In my earlier post on management carve out plans (see it here), I gave a detailed description of what these plans are and why boards of VC-backed companies often use them.
Recall from the prior post that an executive’s allocation from the carve out pool is normally reduced by the value of that executive’s equity (if any) at the time of the change of control triggering the carve out payment. This is to make sure that the executive does not double dip (i.e., get both the carve out amount and the equity value; I guess double dipping is only for VCs that have participating preferred stock 🙂 ). Said another way, the carve out is an insurance policy that pays out when the executive’s equity is not worth enough (or nothing at all).
I recently was discussing a management carve out plan with another board member. He brought up the good point that in addition to reducing the carve out allocation by equity value it would also make sense to reduce it by the value of any “signing” or change of control bonus that the acquiring company is paying to the executive. I can clearly see why this would make sense in many instances (not all instances to be sure, but many). For example, in the worst scenario, an executive might low ball an exit value knowing that he was getting a fat signing bonus from the acquiring company. This is obviously a pretty cynical view point, but none the less worth considering.
Enjoy the weekend.