New Venture Lab: Equipping Christian Entrepreneurs

Question

I am the sole owner of an S-Corp that has received capital from a lender/investor in the form of a loan.  Is there any way I can restructure the capital I've received to show up as equity instead of a liability to improve my balance sheet without having to sacrifice the ownership of my company? Basically, I want to keep the investors on a fixed annual return for their money, but classify their capital as a equity to meet certain net worth requirements for my industry.

Answer

You can change the debt to non-convertible preferred equity with a 4% annual dividend and a return of capital terms that match the current debt repayment terms.  S Corps are not my favorite form of entity, but this conversion should still work with and S Corp (I favor LLCs).  Get a good securities attorney to draw up the preferred instrument and replace the debt with it.  This type of preferred is basically the same thing at debt, but it is considered equity instead.  Because the preferred equity does not convert to common, once you’ve paid back the preferred, you will still end up as the sole owner of the company.  You will have moved the capital from the long-term liability section of your Balance Sheet to the Equity section of your Balance Sheet and while your personal net worth will not have changed, the company’s equity value will have.