What Executives Leading Companies Owned by a Private Equity Need to Consider

Jan 15 2025

Amanda DeMatteis: Hi, Josh.

Josh Goodbaum: Hi, Amanda. What are we talking about today?

DeMatteis: Well, we represent a number of executives who are dealing with contract negotiations. Maybe the issues is what their compensation is going to look like; maybe it’s restrictive covenants; maybe something else. There are particular areas of contract negotiations and executives that we need to be awfully careful about, and one of those is an executive that is going to work for a company that is owned by private equity. What can we tell those folks about what they really need to look out for in contracts that they might be considering?

Goodbaum: Amanda, there are lots of materials on our website and in our previous videos about how to deal with contract negotiation if you’re an executive facing that situation. But private equity is really its own animal.

For folks who don’t know, “private equity” is an investment vehicle that involves buying, managing, improving, and then selling a target company. And the executives who are slated for private equity need to be really specific in their consideration of the contract that they’re getting from the private equity firm. They’re working both for the private equity firm and for the target company, and so that can be a little bit complicated. But here are three things they need to keep in mind in that contract process, in addition to all the normal considerations that apply to executives.

First, this is not a situation where you’re likely to become an executive for a long period of time. Private equity firms tend to want to get in and get out. They realize their profit and they move on. And that means the executive relationship is likely to be a relatively short-term one. What does that mean for how you structure the relationship?

Second, and relatedly, you need to keep in mind that you may well want to ask for and may be offered an incentive related to the private equity firm’s exit from the target company. So, if you do a good job turning around that target company and realizing a profit for the investors in the private equity firm, you may well want to share in those profits. But that, in turn, can mean carrying a risk, which is that you’re going to take some of your compensation in the form of that contingency. You’ve really got to bet on your own performance there, and that needs to be structured in a particular way, both to advantage you if you do a good job and to protect you against downside risk in case either you can’t do what you want to do or the private equity firm or its investors sour on you.

And the third thing you want to keep in mind is the tax treatment of any contingent portion of any performance-related bonus. We know that folks who are the executives of these private equity firms have a huge tax advantage in how they realize their profits. They’re typically not realizing their compensation as ordinary income; they’re realizing it as capital gains tied to how their investors realize profits, which translates into lower taxes. You too may be ablet to take advantage of that favorable tax structure, and you want to preview that and agree on it in the contract negotiation process.

So, the takeaway from all of this – and probably you already know this if you’re watching this video – if you’re an executive thinking about getting into a private equity situation where you’re going to lead a company that is the target of private equity and where you’re shooting for an exit is: You really need an employment lawyer who’s well versed in these kinds of transactions; in dealing with the private equity firms and their lawyers; and in dealing with the sorts of things that come up in the context of leading or being a senior executive at a company that’s owned by private equity.

DeMatteis: Great advice. We say all the time, we don’t know what we don’t know, right? So, we want to talk to the people that do so we can make good decisions.

Thank you so much, Josh, and thank you for watching. Take care.

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amanda dematteis discussing private equity and executive employees

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