After a private equity acquisition, a portion of equity is reserved for management. The plan’s mechanics determine whether it pays.
Pool size as a percentage of fully diluted equity, typically allocated in tranches over the hold period so that later hires can participate.
Instrument. Profits interests in a partnership structure, options, or restricted units, chosen largely for tax reasons.
Vesting. Time vesting over a period, performance vesting tied to a return multiple or internal rate of return for the sponsor, or a combination. Performance vesting means the plan pays only if the sponsor’s return targets are met, which aligns interests and can leave management with nothing in a modest outcome.
Hurdles. A threshold above which the interest participates, reflecting value at grant. Later grants carry higher hurdles.
Leaver provisions. Good leaver — death, disability, termination without cause, resignation for good reason — typically retains vested interests. Bad leaver forfeits, sometimes including vested interests, which is heavily negotiated.
Repurchase rights on departure, at fair market value or at cost depending on the leaver category, with a valuation mechanism and payment terms.
Liquidity. Payment only on a sale or refinancing in most plans. Management should understand that the interest is illiquid for the hold period, which is usually longer than expected.