Deferred Equity

The TV show Shark Tank features different entrepreneurs pitching the panel of investors for investment stakes in their companies. One of the investment structures sometimes proffered runs along the lines of a $100,000 loan at 4% annually that is convertible to a 20% equity stake once the loan principal has been repaid. Such a structure would be booked, for accounting purposes, as debt until the conversion. This structure is known as deferred equity, and is usually either in the form of convertible debt or preferred shares that pay a coupon annually, which has a common stock conversion provision.

Although each scenario is customized, publicly traded companies using a deferred equity platform for financing will often have call provisions, which allows the company to convert preferred stocks or debentures after a call protection period. Alternatively, large block preferred stock holders, such as Warren Buffett, will often control the rights to sell or convert at the time of their choosing, often with those rights built in due to a white knight financing, such as Berkshire Hathaway assisting GE during the 2008 banking crisis.