Search Fund Step-Up
Search Funds & Self-Funded Searches
Definition
A search fund step-up is the negotiated increase in an investor's ownership or economic basis when a funded search moves from search capital into acquisition capital.
Why it matters
The step-up compensates early search investors for backing an uncertain process before a target is identified, but it dilutes later acquisition investors and shapes founder economics.
Common misconceptions
- •Search capital and acquisition capital usually have different risk profiles and economics.
- •A high step-up can be rational for early investors but still create alignment issues at closing.
Technical details
Mechanics
Step-ups may convert search-stage checks into acquisition equity at a multiple, preferred allocation, warrant coverage, or other negotiated premium.
Diligence
Review search budget, expiration, investor consent rights, acquisition financing terms, founder vesting, and how unused search capital is treated.