Excess cash flow formula
This may not be the best place to post this, but I'm in the process of raising first round equity for a tech startup. I've got an investor on the line but he's asking for an "excess cash flow formula." This is a pure equity deal. I'm fine committing to dividends through a hybrid structure, but he's playing extremely hard to get and refuses to explain what he's driving at, just saying I can talk to him when I have it ready to show him. And yes, while he's not an organized VC guy, he is a well-known angel in certain circles. I've asked CFAs and CAs about this and none know what he means.
What is he asking for?
My guess is that he wants you to determine your future working capital needs. Then, when (if) you exceed that amount he can get paid.
I'm not a VC investor by any stretch, but I assume he's trying to be sure you won't be frivolous with the cash and it'll be a way for him to get some cash out if the company doesn't need it for operations.
In the groupon post people are asking wtf groupon s doing with $1B cash. If groupon wasn't public and there were only a few investors I'm sure those investors would want some cash out of the company. It sounds like this guy is trying to put a mechanism in place to ensure that can happen.
Best of luck with the startup - care to share any details on what you're doing?
Thanks for the comment. I think you're right... but we've provided a summary of our model and the entire model is available if he wants to see it.
I actually think I've got it: I think it's about putting in place a trigger to provide a return of capital. I just have no idea how to actually structure it... it could be based on a net revenue threshold, a cash position threshold, it could vary as we expand into new markets... I'm stuck again.
I found this quote from a file on the tubes, which I think is marginally helpful at least. Unfortunately we have no debt so it's not like we can use a debt ratio... but we could use some type of equity to cash ratio... I'm just not sure what.
"The Amended 2010 Credit Agreement also includes provisions that allow the Partnership to make restricted payments of up to $60 million in 2011 and a minimum of $20 million annually thereafter (plus the Available Amount of Excess Cash Flow as defined in the Amended 2010 Credit Agreement), at the discretion of the Board of Directors, so long as no default or event of default has occurred and is continuing. These restricted payments are not subject to any specific covenants. Beginning in 2012, additional restricted payments are allowed to be made based on an Excess-Cash-Flow formula, should the Partnership’s pro-forma Consolidated Leverage Ratio be less than or equal to 4.50x. Per the terms of the indenture governing the Partnership's notes, the ability to make restricted payments in 2011 and beyond is permitted should the Partnership's trailing-twelve-month Total-Indebtedness-to-Consolidated-Cash-Flow Ratio be less than or equal to 4.75x, measured on a quarterly basis."
Why don't you structure it as a convertible debt and explain that it is bad for your business to issue too much out in the form of dividends or interest payments...so in the event of bankruptcy he can be first in line to claim his capital; however, in the event of a success he can convert to equity since at the end of the day VCs (to me) are searching for abnormal returns. IF they want stead cash flows, etc. they should play in other stuff.
Bit unclear, but sounds like he basically wants a pref return on his equity - i.e. he gets an x% dividend on his equity prior to common equity getting paid out. Once he has is pref dividend, he would then share on other dividends on an "as converted basis" (assuming cvt pref in this case) ... this would be very typical structure in angel / VC investments. Happy to discuss further if you want to post here or PM me...
In my OP you can see I mentioned a hybrid structure. After extensive thought I've decided what the investor is looking for is effectively a cash sweep... so he wants to be dividended to the extent he invested through a fixed structure. Dividends at some hurdle rate don't seem to be adequate.
This is the first round and the company has few assets (it's a startup). We would rather sell equity than debt. As well, I don't see this being compatible with what the investor is seeking - as per my comments above, I think he's seeking a cash sweep, which is normally a debt covenant. However, this would enable us to take him out of the deal, thereby taking away future equity gains. So I think we're dealing with a hybrid of a hybrid.
Ut ut perferendis voluptate est. Ut dignissimos eveniet eum ut exercitationem earum officiis. Voluptatem suscipit earum libero aperiam magni quaerat modi ut. Cupiditate aut et ea et cum provident repudiandae. Maxime laudantium quo eius eaque et. Corporis magnam velit sint quisquam eos. Dolorem sed optio est non.
Nisi qui ut vitae. Aut explicabo sed ullam ex harum est voluptatem. Occaecati unde eius voluptates error saepe aperiam.
Accusantium repellat accusantium repellendus quia optio omnis expedita. Voluptate fugiat eum quisquam sit. Fugiat beatae nemo quia. Earum voluptatum eveniet voluptates dolor nostrum pariatur.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...