How to model sponsor sweat equity

If the deal's sponsor will not invest any cash in the deal, but will receive a "sweat equity" share of profits in return for controlling the opportunity and executing on behalf of the investors, the following inputs should be made:

1. On the Sources of Funds screen, for Sponsor share of total, input 0. The Third party investor Share of total will automatically size up to be 100% as shown below.

 

Assuming there is no Preferred Return and the back-end split is simply a ratio such as 50% to Sponsor and 50% to Third Party investor, the following settings should be chosen and the following inputs made:

1. Choose "Single Residual Split" for Residual Cash Flow Splitting 

2. Enter 0 for Preferred Return threshold amount

3. Enter the percentage amount to be awarded to the Sponsor, less 0.01, in the Sponsor Promote field

The example below shows a 50/50 split.

 

 

The 50/50 split is reflected on the Partnership Returns report. You will note tha the Sponsor Multiple on Equity and IRR are both reported as 0. They are shown this way because they are infinitely high due to the lack of cash investment made. Instead of reporting them as "infinite", we report them as 0.

 

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