Simplified vs Complex Option Pool
Hi Everyone,
I've been going through some LBO models and I am seeing varying ways on how to calculate management options at exit. The two methods I see are either:
1. Excess equity aka exit equity less initial sponsor equity * mgmt option % or
2. Treating the options similar to stock options in TSM where the options get exercised then the proceeds get added to exit equity value then mgmt receives option % * Exit equity value inlc. option proceeds
Method #2 seems more practical to me yet I still see a lot of models using method #1. How do you determine which method to use in the context of modeling tests?
Thanks!
Assuming the options are all struck in line with the sponsor's equity basis, both will result in the same figure for net proceeds to the optionholders and the sponsor - so it shouldn't matter which you use for a model test.
Simple numbers:
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