Dumb question about management equity upon sale
Hi sorry for this dumb question.
So say an executive is given 5% ownership of a company (common shares), that will vest without hurdles over 5 years, or fully upon a liquidity event (say a sale or acquisition of the entity).
They have the right to buy in at a certain price (say $1.00 per share, 5 million shares)- this means there are 100000000 shares, and he can buy in at 100,000,000 * $1.00, so at an (equity?) value of $100,000,000.
Say we have $30Mn of EBITDA, and the company is acquired at 7x EBITDA, so at a value of $210Mn.
The company is going through a liquidity event, meaning his shares will fully vest upon this sale, and he will have the right to buy in at the agreed upon price at this point.
That $210Mn figure represents TEV - am I correct in assuming the original sponsor will have invested some % of their own equity upfront that has hopefully grown over time (assuming the company free cash flows were used to pay down the debt over time), and the executive will be able to get a piece of that upon the sale of the business. The amount he gets will not be a % of the TEV, but instead a % of the equity ownership that the PE fund will realize? This detail at the end is confusing me.
Apologies if this is a dumb question, appreciate your help. Thanks!
Lot's of details needed to know for sure, but from what you've provided, it doesn't seem like the exec has actually purchased the shares and provided cash or some other form of payment (e.g., note payable). I'd imagine that it would work out in one of a few ways:
Thank you - very helpful. Correct, he has not yet purchased the shares, but he has the right to do so at this fixed price of $1.00/share.
One follow up question, say scenario 1) happens. He can 'buy-in' at $1.00 per share and sell at a higher value and pocket the difference.
What determines the 'current value'- in a public company that would be Market Cap / Shares outstanding. Is it the equity value of the firm at the time of the transaction? (enterprise value less debt)?
It would be XYZ / 100,000,000 total shares. What is the XYZ (like what is the theoretical concept) and how is it related to the EV at which the company is acquired for?
Should just be most recent valuation. So if there is a company purchasing at $210M then that would be the new "market cap" unless there is something in the employment agreement/grant docs that stipulates otherwise.
You should talk to a management advisor and a tax advisor is the reality of this
And all that matters is equity value
So do you disagree with what PrivatePyle said above?
Not necessarily but there’s not enough information and from the way you explain the situation is very clear you don’t know how this works which means it’s very likely you’re misinterpreting important things when relaying here or simply not disclosing as you think they don’t matter
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