Structured Equity 101: What Investors Should Understand

Last updated on October 10th, 2024 at 03:11 pm

Millions of people have thousands of ideas about what new business they can start. Fewer than a million might be serious, and only a couple hundred are serious about acting on those ideas. And when these passion-driven entrepreneurs are about to work on their ideas, the most important hurdle comes before them: financing. So, as an entrepreneur, what are your options? You can go for traditional bank loans, approach investment banks, or raise it by debt or equity, where you must share your business with the investors.

That’s where structured equity comes into play. Structured equity is a financing option that allows you to get the capital you need to start your firm without sharing your ideas and business ownership with others. What does it mean? Investors get the opportunity to invest in your firm but don’t have the authority to make business decisions; that power will reside with you and your partners.

In this guide, we will study everything one should know about structured equity, from its meaning to how it works and why it might be the perfect fit for both investors and businesses.

READ MORE 7 Key Differences Between Structured Equity and Traditional Equity Every Investor Should Know

What is Structured Equity?

Structured equity is a hybrid finance tool that combines debt and equity features. It allows investors to purchase shares of a firm with the safety features included in debt agreements. Structured equity is designed to balance risk and reward for both entrepreneurs and investors.

Structured equity finance comes with specific guidelines for parties that outline the rights and obligations both have to follow. The terms and conditions are customizable, giving investors and entrepreneurs more flexibility and making it more attractive to many people.

Features of Structured Equity

• Flexible Terms: This type of financing is adaptive, which means it can be customized per the needs of investors and entrepreneurs to satisfy their goals.
• Investor Protections: Structured equity typically has provisions to protect investors’ interests. These could include giving them priority over common stock shareholders in the event of liquidation or having the right to transform their equity stake into debt with certain conditions.
• Potential for Upside: If the firm performs well, it can give investors a significant return. This potential for massive capital appreciation makes it more attractive to investors.
• Mitigation of Risk: Structured equity includes a built-in safety system. Therefore, investing here doesn’t involve capital risk, as there would have been if the money had been invested in traditional equities. These qualities make Structured equity perfect for risk-averse people who still want to invest in equities.

Understanding Structured Capital

Structured equity is a hybrid financing option that helps entrepreneurs raise funds without diluting their authority to investors. Investors get a protected investment opportunity but with a lower potential return than traditional equity investments. This approach aims to strike a perfect balance between risk and reward and help both parties to reach their goal without compromising.

Structured capital can benefit new firms with fresh ideas, and they don’t want others to push their ideas back into traditional ways. So, investors who believe in the firm’s visions can invest in their ideas to grow their money.

Meanwhile, investors do not have control over management decisions and are therefore protected by equity investments. Structured equity could be a good option for investors looking to invest in equity without risk and remain non-management. Furthermore, it allows entrepreneurs to implement their ideas in the way they like. Structured equity can also help the firm survive in the market despite changing market conditions.

How Structured Equity Fits into Your Investment Portfolio

Structured equity may offer lower risk, but it’s important to consider your financial goal and whether this type of investment can help you reach it within a specific time frame. Here are some points for you to consider before you make the decision.

• Risk Capacity: How much capital can you risk in the market? Ask yourself this question to understand your limits. Even though structured equity is a safe option, it’s not 100% guaranteed to provide you with double returns. Investing your capital means it should grow as per your goal because if it does not, your money gets tied up when investing elsewhere, which could have been more fruitful.
• Diversification: If you are an investor who has invested elsewhere and has experience, you must be aware of the risks of investing all your money in one place. So, investing in structured capital gives your investment portfolio more stability with its less risky features. This means that if one or more of your investments is performing poorly, this investment will ensure that your portfolio doesn’t lose money.
• Long-Term vs. Short-Term Goals: Research the firm and its concepts before selecting a structured capital investment option. Then, consider whether the ideas will lead to quick growth or growth with time. Based on your estimation and goal, decide whether the investment is more suitable for the long-term or the short-term.
• Research and Due Diligence: Structured equity is much more complicated than purchasing shares through an online platform. Because of its unique nature, the terms and conditions applicable to these shares are distinct and specific. Ensure you are familiar with the terms and only invest when you see potential capital appreciation.

READ MORE Structured Equity vs. Mezzanine Equity: Which is Right for You?

Real-World Examples of Structured Equity

1. Uber and the Saudi Public Investment Fund: In 2016, Uber received a substantial contribution of $3.5 billion from the Saudi Public Investment Fund (PIF). The deal was designed to include features like convertible notes. It allowed PIF to convert its equity investment into cash, providing both immediate capital and the possibility of equity growth for the investor.
2. Blackstone and Invitation Homes: Blackstone’s investment in Invitation Homes was a structured equity deal that offered preferred equity financing. This arrangement enabled Blackstone to benefit from the features of structured equity, such as prioritized liquidation rights and cash distributions. This was a great way to help Invitation Homes secure capital for its rental properties while also giving Blackstone the security of a safe investment.
3. GoPro’s Investment Round: In 2014, GoPro raised capital through a structured equity deal based on convertible preferred shares. Investors could initially own an interest in a preferred share, with the option of converting to common equity later. This provided an immediate capital gain and the potential for future upside.

READ MORE 7 Fundamental Differences Between Structured Equity and Preferred Equity

Frequently Asked Questions (FAQs)

Final Statement

As we conclude this post, it’s important to consider the benefits of this type of funding for both investors and entrepreneurs. Structured equity is a very new and different concept that many investors find lucrative.

For entrepreneurs, structured equity promises funding options without compromising their ideology and ownership, ensuring their vision stays intact. For investors, this option gives them the opportunity to invest directly into a firm without the risks associated with traditional equity investment and provides additional built-in protections.

As you consider your next steps, consider how structured equity could fit into your strategy, whether you’re launching a startup or looking to enhance your investment portfolio. It’s a versatile tool that can adapt to different situations and offer pathways to success in various sectors.