As part of a private equity (PE) transaction, it is common for investors to offer incentive programmes to the management team.
These are designed to ensure stronger alignment between the shareholders and management team so that the business achieves strategic and financial objectives.
It also contributes to a stronger sense of ownership and limits churn among key employees and managers.
One form of such a programme is sweet equity – where managers and employees can get a disproportionately high return on a small equity investment.
How might such a scheme work?
Sweet equity can account for five-to-ten per cent of the total equity in a company.
Sweet equity
Sweet equity schemes are usually focused on management teams or employees of a business who are not major shareholders today. These programmes can be narrowly defined, taking in a small number of executives, or broader, and open to more employees, even new starters.
Sweet equity can account for five-to-ten per cent of the total equity in a company.
Each member of the scheme is offered the chance to acquire a share of equity in the business to create a sense of ownership. Importantly, shares are often offered for purchase at more attractive terms than the broader shareholder group, providing a higher potential upside. They are normally designed to divert more of the total equity proceeds to holders on exit.
At the same time, they are sometimes also linked with a higher risk through a so-called ‘hurdle rate’, which needs to be met to receive a pay-out.
Incentive programmes can vary, and we are on hand to help build a scheme into a transaction, meeting the needs of both sellers and investors.
A well-executed scheme can be a competitive parameter of a bid.
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