If there is a 10% option pool, carved out of sponsor's investment stake, what does it mean exactly "carved out of sponsor's investment stake"? I usually understand that 10% means fully diluted shares(post-exercise), but does this mean any other meanings? In this case, sponsor acquires 100% of existing shares.
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Wording is a little odd // haven’t heard of the pool referred to that way. Mechanically, the sponsor is giving up 10% of upside after their capital (preferred equity) is repaid (see my example waterfalls in the other thread).
It was extremely helpful Thanks again.
I still don't get the full meaning of 'carved out of' though.
By any chance, Can I ask another quick question?
If there are exercisable options(ITM) at the take-private transaction, should equity value and EV include these values?
Let's say there are existing 100mil of shares and exercisable ITM options of 10mil shares and entry price(tender offer) @10, strike price @5
I thought 50mil should be added at purchase price level(after TEV) as sponsor will pay cash immediately to holders and EV should stay the same as the case w/o any exercisable options here.(100mil shares and no options). So purchase price will be different with options but TEVs are the same.
Am I right..?
Have seen several different methods on model tests. One method, (Exit equity- initial sponsor equity)*Option % = management options. Subtract this amount from Exit Equity (referenced above) and that will leave you will sponsor exit equity. Other method I’ve seen is assuming management actually buys in and exercises options, giving proceeds to add to total equity and then taking this total equity amount * option % to calculate as management options. Have seen the latter method on biws and wso. What is correct for model tests and in practice? Is management actually buying in or am I thinking about it wrong?
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