10+ hours of podcasts, in 5 minutes.
9 quotes from 1 episode on Private Equity Funcast, each with a timestamped link to the source.
Ryan Milligan states that private equity compensation structures often contain hidden risks for operators. Securing LLC profits interests prevents executives from writing personal checks to exercise traditional stock options.
Refusal to share distribution waterfall models during hiring indicates a sponsor intentionally conceals potential downside economics from incoming managers.
“I just think it's about somebody hesitating to share information. If somebody I've heard people have been told, 'We don't share the waterfall.' But that's I don't know. I'd say, 'Well, then let me talk to your boss in that situation.'”
Sponsors introduce tension near a sale by waiting until the last minute to demand executives roll 30% of proceeds into a new buyout.
“On the sale where this also gets tense is private equity firm is selling and they they wait too long toward the end to say, 'Oh, by the way, another private equity firm is buying and they need you to roll 30%,'”
Operators typically receive flat equity percentage quotes that only apply to the residual common equity pool.
“So what's probably going to happen is you're going to get quoted a percentage…”
From Why a 1% Equity Pool Slice Yields Far Less Than Expected
Getting profits interests through an LLC structure is the most tax-advantaged path for a manager. This setup grants equity upside in a sale without demanding out-of-pocket capital.
“So wherever possible we use what are called profits interests…”
From Why Profits Interests Beat Stock Options in PE Equity Pools
“Those are the most tax advantaged situations for a manager. Getting profits interest as part of an LLC structure is probably what you want.”
From Why Profits Interests Beat Stock Options in PE Equity Pools
To start the clock on long-term capital gains treatment, stock options carry a strike price. Operators actually write personal checks to take possession of the shares.
“The issue with stock options is it actually requires you so there'll be a strike price and you you'll have to exercise your stock options.”
From Why Profits Interests Beat Stock Options in PE Equity Pools
“A lot of times with stock options to take possession of the stock option to start what you call start the clock on capital gains treatment people actually have to write a check.”
From Why Profits Interests Beat Stock Options in PE Equity Pools
Private equity sponsors know the exact answers to valuation mechanics. Executives cross-check internal equity illustration grids by taking the information to external investment bankers and other operators.
“On my side of the table, I know the answers to all these questions…”
“Once you have that information then call your investment banking friends, call other executives, call other private equity firms and bounce it off them for a sanity check.”
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