Management Equity Toolkit: Rollover Mechanics, Incentive Plans, and Employment Terms

Document type: Toolkit Practice area: Corporate — Executive Compensation Jurisdiction: United States (federal and Delaware) Last reviewed: 5 September 2026

How to use this toolkit

Where variants appear — Sponsor, Management, Middle — the middle version is where negotiated deals land and is the right first draft from either side.

Two legal anchors run through the drafting. The 26 U.S.C. § 83(b) election must be filed within thirty days, with no relief for a late filing. And Nemec v. Shrader, 991 A.2d 1120 (Del. 2010) confirms that the implied covenant of good faith will not override an express repurchase right — the terms drafted here are the terms that will apply, and no doctrine of fairness will improve them later.

Tool 1: Management term sheet

TRANSACTION: Acquisition of [Company] by [Sponsor] at an enterprise value of $[240]M ACQUISITION VEHICLE: [Holdings LLC], a Delaware limited liability company taxed as a partnership

ROLLOVER · Participants and amounts: [schedule] · Instrument: the same class of Units held by Sponsor, at the same per-Unit price [or: a strip of []% Preferred / []% Common in the same ratio as Sponsor] · Tax treatment: non-recognition under 26 U.S.C. § 721; reporting position agreed by both parties' advisers · Percentage: [30]% of pre-tax proceeds [confirm whether pre- or post-tax]

INCENTIVE POOL · Size: [12]% of fully diluted equity, subject to proportionate increase on any future issuance · Granted at closing: [9]%; reserved: [3]% · Instrument: Profits Interests with a Distribution Threshold equal to transaction value · Participation: from the first dollar of appreciation above the Threshold · Tax distributions: made to cover allocated but undistributed taxable income

VESTING · 50% time: five years, [25]% after year one then quarterly; double-trigger acceleration · 50% performance: linear interpolation between 2.0x and 3.0x MOIC; interim distributions count; follow-on Sponsor capital added at cost with resulting earnings counted; vests to the extent hurdles are met by the exit transaction · Worked example at three exit values appended to the Award Agreement

LEAVER TREATMENT

· Rollover Equity is never repurchased below fair market value — it is purchased capital, not compensation · Valuation: Board determination in writing, subject to independent appraisal at the holder's election, company pays if the appraisal exceeds the Board figure by more than [10]% · Payment: cash at closing up to $[__] per holder; three-year note at [SOFR + __]% above that, accelerating on a change of control

EMPLOYMENT · Base, target bonus []% with stated metrics, severance of [1.5]x base plus target · "Cause," "Good Reason," and "Change of Control" identical across all documents · Restrictive covenants: [] months, defined restricted business, passive investment carve-out

PROTECTIONS · Drag: same consideration, title representations only, several liability, indemnity capped at proceeds, no new restrictive covenants · Tag: applies to partial sales and to Incentive Equity · Information: annual audited and quarterly financials; annual FMV determination · Board: [CEO] seat; indemnification agreement and D&O with exit tail

DEADLINES · 83(b) elections filed within 30 days of grant · 280G analysis, waivers, disclosure, and >75% vote completed before closing

Tool 2: Exit waterfall model

Build this in week one. It is the document that wins the negotiation.

Assumptions. Enterprise value at closing $240M · Debt $120M · Sponsor equity $80M in Preferred Units with an 8% compounding preferred return and a full liquidation preference · Management rollover $39M · Incentive pool 12% with a threshold at transaction value · Exit at year 5.

Scenario A — management rolls into COMMON only ($39M of common):

Scenario B — management rolls into the SAME UNITS as Sponsor (pari passu, $39M of Preferred):

What the table shows, and how to use it. In Scenario A the manager loses thirty-four million at an exit equal to the purchase price. In Scenario B the same manager is whole. The negotiating question is not "can we have better terms" but: is a structure in which management's own capital is destroyed at a flat exit the alignment you intend?

Build your own version with the actual capital structure, the actual preference terms, and the actual pool mechanics. Show it on one page.

Tool 3: Cause and good reason — three variants

3.1 "Cause"

Sponsor draft (resist). "Cause" means, as determined by the Board in its sole discretion: (a) the Executive's failure to perform assigned duties or to meet performance objectives established by the Board; (b) the Executive's violation of any Company policy; (c) any conduct that is or could reasonably be expected to be detrimental to the Company; or (d) the Executive's breach of any agreement with the Company.

Management draft. "Cause" means: (a) the Executive's conviction of, or plea of guilty or nolo contendere to, a felony; or (b) the Executive's willful misconduct or fraud resulting in material injury to the Company, in each case as determined by a final, non-appealable judgment of a court of competent jurisdiction.

Middle (the drafting target). "Cause" means: (a) the Executive's conviction of, or plea of guilty or nolo contendere to, a felony or a crime involving moral turpitude; (b) the Executive's commission of an act of fraud, embezzlement, or misappropriation against the Company; (c) the Executive's willful misconduct or gross negligence that results in, or would reasonably be expected to result in, material injury to the Company; or (d) the Executive's material breach of this Agreement or of any restrictive covenant agreement, which breach (if curable) remains uncured for thirty (30) days following written notice describing the breach in reasonable detail.

Process. No termination for Cause shall be effective unless (i) the Board has delivered written notice specifying in reasonable detail the conduct alleged to constitute Cause, (ii) the Executive has been afforded an opportunity, together with counsel, to be heard before the Board, and (iii) the Board thereafter determines by a majority vote of disinterested directors that Cause exists.

3.2 "Good Reason"

Middle (and management should not accept its omission). "Good Reason" means the occurrence, without the Executive's written consent, of any of the following: (a) a material diminution in the Executive's duties, authority, responsibilities, or title, or a change in reporting line such that the Executive no longer reports to [the Board / the Chief Executive Officer]; (b) a reduction in the Executive's base salary or target annual bonus opportunity, other than a reduction of less than [10]% applied proportionately to all senior executives; (c) relocation of the Executive's principal place of employment by more than fifty (50) miles; or (d) a material breach by the Company of this Agreement or of any equity agreement.

Process. The Executive must give written notice within ninety (90) days of the initial occurrence, the Company has thirty (30) days to cure, and the Executive must resign within thirty (30) days following the end of the cure period.

Note the interlock. These two definitions must appear identically in the employment agreement, the equity plan, and each award agreement. A manager who is a good leaver under one and a bad leaver under another has an expensive drafting failure.

Tool 4: Leaver and call right provisions

Section [__]. Repurchase Right.

(a) Grant of right. Upon a Termination Event, the Company (and, to the extent the Company does not exercise, the Sponsor) shall have the right, exercisable by written notice delivered within one hundred eighty (180) days after the later of the Termination Date and the date any Units become vested, to purchase all or any portion of the Units held by the Terminated Holder.

(b) Purchase price.

Termination Event	Unvested Incentive Units	Vested Incentive Units	Rollover Units
For Cause, or material breach of a Restrictive Covenant	Forfeited for no consideration	Lower of Cost and Fair Market Value	Fair Market Value
Voluntary resignation without Good Reason, before the third anniversary	Forfeited	Fair Market Value less [20]%	Fair Market Value
Voluntary resignation without Good Reason, on or after the third anniversary	Forfeited	Fair Market Value	Fair Market Value
Death, Disability, termination without Cause, or resignation for Good Reason	[Pro rata acceleration of the tranche then vesting]	Fair Market Value	Fair Market Value

(c) Rollover Units. Notwithstanding anything to the contrary, Rollover Units shall in no event be repurchased at a price less than Fair Market Value, regardless of the reason for the Holder's termination. The parties acknowledge that Rollover Units were acquired for value with the Holder's own capital and do not constitute compensation for services.

(d) Fair Market Value. Determined in good faith by the Board, on the basis of the enterprise value of the Company as a going concern less net indebtedness, applied to the Units in accordance with the distribution provisions of this Agreement, without any discount for lack of marketability or minority interest, and delivered to the Holder in writing together with the methodology and material assumptions used. The Holder may, within thirty (30) days of receipt, require that Fair Market Value be determined by an independent valuation firm selected from the list on Schedule [__]. The cost of such valuation shall be borne by the Company if the independent determination exceeds the Board's determination by more than ten percent (10%), and otherwise by the Holder. The independent determination shall be final and binding.

(e) Payment. In cash at the closing of the repurchase, up to an aggregate of $[] per Holder; any excess shall be paid by a promissory note bearing interest at [], payable in three equal annual installments, accelerating in full upon a Change of Control, a Dividend Recapitalization, or a material refinancing.

(f) Expiry. If the repurchase right is not exercised within the period in clause (a), it lapses with respect to the applicable Units.

Drafting note. Clause (c) is the provision management should insist on and sponsors most often concede once the distinction is named. Clause (d)'s cost-shifting sentence is what makes the appraisal right real rather than theoretical.

Tool 5: Performance vesting language

Section [__]. Performance Vesting.

(a) The Performance Units shall vest based on the Multiple of Invested Capital ("MOIC") realized by the Sponsor, determined as of a Realization Event:

MOIC	Percentage of Performance Units Vesting
Less than 2.0x	0%
2.0x	50%
Between 2.0x and 3.0x	50% plus linear interpolation
3.0x or greater	100%

(b) Invested Capital means the aggregate cash amount invested by the Sponsor in the Company from the Closing Date through the measurement date, valued at cost and without any step-up, mark-up, or accrued return, provided that any earnings, EBITDA, or proceeds attributable to businesses or assets acquired with such capital shall be included in the calculation of Proceeds.

(c) Proceeds means the aggregate cash and the fair market value of any non-cash consideration received by the Sponsor in respect of its investment, including all dividends, distributions, redemption proceeds, recapitalization proceeds, and fees of any kind received by the Sponsor or its Affiliates from the Company, in each case whether received before or upon the Realization Event.

(d) Realization Event means a Change of Control, a liquidation, or any distribution following which the Sponsor's remaining investment is less than [25]% of Invested Capital.

(e) Vesting on the Exit Transaction. Upon a Change of Control, MOIC shall be computed giving effect to the consideration payable in such transaction, and the Performance Units shall vest to the extent the resulting MOIC satisfies the schedule above. Performance Units that do not vest shall be forfeited.

(f) Escrows and earnouts. Consideration held in escrow or payable as an earnout shall be included in Proceeds when and to the extent actually received, and the Performance Units shall vest incrementally upon such receipt.

(g) Calculation. The Company shall deliver its calculation of MOIC and the resulting vesting to each Holder not less than ten (10) Business Days before a Realization Event, together with supporting detail. A Holder may dispute the calculation within twenty (20) days, and any dispute shall be resolved by [independent accountant] applying the definitions above.

Annex: Worked Example. [Vesting computed at exit values of $240M, $360M, and $480M, showing Invested Capital, Proceeds, MOIC, and the resulting vesting percentage.]

Clauses (b), (c), and (e) are the ones that matter. Without (c), a dividend recapitalization delivers return to the sponsor and nothing to vesting. Without (b), follow-on capital moves the hurdle away from management continuously.

Tool 6: 83(b) election protocol

The deadline is thirty days from the transfer. There is no extension and no relief.

Protocol — to be executed by the individual, not the company.

Day 0 (grant date). Calendar the filing deadline for Day 20. Note the grant date, the number and class of interests, and the fair market value at grant on the award documentation.

Day 1–5. Prepare the election. Required contents: name, address, and taxpayer identification number; a description of the property; the date of transfer and the taxable year; the nature of the restrictions; the fair market value at transfer determined without regard to lapse restrictions; the amount paid, if any; and a statement that copies have been furnished as required.

Day 5–15. Have the election reviewed by tax counsel. For profits interests, file a protective election even where the interest has no value at grant — the filing costs nothing and the consequence of a valuation disagreement without one is total.

By Day 20. File with the Internal Revenue Service office where the individual files their return, by a method producing proof of mailing and delivery. Furnish a copy to the company.

Retain permanently. The election, the proof of mailing, the proof of delivery, and the supporting valuation. Managers routinely cannot produce this five years later, at exactly the moment it matters.

Confirm responsibility in writing. The company does not file this. If the manager assumes the company is handling it and the company assumes the manager is, nobody files it.

What goes wrong without it. Under 26 U.S.C. § 83, income is recognized as the substantial risk of forfeiture lapses, at the then value — converting appreciation into ordinary income realized over the vesting period on property the manager cannot sell.

Tool 7: 280G timeline and waiver

Start six weeks before closing. The vote must occur before the change of control.

Waiver skeleton.

The undersigned irrevocably waives the right to receive the Excess Payments described on Annex A, conditioned solely upon the failure to obtain the Requisite Shareholder Approval described in the accompanying Disclosure Statement. If such approval is obtained, this waiver shall be of no force or effect and the undersigned shall be entitled to the Excess Payments in full. The undersigned acknowledges having had the opportunity to consult independent tax and legal advisers.

Why the timeline matters. Section 280G disallows the deduction and § 4999 imposes a twenty percent excise tax on the individual. The exception requires disclosure, waivers, and a supermajority vote — none of which can be assembled in the final week, and all of which are routinely discovered too late.

Tool 8: Drag-along limitations

Section [__]. Drag-Along. Upon an Approved Sale, each Holder shall vote for, consent to, and participate in the transaction on the terms approved by the Sponsor, provided that:

(a) each Holder receives the same form of consideration and the same amount per Unit of each class as the Sponsor receives for Units of that class; (b) no Holder shall be required to make any representation or warranty other than as to (i) title to and ownership of its Units, (ii) its authority to enter into and perform the transaction documents, and (iii) the absence of conflicts and required consents applicable to it; (c) any indemnification obligation of a Holder shall be several and not joint, shall be limited to its pro rata share, and shall not exceed the proceeds actually received by such Holder; (d) any escrow or holdback shall not exceed such Holder's pro rata share; (e) no Holder shall be required to enter into any non-competition, non-solicitation, employment, consulting, or similar agreement with the acquirer as a condition to the Approved Sale; (f) each Holder shall be entitled to the benefit of any indemnification or D&O coverage provided to directors and officers in connection with the transaction; and (g) the Holders shall receive not less than [twenty] days' prior written notice, together with the material transaction documents.

Clause (e) is the one most often omitted and most often regretted. A drag-along that compels a manager to sign a five-year non-compete with a buyer, in a sale the manager cannot prevent and did not choose, is a real imposition — and it is nearly always removed when asked for.

Tool 9: Document review map

The LLC agreement's leaver and call provisions sit in the middle of a long document, are the least discussed, and determine more of the outcome than anything else. Read them first.

Tool 10: Team allocation worksheet

Operating principles. Negotiate one framework for the team — a single cause definition, a single good reason definition, a single leaver structure, a single valuation mechanism — and vary only the economics. It is better for the team, easier for the sponsor to administer, and therefore an easier ask.

Do not require rollover from executives who cannot afford it. Requiring a divisional president to roll a down payment is a retention risk, not an alignment tool.

Communicate the outcome in writing, with a model. A team that discovers at exit that vesting worked differently than assumed will not roll into the next deal.

Tool 11: Annual tracking sheet

Maintained by the manager, not the company.

Request the invested capital and cumulative distribution figures from the CFO annually, in writing. Exercise the information rights — a right nobody uses stops being honored, and a manager who has tracked these numbers for five years arrives at the exit with no surprises.

Related documents

• Management Rollover and Incentive Equity in Sponsor Deals: What the Team Actually Gets
• Negotiating Management Terms in a Sponsor Transaction: A Practical Guide
• Management Equity and Rollover Checklist: A Practical Checklist
• Equity Compensation: Stock Options, RSUs, Profits Interests, and Section 409A
• Drafting a Severance and Release Agreement That Holds Up
• Restrictive Covenants in Business Sales, Franchises, and Partnerships

This toolkit is general information, not legal advice, and does not create an attorney-client relationship. Adapt every provision to the transaction.