Units, Step-Ups and Rights of First Refusal

The terms in a search fund offering look standardised. One of the most quoted of them is not, and the difference is worth knowing before you sign your own documents.

Search capital is usually raised in units. An investor buys one or more, and what they are buying is two things at once: the at-risk capital that funds your search, and a right to participate later in the equity that buys the company.

Those two things are priced together, and the pricing mechanism is the step-up.

What the step-up is

When you complete an acquisition, the search capital does not simply disappear or sit as a separate claim. It converts into investor shares in the acquisition. The conversion is done at a stepped-up value, which means each pound of search capital converts as though it were more than a pound of acquisition equity.

Stanford's Primer on Search Funds, in its 2026 edition, says that early search money usually converts at a higher value, and puts a number on it only as a tendency: in the primer's words, "often 150 percent of what was originally invested".

Read those two qualifiers carefully, because they are doing work that almost every document in this market removes. Usually is not always, and often is not always either. The primer describes a convention, not a standard, and it does not say the figure is fixed.

You will see the 50% step-up presented as a market standard in a great many places, including in offering documents. It is common. It is not a rule, and it is negotiated between you and your investors like every other term in your documents.

What the right of first refusal is

The second half of a unit is the right, but not the obligation, to participate pro rata in the acquisition financing when it comes.

The asymmetry is the point. Your search investors can follow and they can decline. If they decline, the equity has to come from somewhere else, and finding it is your problem at the least convenient moment in the process. If they follow, you have a funded deal and a shareholder group who already know you.

That is why the composition of your search investor group matters more than the total you raise. Stanford's primer makes the same point from the investor's side: beyond the capital, the right mix of investors can act as a sounding board, provide introductions and leverage with lawyers, bankers and accountants, introduce sellers and intermediaries to help deal flow, support the searcher through the search, and serve on the board of the company acquired.

The terms that vary, and which you should read

Because the convention is a convention, the specifics live in your own documents and they differ. The questions worth putting to your adviser, rather than assuming:

• What the step-up percentage actually is in your documents, and whether it is the same for every investor.
• What happens to an investor who does not participate at acquisition. In some structures the stepped-up interest converts anyway. In others, participation is a condition.
• Whether the right of first refusal is pro rata to the units held, and what window an investor has to exercise it.
• Whether unexercised allocations are offered to the other search investors before they are offered to anyone new.
• How the searcher's own equity vests, and against what.

None of that is exotic, and all of it is easier to change before your raise closes than afterwards.

Sources. Stanford Graduate School of Business, A Primer on Search Funds, 2026 edition, case E958; conversion and stepped-up value at Part I, page 17; investor roles at Part II.

These articles are published for information only. They describe how the search fund model is commonly structured and what published research reports about it. They are not advice, not a recommendation, and not an offer or invitation to invest in or to fund any search fund. Figures are drawn from the sources named in each article and are reported as at the data cut-off stated. Archimax has not verified the underlying data. Anyone considering taking or providing search capital should take their own legal, tax and financial advice.