Private Equity CEO Cheat Sheet: Negotiating Deferred Compensation
Something I’ve been doing more of lately is acting as an informal sounding board for CEOs negotiating their deferred compensation plans for a CEO gig. When I’m hiring a CEO myself, I believe I’ve been transparent and straightforward, so I’m happy to shed light on the key areas to focus on.
Before I jump in — a quick safety briefing — please note that this is not intended to be legal or tax advice. I am not a compensation lawyer or tax professional, and you should still seek professional assistance in your negotiation. That said, I negotiate these all the time, and I think I can provide you with some practical and useful context in the heat of battle. Please treat it as such, and also seek professional counsel.
Start with the structure
The first consideration is the company’s legal structure, as it determines tax treatment and flexibility, and also how a “distribution waterfall” (meaning who gets paid and in what order) can be structured. I’m focusing here on LLCs and C-corps, because they’re what I see most commonly. I rarely see S-corps anymore (which have some similar elements to an LLC), so I won’t address that to keep it simple. However, if you ever encounter one, ask; I’m happy to discuss that as well.
LLCs. Private equity firms often prefer LLCs due to various tax and flexibility benefits. The good news is that LLCs are also, in our opinion, the gold standard for favorable tax treatment for CEOs, so we use them whenever possible. An LLC allows for a “profits interests” structure, meaning you participate in the upside of a deal just like stock options. Still, you also forego the need to exercise those options, and you can “start the clock” for capital gains treatment right away. In short, this means that 1) you don’t need to write a check to exercise your stock options, and 2) via something technical called an 83(b) election, you take ownership of the incentive units right away, so after a year, you can get capital gains treatment, and are usually taxed at a lower rate (as of 2025) than if it was ordinary income. In short, this is, in my opinion, a way better structure for a CEO, and that’s precisely why we try to use it.
C‑corps. C-corps often exist in private equity structures to “block” passive income from rising to the private equity fund, which most firms have to avoid; so if you see C-corps in the structure, that is normal and ok. However, we strive to avoid management incentive programs at the C-corp level, because that likely means a CEO will be dealing with stock options, which generally don’t allow the “clock to start” on capital gains treatment at the outset. The process of exercising an option often requires writing a check, which is both inconvenient and carries the risk of loss. This is all very technical, but if you are dealing with stock options, please reach out, and I can share more of my perspectives.
Again, I’ve left out a lot of detail and nuance here to keep it as simple, but this should get you started, and I’d be happy to discuss further.
Unpack the purchase price, capital stack, and waterfall
Next, dig into what the private equity firm paid and how the money is distributed to each party. I try to be an open book so people know what they’re getting into, but you may need to press nicely to get your hands on these details:
What did they pay? Ask about the revenue and EBITDA multiple paid at closing. The higher the entry multiple, the greater the pressure on growth plans or debt paydown, and there is also a higher risk that the exit multiple will drop based on market conditions (see 2021 entry prices).
How much cash and debt are on the balance sheet? Ask whether there’s excess cash or a revolver to fund working capital. Debt level and terms matter; high leverage means you’ll encounter friction when it comes to funding growth plans, and a larger portion of the exit proceeds will go to lenders before equity holders receive anything.
What does the preferred stock look like? Many deals include preferred equity in addition to debt. Participating preferred allows investors to receive their investment plus a return and also share in the upside alongside management. In complete transparency, I use a participating preferred structure, and I’m up-front with managers about that. When there is preferred equity, it’s critical to understand what the entry price was, and the current amount of debt and preferred outstanding (and also, what expectation for debt and preferred may be at exit). I lay this out for potential CEOs in an exemplary waterfall. There is also something called convertible preferred, but I’ve chosen not to delve into that here, as it’s not a structure I use frequently.
Ask to see the waterfall. A distribution waterfall lays out the order in which exit proceeds are paid out. Typically, debt is paid first, then preferred investments and returns, then common units or shares that are alongside your management incentives. You should examine the outcome at various enterprise values, including both downside and upside outcomes. You’ll come away with a view on how much structure or money you’re “under”, and what a range of outcomes can be (and you can assess the feasibility of those outcomes for yourself).
I have had some executives tell me the private equity firm won’t share all of this information with them. To each their own, but that would be a yellow flag for me, as it may indicate that the waterfall has a significant amount of debt and preferred stock relative to its current enterprise value. My stance has been to be transparent, so people know what they are getting into. Ultimately, I aim to align with CEOs on goals and potential payouts.
Request historical numbers, the underwriting case, and go-forward plans
I think it is reasonable to request:
Three years of historical financials. Look at revenue, gross profit, and EBITDA trends. It would also be normal to discuss the desired mix of growth % and EBITDA margins, as well as how the board anticipates the business will be valued going forward (meaning on a revenue or EBITDA multiple).
A three‑ to five‑year forecast. Ask for the value‑creation plan that underpinned the investment thesis. Compare the projections to market growth assumptions and comparable companies to test whether they’re realistic. I’ve seen plenty of hockey‑stick projections that require heroic performance. Align on growth plans and resources that will be made available to support their pursuit.
Performance metrics. Clarify the KPIs that you will be measured against — revenue growth, margin improvement, retention rates, and cash conversion. Ask whether budgets and targets are collaboratively set and what happens if actual performance falls short. Setting expectations up front avoids friction later.
Get deeper into the management incentive program
Here is a punch list of the significant items I think you should focus on:
Size of the pool and your stake. Ask what percentage of common equity the management pool represents and how much is already allocated. I won’t get into what I think the market is for a CEO, because it does “depend” (but I’m happy to talk about it). Knowing the total pool will also give you an idea of what you have at your disposal to bring in additional team members.
Vesting schedule. Time-based vesting can vest annually, quarterly, or monthly (or a mix). Understand this, and also if it accelerates and vests upon a change of control. You may also have performance-based vesting that is tied to cash-on-cash or IRR hurdles.
Hurdles and thresholds. Understand what has to happen before management participates. Some plans allocate more of the performance equity at higher cash-on-cash or IRR tiers. If the hurdle is above realistic exit scenarios, your performance-based equity may never generate a return.
Repurchase rights and termination. Determine what happens if you leave — will the company repurchase your vested shares at fair market value or at a discount? How long do you have to exercise options after you depart? The point is to understand how it all works.
Restrictive covenants. Review items such as non-compete and non-solicit clauses to understand what you’re signing up for.
Closing thoughts
I’ll repeat my earlier safety briefing and encourage you to seek the help of professional advisors. M&A or employment attorneys can help, as can tax advisors.
I could continue discussing this for days, extending into current compensation, what happens with M&A, and how to think about governance, but I want to keep this focused on deferred compensation at the hiring stage. I hope this primer provides you with a sense of what to ask and think about, as hiring processes often have condensed timelines that can be stressful to navigate. If the negotiation feels transparent and straightforward, you’re likely working with some good people who want to align your interests, and it’s fun at the end of the journey when everyone does well together financially. It’s always a good use of my time to help a software CEO navigate this. Please let me know if you have any questions or thoughts!