PE-Backed Executive Offer Review: Salary, Bonus, Equity and Tax

Compare the offer with what you would leave behind

Prepare two schedules: the compensation available if you stay, and the compensation available if you move. Separate recurring annual opportunities from awards you already hold. A signing payment should not be counted every year, and a target equity award is not the same as cash received.

Reconcile the equity illustration with the actual award

Ask for a worked payout under the governing agreements. A percentage of company ownership may differ from a percentage of the amount remaining after investor priorities. Enterprise value, equity value after debt, and proceeds available to a management class are separate amounts.

Determine whether the offer promises corporate stock, a partnership capital interest, a profits interest, options or phantom compensation. IRS Publication 541 distinguishes partnership capital and profits interests received for services. Our profits-interest and management-equity guide explains the contractual and tax questions in more detail.

Review each planned grant separately. Later awards may require new approvals, have different participation thresholds or depend on performance not yet defined. A future grant schedule does not establish that the full allocation has already been issued.

Negotiate departure and sale protections before joining

Read the employment terms alongside the equity plan, award and operating agreement. Separate service vesting, performance conditions, continued-employment requirements, forfeiture, repurchase and payment. A provision preserving vested interests may still leave a repurchase formula or exit condition unresolved.

• What survives termination without cause, a good-reason resignation, death or disability?
• Are cause and good reason defined consistently, with workable notice and cure procedures?
• What happens if a sale occurs before later grants or performance dates?
• What happens if the expected sale is delayed or never occurs?
• Can a vested interest be repurchased, at what price and on what payment schedule?
• Do severance and replacement-compensation protections survive a change of control?

See management equity after termination and executive severance and equity-release review. Enforceability and wage rights require analysis of the applicable law; a Colorado resident joining an out-of-state employer should not assume Colorado rules govern every term.

Resolve bonus terms and replacement compensation

A target bonus percentage does not establish a guaranteed payment. Review the performance period, baseline, certification process, payment deadline and any right to change the plan. If targets will be set after hiring, determine what happens if the parties cannot agree. Our guide to bonus goals set after the start date identifies practical questions for the offer stage.

Identify replacement compensation separately from the new role’s ordinary incentives. Match each surrendered award to the replacement’s amount, vesting, payment rights and termination treatment. Make-whole compensation can address an existing forfeiture without replacing the future annual incentive program.

Evaluate the business supporting the promise

The same company may fund your salary, determine your bonus and provide the only market for your equity. Request financial information sufficient to assess those connected risks: operating results, cash flow, debt, customer concentration, sponsor investment terms and support for the projected exit assumptions.

Model a downside outcome, a delayed sale and departure before sale alongside the company’s base case. A lawyer can review rights and identify missing information; independent valuation or financial diligence may require additional professionals. A compensation illustration alone does not establish business quality or likely investment returns.

Identify tax consequences before the first grant

The issuer’s tax classification and your service-provider status matter. The IRS explains that partners are not employees of the partnership for federal employment-tax purposes. An upper-tier partnership award and employment by a separate corporation require entity-by-entity review.

For restricted property, Section 83 may raise an election deadline measured from the actual transfer. Revenue Procedure 2001-43 provides different treatment for qualifying substantially nonvested profits interests; its conditions must be met. Review tax distributions, estimated taxes and possible tax before liquidity. Deferred bonuses, phantom awards and severance also need Section 409A analysis when applicable.

Documents to assemble before signing or resigning

• Current employer’s award agreements, vesting statements and recent bonus and long-term incentive history.
• Proposed offer, employment agreement, bonus plan, severance and restrictive-covenant documents.
• Equity plan, grant agreements, operating or shareholder agreement, amendments and ownership chart.
• Capitalization information, participation thresholds, distribution waterfall and worked exit calculations.
• Financial support for growth, debt and sale assumptions; signing, grant and election deadlines.
• Written replacement-compensation terms, relocation provisions and benefit summaries.

Identify whom counsel represents. Company or sponsor counsel does not automatically represent the executive. A written engagement can define legal and tax review, negotiation or drafting and coordination with employment, valuation or investment professionals.

Common questions

Should I resign before the equity documents are available?

Resolve material award rights, approvals and conditions before relying on equity to justify leaving. An offer summary and a financial illustration do not replace the governing agreements.

Does a higher salary make the offer financially better?

Not necessarily. Compare annual incentives, existing awards forfeited, benefits, repayment obligations, business risk and the timing and reliability of equity proceeds.

Does the $500 consultation include negotiation of the entire package?

The consultation includes up to one hour of total attorney time across review, analysis, preparation and the call. Comprehensive review, negotiations and drafting require a separate written engagement.