Sweet equity meaning

In practice, “sweet equity” describes the ordinary shares acquired by a company’s management team in a private equity–backed deal, typically on a management buyout (MBO). It is a market term (not defined in legislation or case law) used consistently across England & Wales, Scotland, Northern Ireland and Ireland. Key features include: managers subscribing for ordinary shares at a lower effective price than the private equity investor’s instruments (for example, preference shares or loan notes), so that, after the investor’s preferred return is met, management participate disproportionately in upside on exit. The structure is implemented through the Articles of Association and a shareholders’ agreement, usually with an exit waterfall, ratchets linked to investor IRR/money multiple, voting and information rights, anti‑dilution mechanics as agreed, and drag/tag provisions. Management sweet equity is typically subject to vesting and good/bad leaver provisions, with restrictive covenants. Tax is central. In the UK, sweet equity commonly falls within the employment‑related securities regime (Part 7 ITEPA 2003), requiring valuation of unrestricted market value and, where appropriate, a section 431 election to manage income tax/NICs on growth. In Ireland, similar employment-related securities and CGT considerations apply, but rules and Revenue practice differ; local tax advice is essential. The commercial purpose is...