Monday, April 8, 2013

What is a ratchet & the Chairman’s Red Book

The Chairman's Red Book provides a quick reference guide for directors of any company, particularly chairmen of public companies (whether listed or unlisted).

At this stage, the book is only available on request, for anyone interested in receiving a copy, please let me know.  The Chairman’s Red Blog is also another supporting resource for the book.

Over the coming weeks, with special thanks to Brett Heading, and the other editors of the publication, there will be posts from the book on some of the core principles featured.

This week's post is shorter than the others (given the background outlined above) and simply answers the question - what is a ratchet.

A ratchet is a mechanism that varies the equity share that management receives on exit, depending on the achievement of certain objectives.

Typically, ratchets are based either on the multiple of money invested that is received on exit after repayment of debt, or the internal rate of return achieved by the private equity fund.

Ratchets can strengthen the alignment of the interests of management and the investor. However, the taxation implications can be complicated and need careful consideration in structuring any agreement.

Until next week.