Dealing with underwater management equity arrangements

Luc Legon

As a result of the financial turmoil, equity incentives may have become underwater and have lost all motivational and retention value.  To restore motivation, listed companies have started to launch stock option exchange programs. While the issue of underwater equity has definitely hit listed companies, this issue may even be more acute in the private equity industry where the management of private equity backed companies have been asked to commit significant funds in their company and are unlikely to recover their initial stake. Not really motivating! Resetting underwater equity incentive has now really become a priority for private equity houses which need to restore motivation and retain their talents.

The purpose of this session is to address the following questions:

• How can private equity houses cope with underwater equity?
• What are the challenges in resetting incentive arrangements?
• How should the resetting of these incentives be designed from a legal and tax perspective?