Capital Finance - The Investor's Financial Requirements
An investor making a capital investment in your company will normally seek to obtain an appropriate combination of return and security. Hence he will usually require a mixture of ordinary shares (equity); preference shares or loan stock (mezzanine finance); and medium/long term loans (senior debt).
This combination is intended to provide the investor with an overall return over a fixed period comprising an increase in the value of his equity interest, dividend income and the repayment of loan principal and interest.
Equity investors may take anything from substantially all the equity to a small stake. Often the division of the equity between the investor and existing shareholders may be capable of being adjusted depending on the company's performance so that a greater proportion is given to existing shareholders/management if the company exceeds expectations and less if it does not (the ratchet or escalator).
Preference shares usually carry fixed cumulative dividends and are repayable at their nominal capital value but do not participate in the growth in value of the company. Loan stock is used on the same basis as preference shares but is considered to be debt which means that it will rank higher in terms of repayment if the investment turns sour. Both preference shares and loan stock may be convertible into ordinary shares under certain circumstances to provide the mechanism for the ratchet.
This is long term capital borrowing secured by your business assets. It may well be repayable over a five to seven year period. An interest rate based on a number of percentage points above the banks base rate or LIBOR is common. The terms offered and sought by investors are by no means standardised and are governed by commercial forces. Professional advice is critical to assist you in negotiating the deal.