Negotiating preferred equity terms requires careful consideration of various factors that can affect the interests of both the investor and the joint venture partner. Investors that choose to participate in this area of the equity stack (special financing) are looking for quick return of capital and safer, lower returns.
Relevant Template:
Here are some steps to follow:
- Understand your goals and interests: Before entering into negotiations, it is important to identify your goals and interests. What is the minimum return you are seeking? What are your risk tolerance and investment horizon? Understanding these factors will help you determine the terms you need to negotiate.
- Conduct due diligence: Conducting due diligence on the joint venture partner and the underlying assets is crucial to understanding the risks and potential returns of the investment. This will help you identify any issues that may need to be addressed in the negotiation. Find your leverage and use it to dictate terms.
- Identify the key terms: The key terms of a preferred equity investment include the preferred return rate, liquidation preference, conversion rights, and voting rights. It is important to identify which terms are most important to you and prioritize them accordingly.
- Assess the bargaining power: Assessing the bargaining power of each party is important to determining the negotiating strategy. If the joint venture partner has more bargaining power, you may need to be more flexible in your negotiation. If you have more bargaining power, you can be more assertive in your demands.
- Propose a term sheet: A term sheet is a non-binding document that outlines the proposed terms of the preferred equity investment. This is the starting point for negotiation and should include the key terms you have identified. The term sheet should also specify any conditions or contingencies that must be met before the investment can be made.
- Negotiate the terms: Once the term sheet has been proposed, the parties can begin negotiating the specific terms. This may involve several rounds of negotiation until both parties reach an agreement.
- Draft the legal documents: Once the terms have been agreed upon, legal documents will need to be drafted to formalize the preferred equity investment. It is important to have these documents reviewed by legal counsel to ensure that they accurately reflect the agreed-upon terms.
Article found in Joint Venture.
