Financing Innovation: The Rise of “Dequity”
I was talking with a banker the other day and he used a term that I hadn’t heard before but made a lot of sense. He said, they make ‘dequity’ investments. What he meant was they make loans, but the risk they take and the way they look at underwriting loans is similar to an equity investor, and the cost of that capital is much higher than a bank (often between 15%-30%), but it allows companies to get additional capital without giving away the most precious thing owners want to preserve: their equity.
In a way ‘dequity’ type loans have been around for a long time. Mezzanine financing and/or subordinated debt is one type. Its been pervasive since the 1980s and those types of products typically combine both debt and equity into a single investment instrument where it consists of a term loan with an interest rate PLUS takes some equity (i.e. shares) or ‘warrants’ to buy equity. Through this structure, the investor is getting returns from both an interest rate and additional upside by owning some of the Company’s equity. This is often called an investment return ‘kicker.’ Typically, when this type of structure is compared to traditional venture capital or private equity options, the business owners is able to preserve much greater equity or ownership because a large part of the investors’ return is earned through an interest rate. Again this type of instrument has been around for a long time.
Today’s newer “dequity” providers are going even further offering to provide equity-like capital but structured purely as a debt instrument with no equity component (stock or warrant). Also these instruments often have no financial covenants so owners aren’t likely to trip a covenant or lose control of their company. These instruments also offer a longer term for repayment (up to five years) unlike merchant debt loans which charge high rates with short pay back periods which can be 9 months or less. Some “dequity” instruments offer creative repayment options such as revenue based financing, where the repayment of the loan is based on a pre-determined % of monthly revenue until the total return is paid back (then the instrument and the repayment obligation is completed). At the point the company has no further repayment obligation and has given up no equity. We helped a client secure this type of capital and it ended up saving the owners 30% of their equity as compared to venture capital alternatives. ”
So if you are thinking about capital and want to keep control of your business consider ‘dequity’, it may be the solution you are looking for!
Past Client Testimonial
|Don BeckDelta Data Software, Columbus GA “Lantern helped us secure creative financing to fund new product development. Lantern introduced several different options and did a good job of helping us analyze each.”|