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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:
Initial Setup:
Method 1:
Method 2:
Using Shares for Clarity:
At Exit:
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
I for one love it when WSO lists someone as a verified 3rd year PE associate when they're asking undergraduate-level questions.
Don't think that is right - better option would be to assume options are struck at the entry EqV ($250 = $200 sponsor + $50 mgmt), then you just take exit EqV of $1,000 and subtract $250 = $750*10% = $75m proceeds to options on a net (cashless exercise) basis.
No dude... he's correct. This isn't an on cycle LBO modeling test lmao
No dude...he is correct. Typically structured so management gets 10% of the net profits. So he is right, equity value of $1,000 less initial equity check of $250 is $750 of net profits multiplied by 10% is $75. That means $925 is split amongst sponsor (who gets 80% of the $925) and management (who gets 20% of the $925). Everyone structures these slightly different, but that is the gist.
Essentially, the $1,000 equity value would be split as follows:
Sponsor: $740 (80% of $925)
Management: $75 from incentive plan; $185 from management rollover (20% of $925); $260 in total
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