Every concept, endless questions
Each concept is a small financial model. Read how it works, then draw a real interview question from it: forwards, backwards or what-if, with fresh numbers and a worked solution every time.
Forward runs a concept the usual way. Inverse runs it backwards, which is what separates understanding from memorizing.
Deal Structuring
3 conceptsEarnout design
An earnout bridges a valuation gap. The seller believes next year’s EBITDA will be higher than the buyer will pay for today, so the buyer pays a lower price now and promises more if the number is delivered. Three things define it: the threshold below which nothing is paid, the target at which everything is paid, and the line between them. To the buyer the earnout is an expected cost — probability times payout — and the headline price it lets the seller announce is not the price it expects to pay. To the seller it is a bet on their own forecast, which is exactly why it is offered.
Rollover versus cash at close
A seller who rolls part of the proceeds into the new deal is trading certain cash today for a levered bet on the sponsor’s plan. Two things make the trade worth considering. The rolled shares participate in the second exit, which in a good deal is worth several times the cash forgone. And a properly structured rollover defers tax: the seller reinvests pre-tax dollars and is taxed once, at exit, instead of being taxed now and again later. Against that sits concentration, illiquidity and the sponsor’s leverage. The arithmetic says what the rollover has to return to beat the cash; the judgment is whether the seller believes it will.
Preferred structures: liquidation preference and participation
Preferred equity is how an investor buys a share of the upside while keeping first claim on the downside. The liquidation preference says what the investor gets back before the common sees anything — one times its money, sometimes more. Non-participating preferred then makes a choice: take the preference, or convert and take a percentage of everything. Participating preferred does not choose; it takes the preference and then its percentage of the rest, which is why founders call it double-dipping. The exit value at which converting beats the preference is the number that tells you whether the structure is protection or a price cut.