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>Sponsors are paid in “founder shares,” bought at a discount and usually amounting to 20% of the common stock of the future company Can someone explain the flo

>Sponsors are paid in “founder shares,” bought at a discount and usually amounting to 20% of the common stock of the future company Can someone explain the flow of this transaction to me? So this 20% is from the capital raised and used to buy 20% of the acquired companies shares at a discount and then given to the sponsors? Or is it something else. Also I thought there was a management fee too, like 2%, similar to PE and Hedge Funds. Which is decent money for sitting on it for 18 - 24 months.

edoceo 6y ago
Company "worth" 10M. They buy $2M "worth" of shares for $1.5M. Acquire company, now "worth" $50M and liquid. Profit. (Numbers just for example)
- vmception 6y ago
  ah okay, sounds like something I would do while there isn't price discovery. I often times go steeper (how about $1 for the whole grant) so people can afford the 83(b) election to buy the underlying asset and have it just sitting as capital gains instead of ordinary income, it turns out the vesting period for restricted units is not regulated at all while giving you all the capability to play around with discounts and elections.
Lazare 6y ago
The 20% works like this: You create a SPAC with, say, 10 million shares. You sell 8m shares to the public for $10 each, and 2m shares are given (technically, sold, but for some nominal sum like $25k) to you as the sponsor. Now the SPAC is just a box containing $80m dollars (well, actually, significantly less than $80m due to all the bank fees, but let's pretend). Since their are 10m shares, each share is backed by an average of $8 of cash, and you personally own 2m shares backed by $16m of cash. Matt Levine runs through a lot of the math here in his "SPAC Magic Isn't Free" column (https://www.bloomberg.com/opinion/articles/2021-01-08/spac-magic-isn-t-free https://www.bloomberg.com/opinion/articles/2021-01-08/spac-m...)
- vmception 6y ago
  I'll read his article > and 2m shares are given (technically, sold, but for some nominal sum like $25k) to you as the sponsor. yeah I hate the ambiguity here and the article, are they given or do they have to purchase? yes I understand the price discovery of the floating shares being used to value created shares for future dilution. thanks for clarifying, I thought it was in the acquired company. are the sponsors able to sell some into market liquidity before the acquisition occurs? because the SPAC treasury would still have the paid in capital and could give all the money back if they fail, while speculators in the secondary market are just buying at a discount or premium but providing additional liquidity. I'm mainly curious what the market tolerates and what is standard in these offerings, its obvious to me that you can make any arrangement.
- vmception 6y ago
  > Now the SPAC is just a box containing $80m dollars (well, actually, significantly less than $80m due to all the bank fees, but let's pretend). why would it be significantly less? the SPACs have underwriters and all the crap that normal IPOs have, unburdening the target company from doing this stuff? I was somewhat imagining that the SPACs themselves have a very streamlined listing process and there is enough interest in the shares to not need an underwriter. A SPAC could surely do a direct listing...
  - Lazare 6y ago
    Yes, the SPACs have their own IPO with underwriters and fees. And then more fees for doing the merger with the target company. It is somewhat more streamlined, so fees will be on the low side. Often 2% for the initial IPO, then and other 3.5% for the merger, I think? Although with a ton of flexibility and variability and fees hidden in complex structures. Also note that investors can opt to redeem their investment when a merger target is announced, and statistically most money is redeemed, so 2% of the initial amount raised going to be well over 4% of the amount the company receives. There's a reason banks LOVE SPACs and are promoting them heavily and is sure isn't that they get less money from them than IPOs. :)

edoceo 6y ago

Company "worth" 10M. They buy $2M "worth" of shares for $1.5M. Acquire company, now "worth" $50M and liquid. Profit. (Numbers just for example)

vmception 6y ago
ah okay, sounds like something I would do while there isn't price discovery. I often times go steeper (how about $1 for the whole grant) so people can afford the 83(b) election to buy the underlying asset and have it just sitting as capital gains instead of ordinary income, it turns out the vesting period for restricted units is not regulated at all while giving you all the capability to play around with discounts and elections.

Lazare 6y ago

The 20% works like this: You create a SPAC with, say, 10 million shares. You sell 8m shares to the public for $10 each, and 2m shares are given (technically, sold, but for some nominal sum like $25k) to you as the sponsor. Now the SPAC is just a box containing $80m dollars (well, actually, significantly less than $80m due to all the bank fees, but let's pretend). Since their are 10m shares, each share is backed by an average of $8 of cash, and you personally own 2m shares backed by $16m of cash. Matt Levine runs through a lot of the math here in his "SPAC Magic Isn't Free" column (https://www.bloomberg.com/opinion/articles/2021-01-08/spac-magic-isn-t-free https://www.bloomberg.com/opinion/articles/2021-01-08/spac-m...)

vmception 6y ago
I'll read his article > and 2m shares are given (technically, sold, but for some nominal sum like $25k) to you as the sponsor. yeah I hate the ambiguity here and the article, are they given or do they have to purchase? yes I understand the price discovery of the floating shares being used to value created shares for future dilution. thanks for clarifying, I thought it was in the acquired company. are the sponsors able to sell some into market liquidity before the acquisition occurs? because the SPAC treasury would still have the paid in capital and could give all the money back if they fail, while speculators in the secondary market are just buying at a discount or premium but providing additional liquidity. I'm mainly curious what the market tolerates and what is standard in these offerings, its obvious to me that you can make any arrangement.
vmception 6y ago
> Now the SPAC is just a box containing $80m dollars (well, actually, significantly less than $80m due to all the bank fees, but let's pretend). why would it be significantly less? the SPACs have underwriters and all the crap that normal IPOs have, unburdening the target company from doing this stuff? I was somewhat imagining that the SPACs themselves have a very streamlined listing process and there is enough interest in the shares to not need an underwriter. A SPAC could surely do a direct listing...
- Lazare 6y ago
  Yes, the SPACs have their own IPO with underwriters and fees. And then more fees for doing the merger with the target company. It is somewhat more streamlined, so fees will be on the low side. Often 2% for the initial IPO, then and other 3.5% for the merger, I think? Although with a ton of flexibility and variability and fees hidden in complex structures. Also note that investors can opt to redeem their investment when a merger target is announced, and statistically most money is redeemed, so 2% of the initial amount raised going to be well over 4% of the amount the company receives. There's a reason banks LOVE SPACs and are promoting them heavily and is sure isn't that they get less money from them than IPOs. :)