Deal Equity Structure Advice?

March 22, 2024

by a searcher from The University of Michigan - Stephen M. Ross School of Business in Chicago, IL, USA

Looking for input on how to fairly structure equity/ownership stakes in a potential deal.

Some background:
- Two parties involved in the deal
- Equal equity injections will be made by both parties
- Both parties will be on the loan and sign PGs
- One party will act as CEO and take a salary
- The other party will be involved but in more of a higher level/advisory role but still actively involved. Not day to day, however.

Questions:
1. What is the fairest way to determine equity ownership for each partner at this stage? Based on equity injection percentages?
2. Does a MIP make sense for the CEO to earn more equity over time per an agreed upon vesting schedule?
3. Other considerations?

All thoughts and inputs welcome. Thank you in advance!

Reply by a professional
from Harvard University in Lynbrook, NY 11563, USA

Seems like CEO has a pretty strong incentive component without additional equity and is being compensated for his/her services by salary. Question is whether the salary being given is reasonable compensation for the CEO services or is just a minimal get-by kind of salary, in which case the CEO is really investing opportunity cost on top of equity and has a good argument for an uneven equity split. (Or, if the other partner is not getting compensated for advisory involvement, the question might be whether the CEO's salary is commensurate with the difference between proper comp for his CEO services and proper comp for the advisory services).

Reply by a searcher
from Dartmouth College in Princeton, NJ, USA

I like simplicity and would go with 50/50 ownership if both parties were equally involved in sourcing opportunity and diligence (but need to think about implication for decision making). Would pay the other party for a consulting fee for services.

+1 more reply.

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