Option for private equity investors to purchase shares at a discount. Typically associated with mezzanine financings where a small number of shares or warrants are added to what is primarily a debt financing.

An equity kicker is an equity incentive where the lender provides credit at a lower interest rate and, in exchange, gets an equity position in the borrower’s company. An equity kicker is structured as a conditional reward, where the lender gets equity ownership that will be paid at a future date when the business attains specific performance goals.

Early-stage companies use an equity kicker to access funds to finance their operations. They often find it difficult to attract investors since they are relatively new and less likely to earn investors’ trust.

Equity kickers are typically used with LBOs, MBOs, and equity recapitalizations. Such transactions are considered too risky to attract traditional forms of debt. Therefore, mezzanine and subordinated lenders use equity kickers to compensate them for the increased risk of lending to companies with insufficient collateral for loans. The kickers use a convertible feature for shares or warrants at a future date and can be triggered by a sale or other liquidity events.

Companies use an equity kicker to entice lenders to purchase a bond or preferred share from the company at a reduced interest rate. The lender may get an equity kicker from as low as 10% to as high as 80%, depending on how risky the portfolio is.

When a borrower attaches an equity incentive to the terms of debt advanced by lenders, the incentive is referred to as a kicker. Even though the lenders lend at a low interest rate as part of the deal, they get equity ownership that can be exercised at a future date when a liquidity event occurs.