The private equity buyer is requiring us to hold a subordinated seller note that sits behind their massive senior credit facility, meaning we take on high risk for a low interest rate. How do we structure this seller note with a warrant kicker or equity conversion option to compensate for this subordinated risk?

Question

Tyler Smith · Accepted Answer

When a private equity buyer forces you to accept a subordinated seller note, you are acting as an uncollateralized lender with junior status. If the deal goes sideways, the senior lender gets paid first, and you could get wiped out. To justify this risk, you must negotiate terms that reflect your position as high-risk capital.

First, demand a warrant kicker or an equity conversion option. Warrants give you the right to purchase equity in the parent company or platform at a set price, allowing you to participate in the upside when the buyer eventually exits. If they refuse warrants, negotiate a conversion feature where unpaid interest or principal can be converted into senior preferred stock if the buyer defaults or falls behind on covenants.

Second, use your EOS Accountability Chart to show the buyer that your leadership team has the capability to hit the numbers, reducing their perceived risk. By proving your team can run the business without you, you can argue that the seller note is highly secure, allowing you to demand a higher coupon rate or better conversion terms. This is not about being a passive lender. It is about using creative deal structures to turn a risky financing requirement into a highly profitable investment.