Management Options & Warrants
Hey guys,
Long time lurker here and wanted to ask the PE veterans of this forum a question. Will caveat that while this may come easy to most of you, I am still struggling to wrap my head around what the correct approach is to calculate management options and warrants (have looked through the forums and I seem to be getting mixed answers).
Let's assume the following:
Exit Equity Value: $100
Management Options: 10% of the fully diluted company, post-transaction at $0 exercise price
Warrants: lenders receive warrants that represent 5% of the fully diluted company, post-transaction at $0 exercise price
Assume purchase price was funded 50/50 between debt and equity (i.e., $50 sponsor equity)
How much of the exit equity value gets distributed to management, warrant holders, and sponsor? Given the option and the warrants have an exercise price of $0, exit proceeds should be split 10/5/85 between management, warrant holders, and sponsor but please correct me if I'm wrong.
It depends on how the instruments are structured, but I'd usually assume that the sponsor's equity gets a 1x first, then you start splitting the remaining common using these fully-diluted %s.
So if the $100M company (buy-in) sells for $200M:
Total Proceeds: Sponsor - $50M + $85 = $135 (2.7x MOIC); Management - $10M; Warrants - $5M
Let me know if others agree. I admittedly haven't done a ton with warrants.
Agree with your math. Also agree that initial sponsor equity will almost surely be “preferred”.
Not entirely sure but shouldn't the spilt among management, warrant holders, and sponsor be 9/4/87 as the 10% and 5% are fully-diluted ownership?
1/(1+10%+5%) = 87%, then 87%*10% and *5% get you 9 and 4. 87+9+4 = 100
Not really following. Fully-diluted ownership is implicitly the same as the distribution %s.
If someone owns 5% of fully-diluted ownership, they get 5% of common equity proceeds (irrespective of company capitalization or how much preferred equity went in, etc.).
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