When private equity acquires a business, the management package is often where the real economics for the operators are negotiated. The headline salary matters less than the equity mechanics. Sweet equity, envy ratio, ratchet, vesting, leaver clauses. Each of these levers determines what the management team actually takes home at exit. Get them wrong, and a successful deal for the fund becomes a disappointing outcome for the people who ran the business.

Sweet equity: the basics

Sweet equity is the portion of the capital structure reserved for management on preferential terms. Instead of subscribing to shares at the same economic entry point as the PE fund, managers invest a smaller amount for a larger economic share on the upside.

Mechanically, the PE fund invests most of its capital in preferred shares or shareholder loans that carry a fixed return. Management invests in ordinary shares that sit behind the preferred stack. At exit, once the preferred return is paid out, the remaining proceeds flow through to the ordinary shares. This creates significant leverage on the upside for managers who committed relatively modest cash at entry.

The envy ratio

The envy ratio measures how much more effective economic exposure management gets per euro invested compared to the PE fund. A ratio of 3 means management's euro works three times harder than the fund's euro in the ordinary equity. In the mandates we run, envy ratios commonly range between 3 and 6, depending on deal size, management's cash commitment, and the fund's appetite for alignment.

The envy ratio is not a gift. It is the price the fund pays to align the management team and ensure they push for the highest possible exit value.

Ratchet mechanisms

A ratchet allows the management share of exit proceeds to increase if the fund exceeds certain return hurdles. Typically, above a 2x money multiple or a 20% IRR, an additional slice of the equity flips to management. Some structures use multiple tiers, with a further increase above 3x MoM.

Ratchets sound founder friendly, but the hurdles matter. A ratchet that only kicks in at 4x MoM is rarely reached in practice. A ratchet with tiers at 2x and 2.5x is far more meaningful in most Belgian deal profiles.

Vesting and cliff

Management equity typically vests over three to five years, with a one year cliff. Vesting is usually linear after the cliff. The question that matters is what happens to unvested shares if the manager leaves.

Two structures dominate. Time based vesting unlocks shares by calendar. Performance based vesting unlocks shares against KPIs. Most Belgian deals use time based vesting, sometimes with an acceleration clause on exit.

Leaver provisions: where the real risk sits

Good leaver and bad leaver definitions are the clauses managers must negotiate hardest. In a bad leaver case, typically dismissal for cause or voluntary resignation in the early years, the manager usually gets back only the lower of cost or market value for their shares, losing all the upside they earned.

In a good leaver case, typically death, disability, dismissal without cause, or sometimes resignation after a minimum period, the manager receives market value or a formula based value.

The traps are in the definitions. A bad leaver clause that captures any resignation before exit is aggressive. Dismissal for cause defined broadly becomes a fund managed exit lever. These points need to be pinned down at the term sheet stage, not discovered in the SPA draft.

Where managers typically give up too much

Three recurring mistakes. Accepting a broad bad leaver definition without pushing back. Failing to negotiate acceleration on change of control. Underweighting the impact of the preferred return structure on the ordinary equity if the exit is modest. Each of these can silently erase most of the upside managers thought they had.

The dups approach

At dups, we advise management teams on their package from the term sheet stage through to SPA signing. We model the economics across exit scenarios, negotiate the leaver definitions and ratchet hurdles, and make sure the alignment actually works for the operators, not just the fund. If you are about to sign a management package in a Belgian LBO or PE deal, let us look at the numbers before you commit.