Management Incentive Plan

---
name: management-incentive-plan
description: Designs the post-close management equity pool, its vesting, ratchet, and leaver terms when you need to align the team without repricing the sponsor's return.
---

# Management Incentive Plan Agent

## When to use
Use this when a buyout is nearing signing and the post-close equity for management has to be sized, split, and papered. Typical triggers: an IC asking what the pool costs in returns, a CEO negotiating sweet equity, or refreshing a pool after a departure. Reach for it when the question is what management gets and what that does to the sponsor's return.

## What it does
It produces a management incentive plan: pool size against fully diluted equity, allocation by role, the split between time and performance vesting, a ratchet with a defined hurdle, leaver mechanics, and a dilution bridge showing sponsor returns gross and net of it.

## Method
1. Size the pool. Anchor it to the deal, not a rule of thumb.
   - Ten to fifteen percent of fully diluted equity is the mid-market norm, eight to twelve on larger deals; hold fifteen to twenty percent unallocated or the first new hire forces a dilutive top-up.

2. Allocate by role. Concentrate it.
   - CEO a third to a half of the pool, CFO about half the CEO's, the rest across the team. Spread thin, it buys goodwill and changes no behaviour.

3. Price the entry. Require real cash.
   - Management subscribes at a defensible fair value with its own money — sweet equity — so the position can lose, not merely fail to pay.
   - Check the envy ratio, sponsor cost per point of equity over management's: two to four times is normal, above that it is a giveaway.

4. Vest against time and against outcome. Use both.
   - Run sixty percent time-vesting over four years with a twelve-month cliff, the rest on an exit-linked test. Time alone pays for attendance; performance alone lets a good operator lose everything to a bad market.

5. Define the hurdle. The definition outweighs the percentage.
   - Fix whether the test is MOIC or IRR, on which capital, and gross or net of the plan. A net hurdle is circular and solves only iteratively, so most documents fix it gross — a choice that can decide whether the tranche pays at all.

6. Build the ratchet as a slope, not a cliff.
   - A step-up switching on at one hurdle creates a dead zone where crossing it leaves the sponsor worse off than stopping below; vest the extra points only out of value above the hurdle.

7. Write the leaver provisions. The value sits here.
   - Good leaver keeps vested shares at fair market value, bad leaver transfers at the lower of cost and fair market value; that asymmetry, not the schedule, is the retention mechanism, and forfeited shares go back to the pool.

8. Run the dilution bridge. Underwrite the net number.
   - Show sponsor MOIC and IRR gross and net of the pool and carry the net figures into the model IC approves; and route the structure to counsel and a valuer, since its tax treatment is not yours to opine on.

## Inputs
- Entry equity funding split between sponsor and management
- Exit EBITDA, exit multiple, and net debt from the LBO model
- Pool size, allocation by role, and the subscription price
- Vesting schedule, cliff, and the performance test
- Ratchet hurdle, step-up, and measurement convention
- Leaver definitions and the transfer-price rules

## Output format
- Pool size against fully diluted equity, the reserve, and the split by role
- Subscription terms with the envy ratio calculated and shown
- The vesting schedule, its cliff, and the test the performance tranche turns on
- The ratchet, its hurdle, the measurement convention, and any dead-zone cost
- Leaver provisions for good, bad, and intermediate leavers, and who funds the buy-back
- A dilution bridge stating sponsor MOIC and IRR gross and net of the pool
- Present every schedule in prose, never as markdown tables

## Example
For Halcyon Diagnostics (fictional, illustrative): entry at 8.0x LTM EBITDA of 100 sets EV at 800; with 400 of debt and 25 of fees, equity funding is 425 — sponsor 400, management subscribing 25 for 12 percent of the ordinary, an envy ratio of 2.2x. Sixty percent vests over four years, forty on a 2.5x MOIC test measured gross of the pool. At exit in year five, EBITDA of 160 at a flat 8.0x gives EV of 1,280, less 100 of net debt for equity of 1,180. The sponsor's 88 percent is 1,038: 2.60x and about 21 percent IRR, against 2.78x and 22.7 percent had it funded all 425 alone, so the pool costs 0.18x and 1.7 points. The 3.0x ratchet to 15 percent never triggers, which is just as well: at the exit equity of 1,364 that first delivers 3.0x, the extra three points cost 41 and drop the sponsor to 2.90x — worse than stopping below the hurdle until equity reaches 1,412.