The buyer is asking us to accept a large seller note to close our valuation gap, but we are hesitant to take on all the risk of their future performance without any upside. How do we structure a convertible seller note to capture future equity value if they succeed?

Question

Tyler Smith · Accepted Answer

Taking on a standard seller note means acting as a junior lender to the buyer, carrying substantial risk with only a fixed interest rate as a reward. If the buyer is using your capital to fund their acquisition, you should demand a share of the upside through a convertible seller note. This structure allows you to convert a portion of the outstanding debt into equity in the newly combined or capitalized company if specific growth milestones are met post-close. To negotiate this effectively, you must define clear, objective triggers for the conversion. These milestones should be tied to major growth targets, such as reaching a specific revenue threshold or expanding into a new market. Use your V/TO to align with the buyer on what realistic, high-growth milestones look like. Ensure the conversion terms specify the exact percentage of equity you will receive and protect your interest from future dilution. By structuring the note as convertible, you align your incentives with the buyer's success while protecting your downside. This creative deal structure bridges the valuation gap, turns a risky funding request into a wealth-building opportunity, and allows you to participate in the future growth that your legacy business helped create.