What is an Equity Kicker?

An equity kicker is an incentive offered to lenders and other investors in a deal. In exchange for their investment, they receive a small ownership stake in the project that is being financed. This ownership stake will return profits later for the lender. For the investor, equity kickers can sweeten a loan deal and in exchange they may lower the interest rate or provide more generous terms. These types of arrangements are beneficial to all parties involved in the transaction and they are quite common in some regions and industries.

A common example of an equity kicker can be seen in real estate development. In exchange for lending money to finance the development, investors can receive an equity share in the development. When the development is sold, they receive a share of the proceeds that is based on how big their ownership stake is. Sale proceeds can be significant when a development is well planned.

If concerns about repayment are an issue, lenders generally will not offer loans or extend lines of credit, and they have ample documentation to review when making lending decisions that will allow them to evaluate a candidate for a loan with care. The equity kicker is not designed to encourage reluctant lenders, but rather to provide lenders with an incentive and to create a negotiating tool that can be used to get a lower interest rate or agree on more favorable repayment terms. It is structured into the financing agreement and may require a customized contract.

People who are offered an ownership position as part of a deal may want to review all available information about the project to estimate the value of the equity being offered. If the offer is favorable, considerations about concessions in return can be discussed so a contract can be developed. Lenders are not required to accept equity kickers or to offer anything in return for the ownership stake and if the parties involved cannot reach a deal, the financing can proceed as it would in other cases without an equity kicker.

Members of teams looking for project financing can consider offering an equity kicker as an incentive to investors and lenders. Things to consider when developing the offer include the need to retain enough ownership in the project to be able to repay loans from the profits, and the need to maintain a controlling ownership in a project.