Making Management Retention Plans Work

As a director, you may wish to recruit new management in the later stages of a portfolio company. However, the company’s capital structure might make the opportunity less than enticing for new management. Perhaps significant preferred stock and/or debt is outstanding, making the likely purchase price proceeds available to new management under traditional stock options less than appealing. Of course, your goal is to build stockholder value.

A management retention plan ("MRP") may be an ideal tool to provide newer management with a meaningful incentive. An MRP allows participants to receive a bonus when the company is sold. The bonus amount varies, and usually is paid as a percentage of the excess of the purchase price over the current company valuation. These payments typically continue until a specified dollar limit is reached. At that point, options or other equity incentives provided to new management take over.