Mgmt options in LBO - why everywhere different?
I've seen so many different ways of how management options are calculated within an LBO and I am confused.
What is the most replicable way of thinking about it?
e.g., I am looking at a case with 5% mgmt options on a deal in which mgmt invested 25% from the start (and 75% sponsor). Upon exit there is hte potential for 5% addtional options.
I tried to reason myself through it via a per share logic and thought about the proceeds I get when we assume strike prices of beginning equity structure but it still does not make sense to me.
It doesn't matter, you just swap management's bank accounts in the funds flow at exit with yours and flee to Cambodia.
The hidden perk of PortCo work as an Associate.
I might be in the minority on this, but I find the 'per share' method more confusing than just sketching out each step of the waterfall based on (i) proceeds available/needed to be paid in that step based on the design and available proceeds, (ii) implied ownership % for each party in that step.
I'm making things up, but this is probably close to the intended design. Let's say management gets 5% after everyone is repaid a 1x and 5% after a 2x.
I would therefore model out the following (with some fake numbers thrown in and assuming $100M initial equity):
Equity Value to distribute: $250M
Defo agree - I really dislike doing it on per share basis - much easier / cleaner on a % / pool of value type
Agree in the context of an interview or model test, but will argue that a per-share basis is more straightforward for a platform that may do M&A.
Agree with this. Easier to think about % for the initial LBO but per share mechanism important / necessary for future acquisitions
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