Where equity sits in the stack
A typical indie capital stack has layers. Senior debt, secured against pre-sale contracts or a tax credit, is the safest money and gets repaid first. Gap financing sits behind it. Soft money such as grants may never need repaying. Equity fills whatever is left and gets paid back last.
On THE LONG DRIVE, a $2,000,000 feature, the stack looks like this:
| Source | Amount | Share of budget | Repaid from |
|---|---|---|---|
| Pre-sales (deposits and bank loan) | $450,000 | 22.5% | Minimum guarantees on delivery |
| Tax credit loan | $350,000 | 17.5% | Sale of the state tax credit |
| Gap loan | $300,000 | 15% | Future sales, first in the waterfall |
| Deferred fees | $200,000 | 10% | After equity recoups |
| Equity | $700,000 | 35% | After lenders, with 20% premium |
Equity is also what makes the loans possible. Banks rarely lend against pre-sales and incentives without equity already committed, because the equity covers costs the collateral doesn't.
How an investor's return works out
Say one investor puts in $140,000 of the $700,000 (20 percent of the equity). The documents give equity a 120 percent recoupment and 50 percent of net profits, split pro rata. In the waterfall example for this film, $2,000,000 in sales receipts leaves $840,000 for equity recoupment and $220,000 of net profits.
- Recoupment: 20% of $840,000 = $168,000
- Profit share: 20% of the investors' $110,000 = $22,000
- Total back: $190,000 on $140,000, a gain of $50,000 over roughly three years of sales
If receipts come in at $1,200,000, equity only gets $588,000, and this investor receives $117,600, a loss of $22,400. Show investors both cases.
Mistakes when raising equity
Promising different terms to different investors is the classic one. Once the first investor has a 125 percent premium in writing, every later investor will want the same, and a side letter nobody else knows about breaks the collection account setup. Put the terms in one operating agreement.
Spending equity before the rest of the financing closes is the other. If equity pays for prep and the gap loan falls through, investors are exposed with no film. Many operating agreements hold equity in escrow until the full budget is committed and a completion guarantor is in place.
What investors will ask to see
Expect requests for the budget top sheet, the finance plan, sales estimates, a pitch deck, and a P&L projection with low, medium, and high cases. Our guide to financing an indie film covers how equity fits with the other sources.