What it means
When a borrower cannot offer enough security or a high enough interest rate to satisfy a lender, a kicker can close the gap. The lender gets the stated interest plus a chance to share in the upside if the business does well.
This makes the deal more attractive to the lender without increasing the cash interest the borrower has to pay each month. The most common version is the equity kicker, found in mezzanine finance, which is a layer of funding that sits between ordinary bank debt and shareholders' equity.
The lender may receive warrants, a small percentage of the shares, or a right to convert part of the loan into shares. If the company is later sold or floats on a stock market, the kicker pays out.
Kickers also appear outside lending, for example as a step-up in a bond's interest rate if targets are missed, or a bonus for finishing a project early. In each case the word signals an extra on top of the base terms.
For the borrower, the trade-off is that cheap-looking cash interest hides a real cost in diluted ownership. If the company succeeds, the kicker can be worth far more than the extra interest would have been.
Founders should model the total cost of the deal under good, average and bad outcomes before agreeing. For the lender, the kicker improves the overall return and compensates for the chance that some loans will go wrong.
It also aligns the lender's interests with the success of the business, because a larger exit value means a bigger payout. Lenders pricing such deals compare the expected return with the risk they are taking.
Terms to check in the paperwork include the size of the kicker, when it can be exercised, what happens if the company is never sold, and whether it is tied to performance targets. A kicker that is vague on timing or valuation can lead to disputes years later.
In practice
Real-world examples.
Example
A growing software company needs $3,000,000 to expand but banks will lend only part of it against its limited assets. A specialist lender provides the funds at a moderate interest rate plus warrants over 3% of the shares. The company gets the cash without a large equity round.
Example
A property developer arranges a loan for a building project. The lender takes a share of the profit on each unit sold above a set price as its kicker. When the market rises, the lender earns well above the basic interest.
Example
A manufacturing group issues a bond that includes a step-up clause. If its credit rating is cut, the coupon rises by 0.50% a year. Investors accept a lower starting rate because the kicker protects them if the company weakens.
Formula
Calculation
Total lender return = cash interest received + value of the kicker.
Suppose a lender provides a $5,000,000 loan for four years at 10% a year, plus an equity kicker worth 2% of the company's value at sale. Cash interest is 5,000,000 x 0.10 = $500,000 a year, or 500,000 x 4 = $2,000,000 over four years. The company is sold for $60,000,000, so the kicker pays 60,000,000 x 0.02 = $1,200,000. Total return = 2,000,000 + 1,200,000 = $3,200,000, which is 3,200,000 / 4 = $800,000 a year, or a simple 800,000 / 5,000,000 = 16% a year on the loan.Case study
Seen in the real world.
Greenfield Robotics is an illustrative, fictional company that needed $4,000,000 to build a new production line. Its bank would lend only $2,000,000, and the founders did not want to sell a large part of the business to venture investors.
A mezzanine lender offered the other $2,000,000 at 9% interest together with warrants over 4% of the shares as a kicker. The founders modelled the outcome and saw that if the company were sold for $50,000,000 the kicker would cost them $2,000,000.
They accepted because the extra funding let them double production and sell the business later for far more than the model assumed. The illustrative lesson is that a kicker is a real price paid for flexibility, and it should be measured against the alternatives, not ignored because it costs nothing today.
Watch out
Common mistakes.
- Focusing only on the cash interest rate and ignoring the kicker, which can end up being the largest part of the lender's return.
- Forgetting that an equity kicker dilutes existing owners, so each founder's share of the sale proceeds falls.
- Accepting vague terms about when and how the kicker is valued, which can lead to disputes at exit.
Questions
People also ask.
What is an equity kicker?
It is a right to a share of the borrower's ownership or sale value that is attached to a loan, usually as shares, warrants or a conversion right.
Why would a borrower agree to a kicker?
It allows borrowing at a lower cash cost or on more flexible terms, which can be valuable when cash flow is tight or growth is fast.
Is a kicker only used in lending?
No, the word is also used for bonuses, step-up interest rates and other extras added to contracts to make them more attractive.
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