How to Manage Your Management Equity Plan

Management equity plans (MEPs), sometimes also referred to as a management incentive plan (MIP), play a crucial role within private equity strategies, serving as valuable tools for aligning management teams' objectives with the financial interests of private equity backers.

These equity programs have the potential to significantly enhance performance by incentivizing key personnel, thereby reducing operational risks typically associated with ambitious initiatives like business transformations and market expansions.

Given the nature of leverage buyouts and the additional burden of risk they carry, it's crucial that a firm considers both financial and operational factors in their strategy.

Through MEPs, companies can navigate the complexities of increased risk, ensuring everyone works toward common goals.

The effectiveness of these equity programs can ultimately shape the trajectory of a business's growth and success.

Key Takeaways

• MEPs or MIPs should align the interests of management with those of private equity firms.
• They play a critical role in mitigating financial and operational risks.
• MEPs incentivize employees to perform optimally, reducing the likelihood of failure.

The Benefits of Managements Equity Plans

A survey by Willis Towers Watson found that the median equity pool reserved by PE firms for company executives and key employees was 10% of total shares outstanding (undiluted).

Many PE firms give a meaningful stake in the business to the people running it. So what are the benefits of such incentives? Let's take a look:

• Alignment of Interests: MEPs effectively align managers' ambitions with those of private equity investors, fostering a shared commitment towards growth and a successful initial public offering (IPO) or sale.
  
  
• Risk & Reward Partnership: By investing in the company, managers perceive the direct impact of their decisions on performance, thus mirroring the risk-reward profile of the limited partner.
  
  
• Entrepreneurial Mindset: Transforming managers into stakeholders encourages them to adopt an entrepreneurial approach, which supports the investment thesis and stimulates venture capital-like innovation.
  
  
• Enhanced Commitment: A vested interest in the company's success motivates the management to drive strategic initiatives and long-term value creation.
  
  
• Network Expansion: As stakeholders, managers are more likely to leverage their personal network to benefit the firm, enhancing business development and scouting for opportunities.
  
  
• Attracting Talent: Offering stakes in the company makes it an appealing prospect for top-tier talent, crucial for steering the company towards success.
  
  
• Tax Benefits: Though this can vary from country to country, management equity plans can be structured to benefit from capital gains tax treatment, which is often lower than income tax. This can result in tax savingsfor management at exit, especially compared to regular salary income.
  
  

These MEP benefits can culminate in accelerated company growth, improved decision-making, talent retention, and strategic risk-taking, culminating in a successful company IPO or acquisition.

A real-world example of the benefits is GeoStabilization International (GSI), a PE-backed company.

After implementing an equity plan, the company saw its annual employee turnover rate drop from 50% to 17%, according to the Financial Times. 

And the purported impact didn’t seem to stop there. When Kohlberg Kravis Roberts & Co, one of the world’s leading investment companies, sold the company in October 2024 for over $1 billion—five times what they originally invested—GSI employees shared in the success. They received a $75 million payout.

Some even walked away with up to $325,000 each.

Did the equity plan directly drive the outcome? It’s tough to say.

But there’s no question that when employees have skin in the game, they’re more motivated to perform. That can make all the difference in a deal like this.

Structure of Management Equity Plans

In private equity, the alignment of interests between Limited Partners (LPs), investors, and fund managers is very important.

Private equity firms often condition a significant equity investment from the management team in acquisitions to ensure commitment and entrepreneurial behavior:

• Managerial Investment: Managers are required to invest personally, aligning their financial interests with the success of the company.
• Investment Range: This investment can differ markedly based on an individual manager’s circumstances, yet the gesture symbolizes a meaningful commitment.
• Equity Percentage: Typically, in a buyout, management may hold between 3% and 15% of the total equity.

The investment tends to be structured through a distinct entity that allows managers to participate alongside the financial sponsor, integrating both their roles as managers and as investors within the private equity fund process.

The establishment of a Management Equity Plan (MEP) is central to this venture, which during fundraising and operations phases, is facilitated by service providers specializing in investor onboarding and management equity plans.

Considerations for Implementing Equity Plans

In PE-backed environments, expanding equity participation beyond the C-suite to include key managers and rising talent can create a culture of accountability and entrepreneurship.

This approach aligns more of the team with the fund’s value creation strategy and exit horizon.

• Motivation and Alignment: Integrating more employees as stakeholders drives a unified pursuit of company objectives and celebrates collective achievements.
  
  
• Retention and Attraction: Equity plans are pivotal in retaining talent and making the company attractive to prospective employees.
  

• Ground Rules: Set clear parameters for exit scenarios to maintain fairness and balance interests between the management team and investors.
  
  
• Vesting Schedule: Implement vesting schedules that align long-term employee commitments with the company's growth trajectory.
  
  Regulatory Adherence
• AML/KYC Requirements: Ensure the equity plan complies with AML regulations and conducts proper Know Your Customer (KYC) checks.
  
  
• Transformation Process: For an early-stage startup, devise equity plans that support the transformation process into a mature enterprise.
  

Best Practices for Equity Programs

When managing equity programs, it is essential to implement a variety of best practices to ensure effectiveness and minimize operational risk.

Below are key strategies for optimizing the performance of Management Equity Plans (MEPs):

• Early Engagement: Initiate negotiations with the management team early in the acquisition timeline. Involving inexperienced teams promptly can facilitate a smoother onboarding process.
  
  
• High-Level Negotiation: Have senior partners from the private equity (PE) firm lead discussions to convey importance and respect towards the management team.
  
  
• Document Clarity: Ensure all term sheets and documents are straightforward, avoiding complex jargon that may be unfamiliar to the management team.
  
  
• Language Consideration: For teams in non-English speaking regions, provide translated documents to build comfort and understanding.
  
  
• Inclusive Participation: Expand MEP participation beyond senior management to include wider team members, leveraging tools to simplify operational and administrative procedures.

In creating and managing equity programs, it is also beneficial to incorporate Environmental, Social, and Governance (ESG) practices to align with modern investment values and guidelines.

Utilizing operational expertise and tools can reduce the administrative burden and enhance the efficiency and effectiveness of these programs.

Why Fund Managers Pick Vestlane

While Vestlane supports Management Equity Plans (MEP) as part of its broader capabilities, it's not exclusively a MEP solution.

Instead, it's a comprehensive investor onboarding and compliance platform built for fund managers, law firms, and administrators across private market funds.

Below are our platform’s capabilities:

• Seamless Onboarding: Vestlane enables the invitation of potential investors, guiding them through the digital subscription process.
  
  
• Document Sharing: Provision of a secure data room to distribute all necessary documents and term sheets.
  
  
• Guided Workflows: The onboarding platform includes step-by-step investor workflows that clarify each stage, ensuring complete understanding.
  
  
• Global Reach: Capability to onboard participants from around the world, accommodating global access, document signing, and sharing.
  
  
• Regulatory Compliance: Ensures adherence to KYC & AML regulations, maintaining full compliance.
  
  
• Digital Efficiency: The platform focuses on efficiency, allowing fund managers to prioritize relationship building with future management teams.

Management Equity Plans in 2025

Management equity plans have become one of the most precise instruments for shaping behavior and outcomes in private equity-backed companies.

In 2025, with over 10% of equity in many firms now allocated to these programs, the question isn’t whether to implement one, it’s how to do it well.

Research by Goodwin Law shows that incentive equity plans often employ a blend of time-based and performance-based vesting.

Specifically, 62% of such plans combine both criteria, with most allocating between one-half to two-thirds of the grants to performance-based conditions.

Regardless of how firms choose to structure incentives, the most effective MEPs are clear in structure, broad in participation, and aligned not just with financial targets, but with operational strategy.

When designed thoughtfully, they change the way teams think about risk, reward, and ownership. 

Want to know more about Vestlane?

Vestlane reduces administrative efforts, making it feasible to involve more staff in equity plans.

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