Understanding Equity Structures in Private Equity

Before you accept a compensation package, know how your vesting schedule works. 

For many executives entering or returning to the world of private equity, the equity payout itself is among the top reasons they take on the challenge. A KPMG study revealed that 65% of management within PE portfolio businesses report that equity is the most motivating factor in their compensation. A recent Falcon survey shows that 57% of executives feel equity is the most important component when negotiating their compensation package. Firms know that equity is a driving factor for executive alignment, which is why they usually gravitate toward schedules that will drive executive performance. 

Each PE firm typically has their own unique vesting schedule that will apply to each executive’s compensation plan. These schedules generally apply to all executives managed under the firm, and are non-negotiable. Spending valuable time and energy trying to convince sponsors to shorten your vesting period or adjust the plan to your preferences isn’t as valuable a use of your time as other methods of evaluation and diligencing. 

Most vesting schedules can be broken down into time-based or performance-based models.  From there, schedules can vary based on length of vesting time, and on performance benchmarks. Regardless of whether vesting is time or performance-based, private equity vesting participation tends to be limited to the executive team.

Time-Based Schedules

Vesting schedules take into consideration the typical PE-backed hold period of three to five years . For example, a simple time-based schedule woul...