What Does Equity Kicker Mean?
An equity kicker is a type of equity incentive typically issued in combination with privately placed subordinated or mezzanine debt to improve the return for subordinated debtholders. Equity kickers can have a convertible feature exchangeable for shares or warrants to purchase shares at a set price at some point in the future.
Divestopedia Explains Equity Kicker
Equity kickers are often used for LBOs, MBOs and equity recapitalizations since they are considered too risky for traditional financing offered by senior, secured lenders. In these cases, subordinated debt is used since the business has sufficient free cash flow to service debt, but not enough assets to lend against.
Subordinated lenders expect to receive a higher return for assuming higher risk. This higher return will come in the form of a higher interest rate and the receipt of an equity kicker. Equity kickers could be for as little as 10% or as much as 80% ownership in the company's equity depending on the overall risk that the lender perceives. Equity kickers are usually triggered by the sale of the business or some other monetization event.