Flexible Redemption Preferred Stock is an alternative to traditional debt or equity structures that is designed to match investor returns with company performance.
Impact investors who are considering equity investments face a common dilemma: The reality of the current market is that there are not enough equity exits. Therefore, social equity investors do not have a mechanism to realize equity-like returns commensurate with the risks inherent in early stage social businesses.
The default “next best idea” for financing social enterprises is debt. However there are often significant problems with debt, notably 1) lower returns for investors, 2) it is difficult to structure a predetermined amortization schedule that is flexible for the company especially in the first few years of growth, and 3) creative structures can create tax problems for investors. (We expand on this last point in detail in our white paper).
To remedy this problem we designed the Flexible Redemption structure to meet these investor goals:
- provides equity-like returns to investors, both in IRR and risk
- provides investors an exit in the form of near to mid-term return of capital so investors can redeploy capital to other social investments
- is flexible and minimally burdensome to issuing companies
- is tax efficient to the investor and issuer