Structuring an Equity Waterfall for a Two-Phase Raise

[Andrew Erickson]

Hey everyone, I’d love to get your thoughts on structuring an equity waterfall for a two-phase capital raise.

We’re raising in two phases:

• Phase 1 ($600k now): To acquire the property and complete permitting.

• Phase 2 ($1M in 12 months): To fund construction.

Right now, our structure is:

• 8% preferred return

• 70/30 split (LP/GP) up to 18% IRR

• 30/70 split (LP/GP) after 18% IRR

During our webinar, some investors expressed concerns that early investors are taking on more risk and should be compensated more. They also didn’t like the idea that Phase 2 investors would dilute their position when they come in later.

What are some fair and effective ways to address this concern? Should we offer:

1. A higher preferred return or a better split for Phase 1 investors?

2. A separate class of equity for Phase 1 vs. Phase 2?

3. Some kind of waterfall adjustment to compensate early investors for their risk?

4. Another structure I haven’t considered?

Would love to hear what has worked for others in similar situations! Thanks in advance.