Sweet Equity Offer - What's it all about?
Discussion
Long term poster under a different handle here.
Been at my current business for 4 years and recently promoted to a salaried MD (which is simply a head of dept. really as there are multiple MD's in the business with a senior leadership team above running the larger group, albeit I run my own P&L and have lots of autonomy).
We're private equity backed and I'm about to get a sweet equity offer from the group board. This will be the first time I've had to discuss and negotiate such a thing, so I'm after some collective wisdom and thoughts.
My current package is salary plus car allowance plus bonus based on maintaining / growing EBITDA of 'my' business. I expect I'll have to buy in for the equity by way of a Director's loan, or, less likely, shares may be offered as a replacement for the very healthy LTIP I was on in my old account management role.
I know that on salary I'm the lowest paid MD in the business by around £12K PA due to relative experience, which is fine short-term as it's a great company working with colleagues and a team I trust and share a vision with. I'd like to negotiate this upwards over the next 12 months too really, especially as the business I run is one of the most profitable in the group. I also have a couple of my account managers in my team who earn pretty much what I do, which isn't really equitable given the additional responsibilities I now have.
The group's next PE horizon is about 3 years away. The management team isn't likely to change then and I doubt we'll sell the business, more likely to be a change of PE backer with a potential trade sale in around 10 years. In our sector valuations for such tend to be around 12 - 15 x EBITDA. I'm 41 so likely to stick with the business for some time yet too, as will most of the senior team who are relatively young.
So, my main questions are what should I be asking of the group board when I get the sweet equity offer through, are there any obvious sticking points I should be aware of, how should it be structured and what is a good deal for both parties likely to look like?
From what I've read, I know the terms might be pretty inflexible but I'm hoping this also gives me the chance to look at my wider remuneration and achieve a better balance across everything.
It's literally my first rodeo with some of this stuff and while I'm expecting a very amicable chat with our CEO, forewarned is forearmed and all that. Sorry for any vagueness, but with much more it'd be pretty easy to pinpoint who I am / where I work.
Been at my current business for 4 years and recently promoted to a salaried MD (which is simply a head of dept. really as there are multiple MD's in the business with a senior leadership team above running the larger group, albeit I run my own P&L and have lots of autonomy).
We're private equity backed and I'm about to get a sweet equity offer from the group board. This will be the first time I've had to discuss and negotiate such a thing, so I'm after some collective wisdom and thoughts.
My current package is salary plus car allowance plus bonus based on maintaining / growing EBITDA of 'my' business. I expect I'll have to buy in for the equity by way of a Director's loan, or, less likely, shares may be offered as a replacement for the very healthy LTIP I was on in my old account management role.
I know that on salary I'm the lowest paid MD in the business by around £12K PA due to relative experience, which is fine short-term as it's a great company working with colleagues and a team I trust and share a vision with. I'd like to negotiate this upwards over the next 12 months too really, especially as the business I run is one of the most profitable in the group. I also have a couple of my account managers in my team who earn pretty much what I do, which isn't really equitable given the additional responsibilities I now have.
The group's next PE horizon is about 3 years away. The management team isn't likely to change then and I doubt we'll sell the business, more likely to be a change of PE backer with a potential trade sale in around 10 years. In our sector valuations for such tend to be around 12 - 15 x EBITDA. I'm 41 so likely to stick with the business for some time yet too, as will most of the senior team who are relatively young.
So, my main questions are what should I be asking of the group board when I get the sweet equity offer through, are there any obvious sticking points I should be aware of, how should it be structured and what is a good deal for both parties likely to look like?
From what I've read, I know the terms might be pretty inflexible but I'm hoping this also gives me the chance to look at my wider remuneration and achieve a better balance across everything.
It's literally my first rodeo with some of this stuff and while I'm expecting a very amicable chat with our CEO, forewarned is forearmed and all that. Sorry for any vagueness, but with much more it'd be pretty easy to pinpoint who I am / where I work.
The two biggies are:
Vesting schedule (i.e. when and how quickly is it actually yours)
Good/bad leaver provisions (i.e. what happens if you/they decide you should move on)
The last one is important if the firm is still growing and/or there will be more PE activity. You don't want to be in a situation where there's a major new stakeholder who decides your face doesn't fit but leaving (one way or the other) threatens your equity. It gets even more important if the exit horizon is 10+ years as you need to know whether you'll retain, be forced to sell (and how price will be calculated), etc if you leave before that. I know one guy who has missed out on multiple paydays by leaving firms slightly too early and forfeiting his equity!
Worth also clarifying:
The top up schedule (if there is one/expected to be one, or is this a one time thing);
Lock in/restrictive covenant periods (expect they will try for one/both, but they may do this via the top two points).
(Informally) whether there is expected to be a liquidity opportunity at the next PE event.
Depending on sums involved, may also be worth seeing who is eligible to hold (i.e. can you transfer some to partner etc). Also worth taking time to understand the expected tax treatment. The firm may help with this.
Lastly, but most importantly, remember the money isn't yours until it is cash in the bank. Exits aren't guaranteed, and paper wealth can be quickly wiped out if markets turn. Treat it as a significant quantity of potential gravy, but be careful sacrificing too much in order to obtain it.
Vesting schedule (i.e. when and how quickly is it actually yours)
Good/bad leaver provisions (i.e. what happens if you/they decide you should move on)
The last one is important if the firm is still growing and/or there will be more PE activity. You don't want to be in a situation where there's a major new stakeholder who decides your face doesn't fit but leaving (one way or the other) threatens your equity. It gets even more important if the exit horizon is 10+ years as you need to know whether you'll retain, be forced to sell (and how price will be calculated), etc if you leave before that. I know one guy who has missed out on multiple paydays by leaving firms slightly too early and forfeiting his equity!
Worth also clarifying:
The top up schedule (if there is one/expected to be one, or is this a one time thing);
Lock in/restrictive covenant periods (expect they will try for one/both, but they may do this via the top two points).
(Informally) whether there is expected to be a liquidity opportunity at the next PE event.
Depending on sums involved, may also be worth seeing who is eligible to hold (i.e. can you transfer some to partner etc). Also worth taking time to understand the expected tax treatment. The firm may help with this.
Lastly, but most importantly, remember the money isn't yours until it is cash in the bank. Exits aren't guaranteed, and paper wealth can be quickly wiped out if markets turn. Treat it as a significant quantity of potential gravy, but be careful sacrificing too much in order to obtain it.
LooneyTunes said:
Lastly, but most importantly, remember the money isn't yours until it is cash in the bank. Exits aren't guaranteed, and paper wealth can be quickly wiped out if markets turn. Treat it as a significant quantity of potential gravy, but be careful sacrificing too much in order to obtain it.
ThatI've been given equity in my work, which is due to come through in about 3 years. I'm viewing it as nice if it happens, but if I get a better job in the meantime it's not going to keep me around here.
LooneyTunes said:
The two biggies are:
Vesting schedule (i.e. when and how quickly is it actually yours)
Good/bad leaver provisions (i.e. what happens if you/they decide you should move on)
The last one is important if the firm is still growing and/or there will be more PE activity. You don't want to be in a situation where there's a major new stakeholder who decides your face doesn't fit but leaving (one way or the other) threatens your equity. It gets even more important if the exit horizon is 10+ years as you need to know whether you'll retain, be forced to sell (and how price will be calculated), etc if you leave before that. I know one guy who has missed out on multiple paydays by leaving firms slightly too early and forfeiting his equity!
Worth also clarifying:
The top up schedule (if there is one/expected to be one, or is this a one time thing);
Lock in/restrictive covenant periods (expect they will try for one/both, but they may do this via the top two points).
(Informally) whether there is expected to be a liquidity opportunity at the next PE event.
Depending on sums involved, may also be worth seeing who is eligible to hold (i.e. can you transfer some to partner etc). Also worth taking time to understand the expected tax treatment. The firm may help with this.
Lastly, but most importantly, remember the money isn't yours until it is cash in the bank. Exits aren't guaranteed, and paper wealth can be quickly wiped out if markets turn. Treat it as a significant quantity of potential gravy, but be careful sacrificing too much in order to obtain it.
I think this sums things up perfectly. Re the last paragraph above - Perhaps worth adding that this equity will align you with the PE's expectations, which will be to flip the business in the next few years. How important this is to you largely depends upon the potential value of this equity at their target exit price, so it's worth understanding what that might be and not forgetting that in the event of an exit to another PE house, you would normally end up taking 50% of the equity as cash and rolling the other half into the new new business. Leaving under almost any circumstances (except in a box) would likely forfeit any rights you have to this until it is vested - which is normally split into their timeline (say 3 years with 1/3 vesting each year) and once vested, the equity is yours. (clearly if there is a transaction before this all the equity becomes vested at the time) Vesting schedule (i.e. when and how quickly is it actually yours)
Good/bad leaver provisions (i.e. what happens if you/they decide you should move on)
The last one is important if the firm is still growing and/or there will be more PE activity. You don't want to be in a situation where there's a major new stakeholder who decides your face doesn't fit but leaving (one way or the other) threatens your equity. It gets even more important if the exit horizon is 10+ years as you need to know whether you'll retain, be forced to sell (and how price will be calculated), etc if you leave before that. I know one guy who has missed out on multiple paydays by leaving firms slightly too early and forfeiting his equity!
Worth also clarifying:
The top up schedule (if there is one/expected to be one, or is this a one time thing);
Lock in/restrictive covenant periods (expect they will try for one/both, but they may do this via the top two points).
(Informally) whether there is expected to be a liquidity opportunity at the next PE event.
Depending on sums involved, may also be worth seeing who is eligible to hold (i.e. can you transfer some to partner etc). Also worth taking time to understand the expected tax treatment. The firm may help with this.
Lastly, but most importantly, remember the money isn't yours until it is cash in the bank. Exits aren't guaranteed, and paper wealth can be quickly wiped out if markets turn. Treat it as a significant quantity of potential gravy, but be careful sacrificing too much in order to obtain it.
A couple of points....
Is there an expectation of rolling your LTIP into this ? Also do not consider this part of your salary.
Last one under my nose was a good deal - new class of shares not in the money (waterfall) and buy in at par. Gives a huge upside potential and good for tax reasons. It also vested at 25% per year - so as above if your face doesn't fit they don't snatch back.
Be aware if you are out of the picture then they will likely want you paid out or valuation frozen at that oint, so you won't get the full benefit of upside but it is usually fair.
They want you invested in results and sitcky in your role.
More you are putting in the more returns you need and the more rights you need. Get proper legal advice before remortgaging or paying big loan interest
Is there an expectation of rolling your LTIP into this ? Also do not consider this part of your salary.
Last one under my nose was a good deal - new class of shares not in the money (waterfall) and buy in at par. Gives a huge upside potential and good for tax reasons. It also vested at 25% per year - so as above if your face doesn't fit they don't snatch back.
Be aware if you are out of the picture then they will likely want you paid out or valuation frozen at that oint, so you won't get the full benefit of upside but it is usually fair.
They want you invested in results and sitcky in your role.
More you are putting in the more returns you need and the more rights you need. Get proper legal advice before remortgaging or paying big loan interest
Thanks all, some really salient points above for me to consider. Comments around aligning my interest with the PE house are spot on, so I'm going in with my eyes open.
I'm not rolling my LTIP in - that was ripped up when I was promoted from my prior role so in effect this allocation of sweet equity replaces my LTIP.
I'm not rolling my LTIP in - that was ripped up when I was promoted from my prior role so in effect this allocation of sweet equity replaces my LTIP.
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