One the most common questions I get on here is around management incentive programs- the sweat equity award for PE operators.
Makes sense... these programs are the #1 reason to be a private equity operator. They can be life changing (believe me).
But these incentive programs (which go by all kinds of acronyms: LTIPs, MIPs, MIEPs...) can be extremely complicated.
So below, I have compiled a list of questions to help you evaluate the equity opportunity.
These programs are often highly structured and complicated. It is important to realize that their value is not just in your ability or the company's potential - it also lies in how the program is structured.
The questions below are intended to help you evaluate the potential value an equity award when considering a role within a PE-backed portfolio company.
These questions will demonstrate you have some understanding of the mechanisms behind these programs and the key drivers behind creating value.
And, it forces the PE firm to reveal assumptions they may be glossing over.
Even if they get a little squirmy, they will be impressed with your understanding and it will likely increase your leverage.
Couple notes...
- I've added a 🔑 logo next to the ones I thought were most important
- Some questions are bigger than just the structure, but they will help you evaluate the value to you personally
- I've left some similar/repetitive questions in as they appear in a different context/section
Hope you find this helpful...
Comment with any additions and I will try to compile a follow-up to this so we all have a collective resource.
-----
1. Structure & Terms
Mechanics
- What form of equity am I receiving (options, profits interests, RSUs, phantom equity, direct units)? (helps understand tax implications) 🔑
- What is the total size of the management equity pool? Has it been reset before?
- How many executives participate in it, and how are allocations typically adjusted over time?
Vesting & Triggers
- Is vesting time-based, performance-based, or hybrid? 🔑 *beware time & performance based i.e. IRR and MOIC which can make hitting thresholds much harder
- What are the hurdles for each vesting tranche? 🔑
- Are the hurdles based on PE firm performance, overall performance, or something else? 🔑
- What are the specific time-based cliffs and intervals? 🔑
- What happens to unvested equity on an early exit, recap, or sale?
- Is there accelerated vesting on change of control or termination without cause? 🔑
Valuation
- What is my strike price or unit price at grant?
- How was that price determined (latest 409A or transaction value)?
- What is the expected range of unit prices at various IRR/MOIC outcomes? 🔑
- What is the window and process to exercise after departure?
- Are taxes due on exercise or only at liquidity? 🔑
Liquidity & Exit
- When can I actually convert equity to cash? Only at exit or also at recaps?
- Are management participants allowed to sell pro rata in secondary or recap events?
- Are there drag-along or tag-along rights for management?
- Is there any right of first refusal or forced sale language?
- What is the post-exit lockup, if any?🔑
Dilution & Co-Invest
- What is expected dilution from future issuances, M&A, or refresh grants? 🔑 (I like this question just to hear how the firm thinks about it)
- Will I have the option to co-invest cash alongside the fund? On what terms? 🔑 (you should be able to invest on same terms as PE firm, otherwise, don't do it)
- How are future refresh grants handled if the hold extends beyond the expected period?🔑
Makes sense... these programs are the #1 reason to be a private equity operator. They can be life changing (believe me).
But these incentive programs (which go by all kinds of acronyms: LTIPs, MIPs, MIEPs...) can be extremely complicated.
So below, I have compiled a list of questions to help you evaluate the equity opportunity.
These programs are often highly structured and complicated. It is important to realize that their value is not just in your ability or the company's potential - it also lies in how the program is structured.
The questions below are intended to help you evaluate the potential value an equity award when considering a role within a PE-backed portfolio company.
These questions will demonstrate you have some understanding of the mechanisms behind these programs and the key drivers behind creating value.
And, it forces the PE firm to reveal assumptions they may be glossing over.
Even if they get a little squirmy, they will be impressed with your understanding and it will likely increase your leverage.
Couple notes...
- I've added a 🔑 logo next to the ones I thought were most important
- Some questions are bigger than just the structure, but they will help you evaluate the value to you personally
- I've left some similar/repetitive questions in as they appear in a different context/section
Hope you find this helpful...
Comment with any additions and I will try to compile a follow-up to this so we all have a collective resource.
-----
1. Structure & Terms
Mechanics
- What form of equity am I receiving (options, profits interests, RSUs, phantom equity, direct units)? (helps understand tax implications) 🔑
- What is the total size of the management equity pool? Has it been reset before?
- How many executives participate in it, and how are allocations typically adjusted over time?
Vesting & Triggers
- Is vesting time-based, performance-based, or hybrid? 🔑 *beware time & performance based i.e. IRR and MOIC which can make hitting thresholds much harder
- What are the hurdles for each vesting tranche? 🔑
- Are the hurdles based on PE firm performance, overall performance, or something else? 🔑
- What are the specific time-based cliffs and intervals? 🔑
- What happens to unvested equity on an early exit, recap, or sale?
- Is there accelerated vesting on change of control or termination without cause? 🔑
Valuation
- What is my strike price or unit price at grant?
- How was that price determined (latest 409A or transaction value)?
- What is the expected range of unit prices at various IRR/MOIC outcomes? 🔑
- What is the window and process to exercise after departure?
- Are taxes due on exercise or only at liquidity? 🔑
Liquidity & Exit
- When can I actually convert equity to cash? Only at exit or also at recaps?
- Are management participants allowed to sell pro rata in secondary or recap events?
- Are there drag-along or tag-along rights for management?
- Is there any right of first refusal or forced sale language?
- What is the post-exit lockup, if any?🔑
Dilution & Co-Invest
- What is expected dilution from future issuances, M&A, or refresh grants? 🔑 (I like this question just to hear how the firm thinks about it)
- Will I have the option to co-invest cash alongside the fund? On what terms? 🔑 (you should be able to invest on same terms as PE firm, otherwise, don't do it)
- How are future refresh grants handled if the hold extends beyond the expected period?🔑
2. Returns Math & Performance Assumptions
Underlying Assumptions
- What base-case, management-case, and stretch-case models support the equity value? 🔑
- Over the 5-7 year hold, what are your assumptions for:
--> Organic revenue growth
--> EBITDA margin improvement
--> After-tax FCF before debt service as % of EBITDA
--> Exit multiple relative to entry multiple
- What is the timeline to exit, and who is the likely buyer universe? 🔑
Buy & Build Dynamics
- If part of a roll-up, what % of the target MOIC comes from M&A?
- How much incremental EBITDA is assumed from acquisitions?🔑
- What multiple arbitrage is underwritten (entry vs. platform multiple)?🔑
- What is the assumed acquisition cadence and integration plan?
-Is there ample debt capacity to fund those deals?🔑
Sensitivity & Downside
- How does the model behave under lower growth, margin compression, or multiple contraction?
- What happens to my equity if the sponsor needs to fund a follow-on equity cure?
- How do recaps, refinancings, or partial divestitures affect management equity?🔑
- What level of MOIC corresponds to a “0” outcome for management?
3. Capital Structure, Debt, & Risk Profile
Balance Sheet Overview
- What is the current debt structure and leverage ratio (net debt / EBITDA)?🔑
- Is the debt fixed or floating rate? If floating, what rate assumptions are baked in?
- What is projected pro forma leverage after planned acquisitions?🔑
- What’s the fund’s view on leverage tolerance and refinancing risk?
Cash Flow & Coverage
- What is projected FCF conversion?
- What is pre-tax and post-tax FCF coverage of interest and mandatory amortization?
- How much annual cash is available for reinvestment vs. debt paydown?🔑
- What covenant constraints or springing tests exist that could limit flexibility?🔑
Cap Table & Preferences
- Can I see the full cap table?
- What are the liquidation preferences and hurdle rates?🔑
- What’s the sponsor’s equity basis and invested capital vs. management?
- Are there multiple classes of preferred equity with cumulative returns?
- If other classes, what are the incentive thresholds (e.g., 8% hurdle, 1.5x return threshold)? 🔑 (e.g., common equity class getting an ~8% guaranteed return first in the waterfall)
Recaps & Dilution Events
- How does management participate in recaps?🔑
- Will I be able to take partial liquidity?
- How are follow-on equity rounds priced and allocated?
- How have prior portfolio recaps affected management outcomes historically?
4. Governance
PE Firm Profile
- Where is the fund in its lifecycle (early, mid, harvest stage)?
- How much uncalled capital remains for follow-ons or acquisitions?
- How many boards is this firm currently sitting on per partner?
- What is the typical hold period and realized MOIC/IRR track record?🔑
- What % of past management teams have achieved a meaningful payout?🔑
Governance & Decision Making
- Who controls/makes up the board?
- What decisions require management vs. sponsor approval (M&A, hiring, capital spending)?
- How are strategic priorities set and updated?
- What’s the cadence of board and operating reviews?
Information & Reporting
- Can I see the financial model that underpins the projections and equity waterfall?🔑
- Will management have visibility into full company performance and leverage metrics?
- Will I receive regular updates on cap table and valuation evolution? (usually not unless maybe you are the CFO)
Cultural Fit & References
- Can I speak with current or former portfolio company CEOs/CFOs?🔑
- How does the sponsor behave in down cycles?
- Are they patient capital partners or heavy operators?
- How do they approach replacing or re-incentivizing executives?
Underlying Assumptions
- What base-case, management-case, and stretch-case models support the equity value? 🔑
- Over the 5-7 year hold, what are your assumptions for:
--> Organic revenue growth
--> EBITDA margin improvement
--> After-tax FCF before debt service as % of EBITDA
--> Exit multiple relative to entry multiple
- What is the timeline to exit, and who is the likely buyer universe? 🔑
Buy & Build Dynamics
- If part of a roll-up, what % of the target MOIC comes from M&A?
- How much incremental EBITDA is assumed from acquisitions?🔑
- What multiple arbitrage is underwritten (entry vs. platform multiple)?🔑
- What is the assumed acquisition cadence and integration plan?
-Is there ample debt capacity to fund those deals?🔑
Sensitivity & Downside
- How does the model behave under lower growth, margin compression, or multiple contraction?
- What happens to my equity if the sponsor needs to fund a follow-on equity cure?
- How do recaps, refinancings, or partial divestitures affect management equity?🔑
- What level of MOIC corresponds to a “0” outcome for management?
3. Capital Structure, Debt, & Risk Profile
Balance Sheet Overview
- What is the current debt structure and leverage ratio (net debt / EBITDA)?🔑
- Is the debt fixed or floating rate? If floating, what rate assumptions are baked in?
- What is projected pro forma leverage after planned acquisitions?🔑
- What’s the fund’s view on leverage tolerance and refinancing risk?
Cash Flow & Coverage
- What is projected FCF conversion?
- What is pre-tax and post-tax FCF coverage of interest and mandatory amortization?
- How much annual cash is available for reinvestment vs. debt paydown?🔑
- What covenant constraints or springing tests exist that could limit flexibility?🔑
Cap Table & Preferences
- Can I see the full cap table?
- What are the liquidation preferences and hurdle rates?🔑
- What’s the sponsor’s equity basis and invested capital vs. management?
- Are there multiple classes of preferred equity with cumulative returns?
- If other classes, what are the incentive thresholds (e.g., 8% hurdle, 1.5x return threshold)? 🔑 (e.g., common equity class getting an ~8% guaranteed return first in the waterfall)
Recaps & Dilution Events
- How does management participate in recaps?🔑
- Will I be able to take partial liquidity?
- How are follow-on equity rounds priced and allocated?
- How have prior portfolio recaps affected management outcomes historically?
4. Governance
PE Firm Profile
- Where is the fund in its lifecycle (early, mid, harvest stage)?
- How much uncalled capital remains for follow-ons or acquisitions?
- How many boards is this firm currently sitting on per partner?
- What is the typical hold period and realized MOIC/IRR track record?🔑
- What % of past management teams have achieved a meaningful payout?🔑
Governance & Decision Making
- Who controls/makes up the board?
- What decisions require management vs. sponsor approval (M&A, hiring, capital spending)?
- How are strategic priorities set and updated?
- What’s the cadence of board and operating reviews?
Information & Reporting
- Can I see the financial model that underpins the projections and equity waterfall?🔑
- Will management have visibility into full company performance and leverage metrics?
- Will I receive regular updates on cap table and valuation evolution? (usually not unless maybe you are the CFO)
Cultural Fit & References
- Can I speak with current or former portfolio company CEOs/CFOs?🔑
- How does the sponsor behave in down cycles?
- Are they patient capital partners or heavy operators?
- How do they approach replacing or re-incentivizing executives?
5. Personal Fit, Belief & Strategic Conviction
(this is the most important section!)
Vision & Belief
- Do I genuinely believe in the business model and value-creation plan?
- What edge or moat differentiates this company from larger incumbents?
- How much of success depends on my ability to execute vs. external market tailwinds?
Support & Resourcing
- What resources, networks, and operating partners does the sponsor bring?
- Will I have autonomy in strategy, team building, and M&A execution?
- How are conflicts handled between short-term fund objectives and long-term business health?
Economic Trade-off
- If this equity never pays off, would I still view the role and experience as worthwhile?
- How much of my compensation am I willing to risk on sponsor projections?
- Do I understand the “worst-case” outcome and still accept the asymmetry?
Gut Check
- Do I trust the people across the table? 🔑🔑🔑🔑🔑
- Would I build something with them if the financial upside vanished?
- Am I motivated more by ownership or by belief in the mission?
Other:
- What is the PE firm’s exit timing sensitivity if markets close (can they extend the hold)?
- What’s their policy on refreshing equity for long holds (>7 years)?🔑
- Is there D&O coverage and indemnity for key executives?
- Have they modeled carried-interest hurdles relative to management’s IRR/MOIC tiers?
----
Good luck out there!
(this is the most important section!)
Vision & Belief
- Do I genuinely believe in the business model and value-creation plan?
- What edge or moat differentiates this company from larger incumbents?
- How much of success depends on my ability to execute vs. external market tailwinds?
Support & Resourcing
- What resources, networks, and operating partners does the sponsor bring?
- Will I have autonomy in strategy, team building, and M&A execution?
- How are conflicts handled between short-term fund objectives and long-term business health?
Economic Trade-off
- If this equity never pays off, would I still view the role and experience as worthwhile?
- How much of my compensation am I willing to risk on sponsor projections?
- Do I understand the “worst-case” outcome and still accept the asymmetry?
Gut Check
- Do I trust the people across the table? 🔑🔑🔑🔑🔑
- Would I build something with them if the financial upside vanished?
- Am I motivated more by ownership or by belief in the mission?
Other:
- What is the PE firm’s exit timing sensitivity if markets close (can they extend the hold)?
- What’s their policy on refreshing equity for long holds (>7 years)?🔑
- Is there D&O coverage and indemnity for key executives?
- Have they modeled carried-interest hurdles relative to management’s IRR/MOIC tiers?
----
Good luck out there!
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