Equity kicker

How BC law treats it

In financing, a kicker sweetens a loan or investment so the lender accepts a lower interest rate or more risk. Common forms are warrants to buy shares at a set price, a right to convert the loan into shares, or a participation in profits, revenue or the proceeds of a sale or refinancing. Real estate development loans often include a profit participation. The term is sometimes used informally for an employment bonus, but its main legal meaning is in financing. The Criminal Code, RSC 1985, c C-46, s. 347 makes it an offence to enter into an agreement to receive interest at a criminal rate. "Interest" is defined broadly and can include fees, bonuses and other benefits, so the value of a kicker may be counted when calculating the effective rate. Parliament lowered the criminal rate to 35% annual percentage rate effective January 1, 2025. Under the Criminal Interest Rate Regulations, a loan to a borrower that is not an individual, for a business or commercial purpose, of more than $10,000 is subject to a 48% APR cap if $500,000 or less and to no criminal rate if more than $500,000. Courts can sever or read down an illegal interest term rather than void the whole agreement. The Interest Act, RSC 1985, c I-15 adds disclosure rules, such as stating an annual rate. If the kicker involves shares, warrants or convertible securities, their grant is a distribution under the Securities Act, RSBC 1996, c 418 and needs a prospectus exemption, typically under National Instrument 45-106. Warrants and conversions must also be authorized under the company's articles and the Business Corporations Act, SBC 2002, c 57 (BCBCA).

What it means for your business

A kicker can make financing available to a company that a bank would not lend to, but it can be expensive: warrants dilute founders, and profit participations take a share of the upside. For lenders, a poorly structured kicker can push the effective rate over the criminal limit and put the interest itself at risk. Both sides should model the kicker's value and confirm the securities law exemption before signing. Example: A Surrey developer company borrows $3 million from a private lender at 10% plus 15% of net sale proceeds from the project. Because the borrower is a corporation borrowing more than $500,000 for a business purpose, the commercial loan exemption removes the criminal rate cap, and the lender's counsel documents the business purpose to secure the exemption.

Risks and common mistakes

Ignoring the value of warrants or profit participations when calculating the effective interest rate. Issuing warrants without board approval or a prospectus exemption. Failing to define how profits or sale proceeds are calculated for a participation kicker. Assuming the pre-2025 criminal interest rate still applies. Overlooking the dilution a kicker causes in later financing rounds.