LBO Model - Management Option Pool
How would you model this in an lbo model test during an interview?
My thoughts:
Would you assume some share count (90 shares) for the sponsor investment with a strike price = sponsor equity investment / 90 share
The mgmt would receive 10 options with a strike price per above.
Then once you exit in year 5, you'd take exit equity value divided by 90 shares = Ending Share Price
Assuming (in almost all cases due to value creation) Strike Price Ending Share Price, management receives 10 shares. There are now 100 shares (90% sponsor ownership / 10% management ownership)
Returns calc'd as follows:
Sponsor investment = the full $$ sponsor equity investment Sponsor exit equity = 90% (90/100 shares) of ending equity value
Mgmt IRR is essentially infinite or N/A since they didn't put any $$ in.
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