When you receive an offer for an executive role at a private equity portfolio company, it's likely that the equity package will look compelling on paper.
The numbers can be significant — but they work differently than the stock comp you may have received at a public company, and the differences matter before you sign.
That said, if the sponsor isn't willing to engage about the potential future value of the equity you've been offered, that is a red flag, but something we will address in a separate article.
What should executives review before accepting an offer to join a private equity company when substantial equity is involved?
The Structure Is Different From What You're Used To
If you've spent your career at public companies, your experience with stock-based compensation is likely built around RSUs and options with a known market price. PE equity doesn't work that way. Your shares have no public market, no daily price, and no liquidity until the sponsor decides to exit — whether through a sale or an IPO. There is a very big difference between having a liquidity event at a public company (i.e. a quarterly trading window) and being tied to the sale of an entire business.
That exit could be three years away, or it could be five, and when a deal is in motion it doesn't happen overnight. The timeline is not yours to control, but this isn't a reason to walk away from the offer. Instead, it's a reason to understand what you're actually being offered before you accept it.
Your Upside Depends on the Dynamics of the Exit
Stock-based compensation at private equity companies is almost always more complicated than what you might receive from a public company, or even from a company that is VC-backed. Your payout at exit depends on the sponsor's return, and this is driven by how much they paid for the business, how much debt is outstanding, and the multiple they achieve when they sell.
Vintages (i.e. when the company last changed hands) also make a big difference, as these reflect low, high, or even extreme market conditions as they relate to valuation. So, if a company last traded at a time when valuations were exceptionally high, that sets a high bar for the firm to later sell at an acceptable price. The same holds true when a company was sold when valuations were generally low, but PE firms have considerable control over when they sell an asset, so that doesn't happen often. Market conditions at the time of the last and next sale of a company can easily overwhelm actual changes in the underlying growth and profitability of a business.
Liquidity Is the Risk Most Executives Underestimate
Many executives view the illiquid nature of employer stock at a PE-owned firm as the biggest risk they face because they are wholly dependent on a successful exit event in order to make any money from their stock. While a valid concern is how value is created, this is actually a secondary issue.
The most pressing issue is what happens if they leave in advance of an exit event — voluntarily or not — with meaningful vested equity, and even more so if the company is performing well, ironically.
Unlike VC-backed companies, which often start with a relatively low valuation and where ISOs (Incentive Stock Options) are the most common form of employer stock, PE companies are more likely to offer NSOs (Non-Qualified Stock Options) than ISOs due to vesting structures that may be tied to the multiple at which the company is sold.
The implication is that exercise prices tend to be very high six figures, or sometimes seven figures, and that doesn't even include taxes resulting from a gain upon exercise. These are true golden handcuffs, and as a result, separation can be an unpleasant experience if it takes place prior to an exit when the company is doing well.
All of these factors have real planning implications, and that's why it can be highly valuable to speak with an advisor who is skilled in stock-based compensation, with a close understanding of compensation structures at PE portfolio companies. Making a decision to join — or leave — a PE company at the executive level has implications for the next several years of your career, as well as your personal finances.
If you'd like to explore whether ongoing financial planning and investment management make sense for your situation, you can schedule an intro call here:
Common Questions
What is the difference between PE equity and public company stock options?
PE equity has no public market and cannot be sold until a liquidity event such as a sale or IPO. Public stock options can typically be exercised and sold once vested, with a known market price at any time. Vesting structures also tend to be more complicated, often tied to the exit event, not just employee tenure.
How long do executives typically hold PE equity before a liquidity event?
Hold periods vary but typically range from three to seven years depending on the sponsor's fund cycle and market conditions. There is no guaranteed timeline, and in some cases it may exceed how long someone might normally intend to remain at one company.
What documents should I review before accepting a PE equity package?
Ask for a copy of the stock plan document and all relevant details related to what you are being offered. An advisor who is skilled in executive compensation can evaluate the potential upside of an equity package — or the absence of upside — as well as the key terms and conditions required to achieve value.
This blog was written by Jeremy Bohne, Principal & Founder of Paceline Wealth Management. Paceline is a fee-only investment advisor serving clients in the Boston area, and on a remote basis throughout the country. Paceline specializes in helping tech and biotech executives, business owners, physicians, and those seeking financial planning services.