Initial Funding of a SPAC by a Sponsor
Enabeling a SPAC
Budget to Start the Process
To engage securities counsel, underwriter, auditors and other services needed to prepare the IPO, a budget of +/- $500,000 should be taken into account. This budget has to be provided by the Sponsors as the beginning of a SPAC process.
In exchange for this payment the Sponsors will receive a promissory note from the SPAC and the amount will be paid back to the Sponsors shortly after the IPO.
Sponsoring a SPAC
At-Risk-Capital as Inside Investment
Sponsors either use their own capital or raise outside capital to fund what is called “skin in the game money”. This capital will also be used to pay the expenses the SPAC will spend prior to acquiring a target, including legal fees, underwriting fees, administration and so on.
This initial investment from the Sponsors should be around 4% to 6% of the targeted IPO proceed. In return, the Sponsors hold all of the pre-IPO equity.
In earlier periods, those fees were paid by the proceeds of the IPO. Today, Sponsors will receive a unit of “founders shares” and “warrants” in exchange for their investment.
Return on Investment
A Unit / Founder Shares / Warrants
An attractive Offer to the Investor
A SPAC will typically sell units consisting of one class A common share and one warrant or a friction of that at a strike price of $11.50; the warrants have an exercice time of up to five years.
This unit of a common share and a warrant is sold to the Sponsor at a price of $10.00. So a Sponsor contributing $4 million in at-risk-capital would receive 400,000 units.
By this, a unit already reflects a value of twice the investment the Sponsor made.
1 Common Stock @ $10.00 (Founder Shares)
Founder Shares are restricted from trading for 1 year after the business combination
1 Warrant with an exercise price of $11.50
No lockup period for warrants
Common Stock and Founder Shares are sold in a Unit @ $10.00
Strike period for a warrant is 5 years
Premium on Investment
In addition to the unit, Sponsors will receive so-called founder shares on top. This bonus is given to the Sponsor as an incentive to reward his commitment and sweeten his undertaking.
The Sponsor decides, how many founder shares he takes for himself and how many are allocated to the managment team as the only compensation but also an incentive to them.
The remaining founder shares shares thus result in an additional bonus for the sponsor of up to two to three times the paid investment – depending on the split between sponsors, service providers and management of the SPAC.
Governing the SPAC
Key decision maker
Besides deciding how founder shares are allocated, a Sponsor also provides the basic framework of the SPAC:
- board members,
- possible aquisition targets.
All this combined creates a strong incentive for Sponsors to focus their time and resources on the SPAC to find an acquisition. But it also makes SPAC very lucrative to any Sponsor: if you take an other perspective, as a Sponsor you can receive $10.00 in equity for an investment of $2.50!