Management Options - LBO
I came across the below in an LBO modelling question. What do they mean by "option strike price is set at Sponsor's original cost"? Can you walkthrough how this will be dealt with?
"Management have agreed to a 5% option pool that will be fully allocated at closing. The option strike price is set at Sponsor's original cost."
Thanks!
It’s just an option for management where they benefit from any appreciation. Let’s say sponsor buys a business for $100M and shares are set at $10. If they sell at 5 years for $200M, management can buy 5% of the shares (diluting other holders) for $10 each even though the shares are actually worth $20 (ignoring dilution but you get the idea)
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