-Jim Gilreath
CHAPTER 1
THE CONCEPT OF SKIN IN THE GAME
“Skin in the game” (SITG) is a term coined by famous investor Warren Buffett, referring to a situation in which high-ranking insiders use their own money to buy stock in the company they are running or helping grow. Theoretically, putting skin in the game makes certain that the people who run a company have a direct interest in running the company well. In the majority of my completed skin in the game senior management searches, the majority have consistently performed well and have reaped their monetary rewards at the liquidity event (company exit). When management owns stock in a company, they want their company to perform at a high level to generate returns and will put forth a consistent effort to accomplish or exceed company Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA) goals. Having skin in the game is different from having performance-based bonuses and other types of compensation because there will be direct consequences to management if the value of the company's equity drops. Skin in the game management will definitely lose money if their company loses money.
On the Private Equity Capital Growth Council’s website, watch Private Equity Minute, a six-part video series featuring Dartmouth College’s Tuck School of Business Professor Colin Blaydon. The series is a primer on the private equity model and how value is created for private equity-backed companies. Check out: http://www.privateequityatwork.com/what-is-private-equity/.
Chief Executive Officer (CEO) hires would typically invest $100K of their own funds in exchange for, typically, a double digit percentage of company equity depending on the market capitalization amount. Vice Presidents (VPs) would invest $60K-$100K for a single digit percentage of the company. Generally all hires made soon after the portfolio company has been acquired by the private equity firm are given the “strike price” per share, which is the same price per share as the original private equity ownership. Some hired candidates have asked for and been allowed to purchase more shares. Vesting is typically 20% per annum; full vesting takes five years or at the sale of the company. Stock option plans often require the company attaining annual goals and objectives to be earned individually for each year. Normally companies are held by the ownership for four to five years, but can be up to seven years (or more) until they are sold to either a financial buyer or strategic buyer. If you end up joining a portfolio company as a skin in the game hire a few years after it has been acquired, you may incur tax obligations due before the company is sold to another ownership. Often our Private Equity Group (PEG) client will loan our hired candidate the money to pay such taxes and deduct it from the hired candidate’s future bonus earnings or at the liquidity event.
I always advise my skin in the game candidates to discuss their job offer letters with appropriate legal and tax advisors before making their decision.
Below are the results of several of my random skin in the game C-Level hires:
Do you enjoy being in a risk reward situation? What does it mean for you to be a peer equity owner in a company you are helping grow versus being just an employee? Do have any money to invest in a skin in the game job opportunity at the title you are seeking with a middle market portfolio company? I have been involved in senior manager hires involving as little as $20K hired candidate investment. Sometimes a client will offer earned stock options with no out of pocket expense to the hiree. If you are presenting yourself as a CEO, Chief Financial Officer (CFO), or VP seeking a signing bonus, maximum starting salary, automatic raises and bonuses, perks, and four weeks’ vacation, odds are the private equity owners of the portfolio company you are considering won’t be interested if you can’t put skin in the game. Forewarned is forearmed.
Investing your own money in portfolio company equity depends on your own interpretation of your due diligence research. Consider the Confidential Descriptive Memorandum of the PE firm’s acquisition of the company and their financials as well as the PE firm’s strategy going forward to grow the company’s EBITDA towards a successful exit plan.
How much challenge do you want in your employment situation? You have to conduct your own research regarding the company, industry, markets, reputation, and track record. How many prior hires in your function has the PE firm recruited since they bought this company? How do the financial statements and balance sheet look? How leveraged is this deal for the PE firm? Does it need major Capex? Can it meet its covenant obligations with reasonable assurance? Are you joining a company whose current mission is getting it ready for sale or to grow?
The more you know about the PE firm investors, this business, industry, and markets in relation to your own experience and expertise, the more likely your success. Check out the private equity owners and ask to speak with someone in your corresponding management function from another of their portfolio companies. What feedback have you gotten? Even if you meet or exceed the company job specs, are the owners a good match for your integrity, temperament, ethics, and management style?
The other career advantage for you is that once you are successful in a skin in the game job function for a private equity firm, the more likelihood of you being sought after by other PE firms once your deal is over and you’re looking for your next opportunity. Reputation means a lot in the PE sector.
Welcome to the middle and lower middle market Mergers & Acquisitions (M&A) sector. Joining the right private equity group (PEG) offers a risk and results-oriented, fast-paced, non-political, transparent, hands-on, exciting environment. These employment circumstances apply to you, your boss, the PEG Managing Partner and your direct and indirect subordinates. If management all has skin in the game there is a general camaraderie, a “you watch my back, I’ll watch yours” environment. Plus your equity could multiply by five or seven, and your payoff for helping the company grow could be sensational.
CHAPTER 2
PREPARING FOR YOUR SKIN IN THE GAME JOB SEARCH
This book has good advice for any job seeker or PEG hiring authority. However it was written for skin in the game Chief Officer (C-Level) executives to help them become hired by PEGs for one of their middle market portfolio companies. That’s my expertise. I have no retained search experience handling skin in the game C-Level assignments for any Venture Capitalists (VCs).
If you are entrepreneurial, a risk taker, and have a C-Level background in technology, visit NVCA.org and click on “About NVCA” then on “Members” and open up their list of over 400 mostly VC and some Leveraged Buyout (LBO) firms. Click on a VC’s website and click on “Portfolio”. See if any of their invested companies are a match with your credentials, experience, and industry background. If so, click on “Team” and then locate the person to email, such as the Partner in Charge or Managing Partner, General Partner, or Partner. Let them know you are a C-Level executive (give specific title sought) and attach your resume. Would they be interested in discussing you putting some skin in the game in the right VC company in exchange for some equity? What would the next step be? Take it from there and do plenty of sound due diligence. Consult an attorney and tax accountant about any eventual agreements involving money, stock acquisition terms, and written job offers.
THE DIFFERENCE BETWEEN PEGS AND VCS
PEGs raise funds from Limited Partners, accredited investors, endowments, insurance companies