A standby equity distribution agreement, also known as a SEDA, is a type of financial tool that helps small and medium-sized companies raise capital. It is a contract between the company and an investor, whereby the investor commits to purchase a certain number of shares of the company`s stock over a period of time, in exchange for upfront cash.
SEDA is becoming increasingly popular among companies looking to raise capital without having to go through the traditional IPO process or other forms of equity financing. It is a flexible and convenient way to raise capital, and companies can use the funds for a variety of purposes, such as research and development, expansion, and other growth initiatives.
How a SEDA Works
Under a SEDA, the company and the investor agree on the number of shares to be sold and the price at which they will be sold. The investor then pays the company an upfront cash payment, which is typically a discount to the market value of the shares. In exchange, the investor receives the right to purchase the shares at a pre-determined price over a set period of time, usually up to three years.
Once the investor has made the upfront payment, the funds are available to the company for use. The company can draw down on the funds as needed, up to the pre-agreed limit. As the company draws down on the funds, it issues shares to the investor at the pre-determined price.
Advantages of a SEDA
There are several advantages to using a SEDA to raise capital. First, it is a flexible and convenient way to raise capital without having to go through a public offering or other forms of equity financing. This allows companies to raise capital quickly and efficiently.
Second, a SEDA is less dilutive than other forms of equity financing, such as a public offering or private placement. This is because the investor is purchasing shares at a pre-determined price, which is typically a discount to the market value of the shares. This means that the company is not giving away as much equity as it would with other forms of financing.
Third, a SEDA is a cheaper form of financing than debt financing, as the interest rates on debt financing are typically higher than the discount rate on a SEDA.
Finally, a SEDA can be structured to provide downside protection for the investor. This means that if the market value of the shares falls below the pre-determined price, the investor can either terminate the agreement or receive additional shares to make up the difference.
A standby equity distribution agreement is a useful tool for companies looking to raise capital quickly and efficiently without having to go through a public offering or other forms of equity financing. It is a flexible and convenient way to raise capital, and provides several advantages over other forms of financing. However, as with any form of financing, it is important to carefully consider the terms and conditions of the agreement before entering into it.