 15% equity in the company for each $150,000 investors loan the company.

Company A finds two investors, each of which is willing to loan the company $150,000.

So, each of the investors will receive an equity sweetener of 15% in Company A.

But, the investors will only have the right to exercise the right to acquire the stock should the company be sold.

Warrant Example 

equity kicker

Suppose a business decides to structure its debts as a warrant, thus allowing its lenders the option to purchase a specified amount of stock at a certain price on a future date.

As an example, the company might provide 15% warrant coverage for the amount each lender supplies the company.

Suppose the business received $100,000 in loans from Bank A and $150,000 from Bank B.

Bank A would receive $15,000 in warrants, and Bank B would receive $22,500 in warrants for the business’s stock.

Equity Kicker Options

Lenders give loans to companies to help them meet certain performance goals and to increase the company’s value.

For doing this, lenders are given equity in the company, which will be paid if the company reaches certain performance objectives or it has a liquidity event happen.

If these events do not occur, the lenders will just maintain the same equity position.

Because the lenders are equity holders, they do receive dividends when the company pays out dividends along with earnings that are based on their percentage of ownership in the business.

The lenders will also be paid first should the company reach a certain previously agreed upon earnings potential or if the owners sell the business.

Real Estate Equity Sweetener

Equity sweeteners are also an option for individuals or businesses that wish to invest in real estate but do not have sufficient collateral for a loan and yet are expected to be able to pay off the loan with their future earnings if they can borrow the money they need for their plans.

An equity kicker provided by the borrower that gives a lender a share of the income generated by the property may cause a lender to be willing to give a real estate loan at a lower interest rate.

The equity sweetener can be set up so that the lender will obtain a percentage of the income from the property if it surpasses an agreed-upon amount.

It could also depend on an event occurring in the future, such as the property being sold, in which case the lender would receive a part of the proceeds from the sale based on the percentage of equity they own in the company.

As an example, suppose an investor borrowed $2 million to buy an apartment building.

The investor used the funds from the loan they obtained to buy and upgrade the apartments in order to rent them out.

Once the apartments are upgraded, they are valued at $3 million.

If the investor gave the lender an equity sweetener of 15% to obtain the loan, the lender would receive 15% of the increase in the value of the apartment building when the building is sold.

FundsNet requires Contributors, Writers and Authors to use Primary Sources to source and cite their work. These Sources include White Papers, Government Information & Data, Original Reporting and Interviews from Industry Experts. Reputable Publishers are also sourced and cited where appropriate. Learn more about the standards we follow in producing Accurate, Unbiased and Researched Content in our editorial policy.