Most PE executive offers are negotiated on the wrong number.

An executive weighing a PE-backed offer will spend most of the negotiation on base and bonus. Those are the numbers they understand. The equity is the number that will actually determine whether the five years were worth it, and it is usually the one nobody pressure-tests.

‍

The real problem

Public company equity is simple enough to evaluate. There is a share price, it is public, and the grant is worth roughly what the arithmetic says.

A management incentive plan works differently, and the difference is structural rather than a matter of degree. Your grant is not a claim on the company’s value. It is a claim on what remains after a specific sequence of other people get paid.

Most executives learn that sequence after signing.

‍

The waterfall is the whole deal

Your equity sits at the bottom of the capital stack. At exit, proceeds pay out in order. Bank debt and secured lenders first. Unsecured debt next. Then the sponsor’s invested capital. Then the sponsor’s preferred return. Whatever is left flows into the management incentive pool, and your slice comes out of that.

Run the implication. A company can sell for a number that looks like a win, the sponsor can clear its hurdle, and the management pool can still pay out far less than the headline suggests. In a deal that goes sideways, it can pay nothing while everyone above you is made whole.

This is not a trick. It is how the instrument is designed, and sponsors are generally open about it if asked. The failure is that most candidates do not ask, because they are evaluating the grant as though it were stock.

‍

What the pool actually looks like

Typical MIP pools run 10 to 20 percent of total equity. The CEO takes the largest single share, with roughly half to sixty percent of the pool distributed across the rest of the leadership team: CFO, COO, and the VPs the plan depends on.

Vesting is usually time-based across four to five years, often with a one-year cliff, or performance-based and tied to exit metrics. Many plans use both.

Those are the numbers. They tell you the size of the pie. They tell you nothing about whether you will be there to eat it, or what it will be worth when you are.

‍

Four terms that decide the outcome

1. Where the hurdle sits and what it assumes. Ask for the sponsor’s preferred return and the invested capital figure, then ask what exit value is required before the pool pays anything at all. If nobody can produce that number quickly, that is information. Any sponsor who has thought carefully about alignment has run it.

2. How a bad leaver is defined. This is the term that quietly determines whether vested equity survives your departure. Narrow definitions cover cause in the ordinary sense. Broad ones can sweep in a resignation, a non-compete dispute, or a board decision you did not control. Read the actual language rather than the summary.

3. Single trigger or double. Single trigger means a change of control accelerates your vesting. Double means a change of control plus your termination. The second is common and it is not unreasonable, but it means a new owner can keep you unvested through another hold period. Know which one you signed.

4. How the pool was treated in the sponsor’s last three exits. The most useful question on this list and the one candidates skip. Terms describe intent. History describes behavior. Ask whether the pool was ever diluted, restruck, or renegotiated mid-hold, and ask to speak to a CEO from a prior portfolio company. A sponsor who hesitates at that request has answered it.

‍

Rollover is a separate decision

Many offers include or expect rollover, where you put your own capital in alongside the sponsor. That can be the right call, and sponsors reasonably read it as commitment.

Treat it as an investment decision rather than a compensation one. You are buying into the same waterfall, at the sponsor’s valuation, with no liquidity and no ability to exit early. Decide whether you would make that investment if it were offered without the job attached.

‍

The close

The executives who do well in these structures are not the ones who negotiated hardest. They are the ones who understood what they were negotiating over.

Title and base are the parts of the offer that feel real in the first week. The waterfall is the part that decides whether the five years paid.

Worth a read if you are weighing a PE-backed offer, or building a package you want a strong operator to accept. Contact us if you want a second set of eyes on the structure.

‍