Definition - What does Sweet Equity mean?
Sweet equity is an instrument in the form of options, performance rights or rights to be issued further shares that increase the value of management equity relative to other shareholders, depending on the success of the investment.
Sweet equity shares are typically only issued to management teams in a leveraged buyout (LBO) involving a private equity (PE) partner. This class of shares is also issued at a lower price to motivate management with the incentive of a higher upside and is designed to divert more of the total equity proceeds on exit to management.
Divestopedia explains Sweet Equity
Sweet equity is subject to hurdles before it is "in the money," which could be the financial performance of the investee company; or, more likely, the internal rate of return (IRR) -- say 30% -- of the investment achieved by, and a multiple -- say 2.5 times -- of, the original invested amount returned to the private equity fund.
The management team should review these arrangements for clarity on how the IRR calculations are affected by refinancings, dividends, further equity issues and value returned to the PE fund through fees and partial sales.
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