Equity Comp Structures

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November 02, 2022

by a searcher from Northwestern University - Kellogg School of Management in Fort Lauderdale, FL, USA

If anyone could provide guidance on equity incentive structures for manager/partners I’d appreciate a chat. I’m aiming to incentivize incremental value (via EBITDA growth) and trying to decide between a Profit Interest that vests upon a liquidity event or traditional Equity (capital interest).
DM me if you could help talk through it.

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commentor profile
Reply by an investor
from University of Nebraska in Austin, TX, USA
Equity is a forever thing and tough to take back...so make sure it's structured right (earned over the long-term, 1 yr cliff, and lose their value if if they compete with you or disparage, tax efficient). Also I've found options/equity don't motivate a good chunk of people, so determine if they value it first. Don't give away something that someone has no perceived value for. Sometimes cash is king especially when comp is under $150K, they usually just value more cash now to make their life better.

Easiest solution is to do success based financial bonuses both long term (when we sell for $10M you get $500K) and short term. A friend of mine does a 'profit sharing' bonus after a certain meeting a certain EBITDA threshold in a year (>10% EBTIDA margin in her situation) - gets measured every 6 months and the threshold changed every 6 months as well. She wanted to incentivize teams thinking like owners and her perception is that it's worked and the business has cut costs in areas she didn't realize. So it depends.
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Reply by a searcher
from Rensselaer Polytechnic Institute in Durham, NC, USA
The way I'm structuring this with a manager who'll be running an acquired business for me is as follows:
1 - Vesting over 4 years, 10%/20%/30%/40%
2 - Double trigger acceleration on change of control
3 - Once vested: (a) person is entitled to a cash payment equal to a % of EV growth between acquisition and exit, (b) after 5 years if still employed and no liquidity event person will also be entitled to a % profit share

The goal is to (a) support long-term engagement in helping to growth the business towards an eventual exit and (b) if no exit happens in a reasonable timeframe, provide add'l cash comp while still employed.
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