Equity Comp in Turnarounds and Consolidations

Q: I thought i’d ping you on your thoughts regarding the non-cash compensation for key executives in strategic plays that aren’t strictly early-stage.. as an example, how would you structure your framework in providing equity comp to key executives in strategies involving turnarounds, consolidations and roll-ups etc.

A: (Brad): Equity comp for turnarounds / consultations / roll-ups for management and employees tend to be in the 10% to 20% range.  The structures vary widely, but they are usually some combination of stock, stock options, or a bonus pool based on performance.

It’s usually pretty easy to structure something that is fundamentally interesting to everyone in the success case although the style and approach of private equity investors tends to vary a lot.  Usually, the larger and less messed up the company is, the larger the base package tends to be.  This is counter-intuitive as you’d expect the most messed up companies to have the biggest upside for new management, but my observation (mostly indirectly, although directly in several cases) is that the patterns of comp tend to be more linked to the investors and their historical relationship with management (e.g. investors are more generous with either (a) people they’ve worked with before or (b) superstars that they want to work with.)

I’ve rarely seen situations where the non-investor equity ends up going above 20% in a turnaround or consolidation, but I’m sure there are cases where this has occurred, especially if management is founding the company and then bringing in investors.

  • Equally important to the percentage of common shares is any carve out before liquidation preferences.
    In a turnaround situation, there could be deep liquidation preferences — and the new management team, having done a fantastic job, would be left with valueless stock without this provision.