When interest and fees are not enough to attract conventional debt providers, some alternative financiers will participate with a “kicker” that provides additional financial upside.
An equity kicker is a common way that venture debt providers seek higher financial returns. Typically this is structured as warrants – an option to buy a specific amount of stock at a particular price for a specified period of time. For example, a $2 million venture debt loan might have 10% warrant coverage as an equity kicker, meaning the lender has the right to buy up to $200,000 of the company’s stock on the same terms as the most recent venture capital round, perhaps for a period of seven years.
A somewhat more exotic kicker is a revenue share, also called a royalty stream. For example, Arctaris Michigan Partners structures its loans as conventional 5-year term loans and adds a share of revenue on top as a kicker.