3.B4. How to Structure Your Deal

Structuring a Deal: Key Considerations

Understanding Equity Distribution

• The structure of a deal can vary widely; the speaker focuses on common structures they have used.

• Determining how much equity to give investors depends on the deal's support and the returns investors expect compared to other opportunities available in the market.

• In their first deal, the speaker gave away 100% of equity due to lack of knowledge about retaining part for themselves, illustrating a learning curve in equity distribution.

Calculating Ownership Shares

• If raising $100,000 with a personal investment of $25,000, ownership would be calculated as 25% for personal investment plus additional shares for bringing in investors.

• The speaker learned to retain 10% equity just for sourcing deals; thus, total ownership could reach 35% if they also invested.

Market Returns and Investor Expectations

• Investors typically receive around 90% of cash flow; it's crucial to ensure that their returns remain competitive within market standards.

• General Partners (GPs) usually retain between 20%-30% of deals but can keep more if they provide attractive returns (e.g., an 8% cash-on-cash return).

Planning for Contingencies

• When structuring deals, it’s essential to have contingency plans (Plan A, B, C), especially when facing potential project failures or cost escalations.

• For example, if long-term rentals are unfeasible due to interest rates, alternatives like short-term rentals or condo conversions should be considered.

Communication and Problem-Solving Strategies

• Effective communication with investors is vital during challenges; preemptively discussing potential issues fosters trust and transparency.

• Anticipating problems allows you to execute pre-planned strategies rather than scrambling under pressure when issues arise.

Key Principles in Financing

Creditworthiness and Debt Management

• Lenders assess creditworthiness based on income relative to debt; having only partial ownership while guaranteeing loans can lead to financial strain.

• As debt accumulates without corresponding income growth from ownership stakes, banks may require additional guarantees from partners or co-signers.

Utilizing Key Principals

• Engaging a key principal who solely guarantees loans without investing cash can help secure financing while maintaining control over project equity.

Equity Investment Strategies

Structuring Equity Deals

• The speaker discusses retaining 30% of a deal while allocating 10-15% of that share to key principals involved in the investment.

• An alternative strategy involves asking equity investors to guarantee loans, which can be framed as a request for support or goodwill.