The buyer is short on cash and wants us to carry a large seller note to close our valuation gap, but we want more than just a fixed interest rate for taking on this debt risk. How do we structure equity warrants or conversion rights into our seller financing to capture upside if they hit their post-close growth targets?

Question

Tyler Smith · Accepted Answer

Carrying a seller note means you are acting as the bank, but without the bank's diversified portfolio. If you are going to take on that level of risk to close a valuation gap, a standard single-digit interest rate is rarely enough. You should demand equity warrants or conversion rights that allow you to participate in the upside of the business you built.

Equity warrants give you the right to purchase a specific percentage of the buyer's company at a pre-determined price, usually a nominal amount, within a set period. If the buyer hits their post-close growth targets, the value of those warrants will increase, giving you a second bite of the apple when they eventually exit. Alternatively, you can structure the seller note with a conversion feature, allowing you to convert a portion of the unpaid debt into equity if certain operational milestones are met.

To make this work, you must ensure that your rights are not diluted by future capital raises. Negotiate anti-dilution protections and clear information rights so you can monitor the financial health of the business.

From an EOS perspective, this structure keeps your interests aligned with the new leadership team. You can use your V/TO to show the buyer how your systems will drive the growth that makes those warrants valuable. By documenting this potential in your strategic plan, you turn a risky debt carry into a highly lucrative partnership.