The preferred equity a private equity firm puts into a deal often accrues at 8% a year, and it sits ahead of everything the management team owns.
Executives negotiating a new job read the salary and the bonus closely and skim the equity section, on the theory that a percentage is a percentage. Ryan Milligan and Paul Stanzic spent 44 minutes explaining why that percentage describes only the bottom layer of the payout, and what has to be asked before it means anything.
"So there's a world where you go generate three, four, $500 million of value and you don't get to participate in that if you don't kind of understand how all this works."
Milligan is a partner at Parker Gale, a lower middle market private equity firm that buys and sells software businesses, and Stanzic works on its operations team. Between them they take the calls from executives who have an employment agreement in front of them and no idea which questions to ask.
I listened to the full episode so you can skip it. 44 minutes of audio, 19 minutes of reading.
Here are the 14 principles that matter.
🎙️ Hosts: Ryan Milligan, a Partner at Parker Gale, a lower middle market private equity firm, and Paul Stanzic, of the firm's operations team
📰 Published: 9 September 2026 on YouTube
🔴 YouTube | 🔗 Episode page | ⏱️ 44 min | ✅ Time saved: 25 min
Key Takeaways
The percentage an executive is quoted is a share of the common equity only, which is the last thing paid
Debt is repaid first, then the firm's preferred equity, then common
Preferred equity that accrues at 8% a year can absorb hundreds of millions of dollars of value creation
Milligan describes a business bought at 10 times revenue and now worth six or seven
Profits interests beat stock options for a manager, because options have to be bought before they are worth anything
Exercising can cost tens or hundreds of thousands of dollars on stock that may end up worthless
The first question is not about the equity at all — it is where the business is and where it has to go
Time vesting is worthless without acceleration on a change of control
Market is four to five years, and most deals sell inside that window
Parker Gale's performance hurdle is 25% or three times its money
A refusal to share the waterfall is the number one red flag
Milligan's response is to ask to speak to that person's boss
An underwater equity plan can be replaced with a contractual sale bonus, at the cost of the tax treatment
The rollover demand arrives late, and the time to negotiate it is at the start
Buyers routinely ask management to roll 25% to 40% of their proceeds into the next deal
The information gap is deliberate, not structural
"If I'm not willing to offer it up, it's because I'm trying not to, not because I can't"
1. Why the Equity Gets Skipped
Stanzic opened by saying most of the calls the firm gets are anxious ones, from executives joining a company at the point of an investment or midway through a hold period. The pattern he sees is that people focus on the headline cash compensation and speed past the equity.
Milligan said the anxiety is rational, because several things are being settled at once: the company's existing performance, the change the incoming executive is being hired to produce, the legal terms, the structural terms and the emotions. "And people are basically signing up for 5 years together."
The reason to take a private equity job in the first place is the sale, and the sale sets the clock. "Private equity businesses are bought to be run, improved, and sold." Milligan said the timeline is usually five years. "That's a nice bite-size for an executive to come in, make an impact, work alongside a private equity, and then sell"
The incentives are partly aligned and partly not, and the misalignment is what creates the information gap. "Now, depending on the private equity firm that you're working with, there's some aligned incentives and there can be some misaligned incentives," Milligan said. The firm wants a candidate excited enough to take the job while "paying them enough but not too much" if the deal goes well
Two failure modes, in his account: executives who treat the equity as "funny money," a lottery ticket they never examine, and executives who overanalyze and stress about it
Done properly, the equity conversation sets the expectations for the whole investment. It is where the manager learns where the firm thinks the company is, where it needs to go, and what a good outcome looks like for the firm's investors
2. The Waterfall, In Order
Stanzic asked what the structures actually are. Milligan started with the term he said executives most need: the waterfall.
"The waterfall is what order do people get paid in?" The starting point is the enterprise value, which is the sale price
Debt is repaid first, and Milligan noted that private equity companies often carry a lot of it
Preferred equity comes next, which is what the private equity firm put into the business
Common equity is last, and that is the layer a manager participates in. "So what's probably going to happen is you're going to get quoted a percentage. It's going to be 0.25%, 25%, 1%, 2%, whatever that might be. That's going to be your share of that common part of the equity"
Milligan's instruction on this is one line: "ask for the waterfall"
Stanzic drew out the consequence for the reader. Half a percent is not half a percent of every dollar that comes back on a sale, because of what he called the stack — debt at the top, preferred next, common at the bottom. The two questions that follow are which part of the stack the manager is in and what percentage of that part they hold, because that is what determines the number that arrives in a bank account at the end of the five-year run.
3. Profits Interests vs Options
Wherever it can, Milligan said, Parker Gale uses profits interests, which are tied to an LLC structure and let the manager participate in the profits of the sale.
"Those are the most tax advantaged situations for a manager." The benefit is speed to capital gains treatment: over a five-year hold, the manager gets credit for a long-term capital gain rather than a short-term one. Milligan noted twice that neither host is a lawyer
Stock options are the common alternative and carry a cash cost the recipient often misses. Options are tied to corporate structures, come with a strike price, and have to be exercised to take possession of the stock and start the clock on capital gains treatment
The check can run to tens or hundreds of thousands of dollars, and the stock is still at risk once bought. "You have to basically purchase them or exercise them, which means you're coming out of pocket for something that could end up not having value"
The downside case is a total loss plus a tax deduction. "There's a world where you exercise a stock option and then at the end you get zero," Milligan said, at which point the consolation offered is "Oh, but you get a tax write off"
Restricted stock plans and phantom plans exist as well; Milligan said the industry has largely settled on profits interests, which is why offers talk about units rather than shares
4. Start With the Business
Asked what else belongs on the punch list, Milligan moved off the paperwork entirely. The framework he recommended starts elsewhere: "I'd say the framework for somebody to really dig in on for that would be where's the company at? How's it doing? And where does the company need to go?"
Every term in the agreement is priced off the gap between the current trajectory and the required one. An executive is usually hired to change that trajectory, and cannot judge the equity without knowing the size of the change
"I do think if executives aren't staring long and hard at numbers just to start, you're not doing enough."
Stanzic added the time horizon as a second question. Joining in year one of an investment is a different job from joining in year five or six, and the honest question is how much time is left
Milligan cited a chief executive he knows who valued the private equity clock precisely because it changes the decisions. In years one to three the manager wears a long-term hat and can make strategic bets; by years four and five the calculation shifts — "if you're going to sell in 12 months, you know, is there a software rewrite you're going to start then or is there some big strategic project?"
Stanzic's own addition: ask the same question of more than one person. A chief executive should put it to several members of the deal team or the board; a management team member should ask the chief executive and the investors. Agreement across them is a good sign, and disagreement is something to know before signing rather than after
5. When the Firm Clams Up
Stanzic said executives who start asking for numbers and expectations often find the private equity side goes quiet, with some version of "we don't really go into that."
Milligan conceded the friction is real and structural. A firm hiring into a problem does not want to spook the candidate, so it tries to be transparent about what is good and what is challenging without going too far into the numbers.
His recommended response is to remove the risk of the honest answer. "I'm coming into this assuming it's worse than you're telling me. The more that we look at this together and figure out what needs to happen, the better off we're all going to be. It's better to have this conversation this week than a week after I start"
The framing turns the disclosure into an audition. "I'm not taking this job because it's easy. I'm taking this job because it's hard, but the hard part is where the value is created," Milligan said, adding that working through it also lets the firm assess whether the candidate can hit the goals
Stanzic said the exchange doubles as a test of the working relationship, which matters when the commitment runs five years
6. Reading the Equity Grid
When a firm shows an executive what the equity could be worth, Milligan said, it arrives as a grid: enterprise values across the columns, the waterfall running down below them. He warned that the numbers on the top row are "probably pretty ambitious."
The top row is the only variable that matters, so it gets tested first. "I mean the biggest variable on the page is that enterprise value." The test is what revenue multiple and what EBITDA multiple those sale prices imply, and how much revenue and EBITDA has to be generated to reach them
Stanzic put the same question in plainer terms: how far is that from the current trajectory, and does it require a fundamental change to the business or the cost structure
Milligan told executives to check the numbers outside the room. "Call your investment banking friends, call other executives, call other private equity firms and just kind of bounce it off them for a sanity check"
A single case is not a plan, and asking for a range tests whether the firm has done the work. "Make sure you get the good, better, best" — sensitivity around the outcome shows the person opposite has thought about it, and shows the manager the spread between doing well and doing very well
7. Ending Up Underwater
The reason the layers above common equity matter, Milligan said, is that a lot of deals from 2019 onward carry heavy debt and heavy preferred equity, and both grow.
A repricing between purchase and sale can consume all of a manager's upside. "There's a world where somebody paid 10 times revenue for a business. Markets have changed. Maybe it's worth six or seven times revenue which is still a pretty good multiple for a healthy business"
The preferred keeps accruing while that happens. "The preferred equity is often growing at 8%"
The result is the line that gives the episode its warning. "So there's a world where you go generate three, four, $500 million of value and you don't get to participate in that if you don't kind of understand how all this works"
Stanzic supplied the industry term for the position: underwater
The point of the exercise, Milligan said, is to arrive at an honest view of what the common equity can be worth
8. Vesting and Acceleration
With the value of the common equity established, the next question is the security itself — units, options or otherwise — and its vesting schedule. Milligan split it into time vesting and performance vesting.
Time vesting
Market is four to five years: "That's four to five years is market"
Cliffs and frequency vary, but a year followed by quarterly vesting is common
A manager who leaves in year three keeps what has vested by then
The clause that decides whether any of it pays is acceleration. "The key part for all of that though is does it accelerate on a sale or a change of control." On a five-year schedule with a sale in year three, acceleration is what delivers the unvested time-vesting units rather than leaving them behind
Performance vesting
Parker Gale's own hurdle is a 25% return or three times its money, in Milligan's words: "So what we often use is 25% or three times our money"
That sends the manager back to the first calculation — whether the common equity is worth enough, at the enterprise value required to clear the hurdle, to be worth having
The sanity check is a single sentence. "If your investors do good, you should do good"
Milligan turned down a job on exactly this arithmetic. "I had a job offer at a venture capital-backed company a long time ago and I did very similar math and both looking at the revenue multiple test and just the spread between how good the investors had to do versus when the equity started paying it just didn't make sense and I ended up turning down the job"
Larger firms sometimes pre-agree the investment case before the deal closes, walking management through expected growth and EBITDA by year and setting parameters around them. Milligan said that works in a mature business with predictable performance and tight underwriting
In lower middle market deals, he said, the path to the end state is "more of a jagged line," which makes those structures harder to write and leaves more of the judgment to a shared bet on the plan
9. What Is Actually Negotiable
"My opinion for negotiating comp is everything's technically negotiable," Milligan said, before drawing the distinction that matters: what is negotiable is not the same as what is normal or acceptable.
An executive inside a live M&A process has the most leverage to shape the program. The firm has a band of outcomes it works within, and the differences are not wild, but the key terms are open
The specific items he named: four-year against five-year vesting, annual against quarterly vesting or a mix, and the methodology for distributing equity to the rest of the team
The two industries distribute equity differently, and the chief executive gets a say. "Venture capital gives out much more equity further down the org chart. Private equity keeps it a little tighter but the CEO has a hand in that"
The underlying question is whether the equity is a tool for incentivizing people through the organization or something concentrated at the top — which Milligan said is a legitimate conversation to have during the deal, because it determines how the incoming executive can run the team
10. The $50M Sale Bonus Story
Asked for a case where alignment failed, Milligan told one from outside his own portfolio. He was building a relationship with the chief executive of a larger business, and over a drink the man volunteered that he did not feel aligned with his board on the incentive program.
The plan the executive described was an ambush timed to the closing. "Hey I'm going to sell this business for $2 billion someday," he told Milligan, and at the point where the firm was pushing to close he intended to say: "I need a $50 million sale bonus"
The arithmetic behind it, in Milligan's retelling, was that a firm looking at roughly a billion and a half dollars for its fund would "shave 50 million off the top" rather than lose the deal
Milligan's objection is that it is what unaddressed misalignment turns into. An executive who feels shortchanged puts the grievance in "my own political capital box" and takes it out at an inopportune time; both sides then "play liars poker to see who blinks first"
"There's a real moral hazard there if you're not taking care of people and having them understand this stuff."
His fix is to state priorities before any employment agreement exists. Telling investors early whether cash compensation, the equity or the vesting matters most is useful to them, because a firm that knows what a candidate values can iterate toward it rather than guessing
"When you're doing a deal in private equity, it's like a marriage. It's a five-year commitment," Milligan said — the risk of silence is that the grievances surface two months in, the first time something is hard
One caveat: an existing portfolio company with eight people already on a program will offer consistency rather than a custom deal. Milligan said the right response there is to read it, understand it and ask why, even where the terms themselves are fixed
11. Homework Before the Offer
Asked where people fail to dig deep enough, Milligan returned to the business and pointed at his own firm's interview process as the place the answers surface.
Parker Gale runs panel interviews, and the questions are chosen because of what is happening in the business and what has to change
The candidate should mine the interview for information rather than only answering it. Milligan advised taking notes and coming back to them: heavy questioning about DevOps or product is a signal about where the work is, and it is fair to ask whether that is the starting priority or whether the go-to-market is what needs attention
The firm now hands over real company data as a test. "We've even gravitated towards sharing a lot more real company data whether it's board decks or diligence materials or both and treating that as the homework assignment"
The stated purpose is two-way: "We want you to have situational awareness of what you're stepping into," while the firm tests the candidate's instincts against the same material in a conversation that can run three hours
The second piece of homework is the waterfall, and the questions are blunt ones. What did the firm pay, did it pay too much, what did it miss, and what is happening in the market — because the alternative is discovering in year two that the plan is running late and the equity is already underwater
12. Fixing an Underwater Plan
Milligan said people get so attached to tax treatment that they forget what the plan is for. The reason equity is used rather than cash is the gap between capital gains and ordinary income rates, but that reasoning stops applying once the equity cannot pay.
His advice to executives holding a worthless plan is to propose a contractual sale bonus instead. "It's all underwater. I was like why just do a sale bonus, right?"
A sale bonus can be written to behave like equity without being equity. A contract can specify a bonus above a stated enterprise value, payable after the debt is repaid, participating alongside the preferred or the common
The cost is tax: the payment is ordinary income rather than capital gains. Milligan said firms can true up for that, and that the motivational value outweighs the leakage. "If the goal is alignment and transparency, why not just get to it and do that?"
He said the obstacle is usually admission rather than mechanics. Restructuring the plan means acknowledging that the deal has gone sideways, which is why firms avoid it
Even a rejected proposal signals that the manager understands the position. The framing is that a manager on 2% of the common is clawing back toward the original deal — "for every 100 million of value I create, I get two million bucks"
True-ups at closing are already routine for a related problem. Managers who joined at different times have different participation thresholds, so an executive who joined late and did the work that got the transaction done can end up with very little; firms look at the proceeds at closing and write sale bonuses to correct it
13. Red Flags and Rollovers
Stanzic asked what should raise an executive's hackles. Milligan's answer, which the show used as its cold open, was about behavior rather than terms.
"I just think it's about somebody hesitating to share information." He has heard executives told "We don't share the waterfall," and his response is to escalate: "Well, then let me talk to your boss in that situation" — because the person refusing is not the person who can decide
His read on that refusal is that it usually comes from someone early in their career whose job is to get the executive in as cheaply as possible
A second flag is a hurdle set at an implausible multiple of where the business is today, particularly when all the vesting is performance vesting. Milligan said that is not automatically a reason to walk away, but it is a reason to ask how the inflection point is supposed to happen, how quickly, and how much room the executive has to maneuver. Pressure to stop asking and sign is itself the answer
The behavioral interview can be turned around. Milligan suggested asking the firm to describe a deal where the team performed but missed the incentive hurdles, and what happened to their pay. The answer is either "on the tip of their tongue" or it is not, and a firm with the story should be able to name the company; a firm without one can be asked to answer it hypothetically
The rollover conversation is the one most often deferred, and it arrives at the worst moment. Milligan described a firm waiting until late in a sale to tell management that the buyer, in the firm's words, will "need you to roll 30%" and said some firms present a 40% rollover on a take-it-or-leave-it basis
Better firms negotiate it into the letter of intent instead, telling a bidder up front what the management team will roll — his example was 25% of post-tax proceeds — so the bid is made knowing it
The reason to pull the conversation forward is that management's power peaks exactly when the ask lands. The buyer needs the team to stay and wants them to have skin in the game, which Milligan called the second stressful moment of a five-year deal: "Your equity is only as good as it's worth when somebody buys it"
He closed the section by naming the asymmetry. "On my side of the table, I know the answers to all these questions. I can do the math in my head. If I'm not willing to offer it up, it's because I'm trying not to, not because I can't"
14. What Goes on the 3x5 Card
Stanzic asked for the takeaways an executive should carry. Milligan's list ran to five items and one instruction.
"You only get one shot, so ask questions."
Ask about the company's current performance
Ask about its expected performance and what good looks like
Understand the waterfall
Understand the vesting terms
Have the conversation about both outcomes. Milligan said the manager and the investor should have talked through both what happens when the investment goes great and what happens when it "goes sideways or wrong"
The instruction underneath all of it: "Start being partners before you're partners." Stanzic agreed, saying partnership was the word for the whole episode
Bonus Insights
Milligan said the language follows the structure: firms using profits interests talk about units rather than shares, and that is ordinary rather than a sign of anything
Stanzic referred listeners to the show's earlier episode on private equity terminology for the vocabulary itself, including the stack
Both hosts flagged that they are not lawyers before discussing the tax treatment of profits interests and options
Milligan's argument for transparency includes a self-interested version: getting grievances on the table before closing is what keeps the management team focused on the business afterward rather than on what they should have asked for
References are underused, in his view — an executive can ask to speak to other chief executives in the firm's portfolio before signing
Milligan's bottom line is that a management equity package is unreadable without the waterfall, the vesting terms and an honest account of where the business is, and that a firm unwilling to supply all three is telling the executive something about the next five years.
Products, Companies & Tools Mentioned
Parker Gale (The private equity firm both hosts work for; buys lower middle market software businesses, uses profits interests wherever possible, and sets a performance hurdle of "25% or three times our money")
Books & Resources Mentioned
The Private Equity FunCast's earlier episode on private equity terminology (Stanzic pointed listeners to it for the vocabulary, including the "stack" of debt, preferred equity and common equity)
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