Structuring Milestone Ratchets For Operator Equity In Downside Turnarounds
Milestone ratchets grant turnaround operators equity tranches as operational targets, net debt reductions, and cash flow hurdles are achieved.
phantom equity units
Meaning
Cash-based incentive plans provide employees with a financial benefit that tracks the price of company stock without issuing real shares. Recipients of phantom equity units receive a payment upon a specific trigger event, such as a sale of the company. This arrangement avoids the complexity of adding new names to the cap table.
Value Tracking
The contract specifies how the unit value is calculated, often using a formula based on earnings or a recent valuation. These units mirror the upside of ownership without providing voting rights or dividends. The founder uses this tool to provide incentives when the available equity pool is limited.
Liquidity Timing
Payout is usually tied to a change in control or the end of a specific vesting period. Because phantom equity units are settled in cash, the company must ensure it has the liquidity to pay out the units when they mature. This obligation is recorded as a liability on the balance sheet which can impact the net worth of the company during an audit.
Ownership Concentration
Equity remains concentrated in the hands of the original shareholders because no new shares are created. This concentration simplifies the decision-making process during a potential exit. The cost is the cash outflow required at the moment of the event.