Advice on PE equity deal and tax implications

Taxes
1

Not sure if this is the right place for this post. Mods feel free to move

I am going through a process to join a company that is owned by a PE fund. As part of this, I am entitled to equity, which to be fair is all on paper until there is a liquidity event. I do have 2 questions in case anyone has been through this.

  1. Given the potential wealth creation, I want to ensure I don’t get caught in the fine print of the equity arragement. Things like vesting acceleration upon exit and anti-dilution provisions or other specific clauses in PE Shareholder Agreements that may be “surprise traps”. What would be the best way to validate the documentation and ensure I understand the details?
  2. If all goes well there is a liquidity event in a few years but hopefully not a tax bill.:slight_smile: Ideally there is a way to structure this as tax-free private capital gains. I don’t thikn a corporate or tax lawyer will know enough and I’d rather thave a PE-Specialized Legal / Tax Advisor. Does anyone have any contacts (ideally in Canton Vaud)

thanks!

2

I would check when you join.

Depending from the PE but if it’s a medium or large one, I don’t think you have any flexibility to amend the contract terms, just some variable in the comps or related to it.

Re #2, good to explore. What I know is that is generally taxed as income (the share appreciation value)

3

I should check before I sign :grinning_face:

On #1 you are right there is likely less flexibility but there will be some. Even if there is not, I’d like things like “good leaver” vs “bad leaver” to be well defined if they are not

On #2 any suggestions? I plan to ask my regular tax advisor but he is a small shop of 5 people since my situation is quite simple. I don’t think he will have the expertise but you never know.

4

Yes good to check on good or bad leaver. Also pay attention at small notes such as if your performance rating is below expectations if this may cause some payment withholding or not distribution of further shares. And also if there are further clauses related to the company itself and retrospective pay back if you fail at some compliance or some other negligence.

On 2. I really doubt you can set up your own Small entity if you aren’t the founder but simply the employee, but maybe I am wrong, I really didn’t explore this as you usually time is tight before accepting. However, there are cases where equity isn’t always taxed as income depending on length and whether it’s proper shares or simply some instrument.

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5

On 2. I really doubt you can set up your own Small entity if you aren’t the founder but simply the employee, but maybe I am wrong, I really didn’t explore this as you usually time is tight before accepting. However, there are cases where equity isn’t always taxed as income depending on length and whether it’s proper shares or simply some instrument.

I agree. What I was thinking is if I get the shares now (or the option) and potentially even get taxed at FMV, when (if) they appreciate as per the value creation plan, when there is a liquidity event in 4-5 years there should be no CGT. There is a risk inherent to this but it may be worth taking… I was curious if anyone explored this or not.

thanks for your remarks

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