When a company wants to raise money, it can do so by selling a portion of itself to investors. This is called equity financing. Preferred equity is a type of equity financing that gives investors some special privileges. What are those privileges? Well they could be all kinds of things and there is no single 'correct' meaning here. The term is just trying to say, 'hey look, that equity is treated differently and comes along with this and that'.
Relevant Templates:
- Preferred Equity - Single Hurdle - 100% Repayment of Capital Before Any Other Splits
- 3-Tier IRR Hurdle Waterfall (can work with many preferred equity structures)
Think of it like a VIP ticket. When you buy preferred equity in a company, you get some special benefits that regular shareholders don't get. For example, you might get a guaranteed dividend payment, which means the company has to pay you a certain amount of money every year. This can be really attractive to investors who want a more stable return on their investment. There are all sorts of ways to design that dividend payment.
Another benefit of preferred equity is that if the company goes bankrupt, you'll get paid back before regular shareholders do. This means you're more likely to get your money back if things go wrong.
However, there's a downside to preferred equity too. Because you're getting all these special benefits, you usually don't have as much say in how the company is run as regular shareholders do. This means you might not get to vote on important decisions like who gets to be on the board of directors or how the company spends its money. It also commonly limits upside share of profits.
So, to sum it up, preferred equity is a type of equity financing that gives investors some special benefits in exchange for giving up some control over the company.
