10% management options

Based on the most helpful WSO content, if you are told there is a 10% option pool for management, it typically means 10% on a fully diluted basis. Here’s how it would work using dummy numbers:

1. Initial Setup:

   • Sponsor equity at entry: $100
   • Equity at exit: $500
   • Management option pool: 10%

2. Method 1:

   • Value of management option: 10% of $500 = $50
   • Value of sponsor equity after management option: $500 - $50 = $450

3. Method 2:

   • Cash received from management option exercise: 10% of $100 = $10
   • Adjusted equity at exit: $500 + $10 = $510
   • Portion owned by management: 10% / (1 + 10%) = 9.1%
   • Equity owned by sponsor: 510 * (1 - 9.1%) = $464

4. Using Shares for Clarity:

   • Assume 100 shares at $1/share initially.
   • A 10% pool means management gets 10% of the company, excluding the impact of strike but including option dilution.
   • Option pool: x / (100 + x) = 10%, solving for x gives approximately 11.11 shares.
   • Post option issuance, sponsor holds 100 shares, and options are 11.11 shares.

5. At Exit:

   • Equity value pre-options: $500
   • Post option payment for strike: $511.11
   • Sponsor gets 90%, which equals $460.
   • Management gets 10%, or $51.11, less the payment for strike of $11.11 = $40.

These methods illustrate different ways to account for the management option pool in an LBO model. The choice of method can depend on specific instructions or the context of the deal.

Sources: Management Option Pools in LBO Models, Option Pool Question, Diversity Recruiting... a Manifesto, Management Option Pool LBO Question, Diversity Recruiting... a Manifesto