Management equity

Management equity can create meaningful upside. Whether that upside is real, conditional or easily lost is decided by the documents. Executives should understand the economics, the leaver provisions, vesting and the exit mechanics before they sign.

What decides the outcome

• Instrument. Sweet equity, growth shares, ordinary shares, options or loan notes all behave differently.
• Hurdle and waterfall. Management may only share value above a threshold, or after the investor’s preferences are paid.
• Vesting and leavers. Leaving before an exit can reduce or wipe out the value.
• Dilution. Future funding rounds can change your percentage.
• Tax and covenants. Tax treatment and post-termination restrictions need separate review.

A short checklist

• Ask what instrument you are being granted, and when it actually has value.
• Model the exit proceeds at different valuations.
• Review the good leaver / bad leaver provisions.
• Check whether dismissal without cause protects vested value.
• Take tax advice before signing.

Common traps

• Focusing only on a percentage of ownership.
• Not understanding the hurdle.
• Ignoring the leaver provisions.
• Signing under time pressure without independent advice.

We give management teams independent advice on equity arrangements, PE transactions and how they participate in the exit.