Every forecast I've ever built started the same way: exporting a CSV from NetSuite and praying nothing changed since this morning. The joys of static data.
I'm sure you know the pain - ERP actuals over here, CRM pipeline over there, and a hiring plan in a Google Sheet someone on the People team owns.
By the time you've stitched it all together, the numbers are stale and you've spent your week as a data plumber instead of a finance leader.
Cool, cool, cool.
This is why I think it's worth knowing that Abacum just became a Built for NetSuite SuiteApp. This is a pretty big deal as it is the first FP&A platform live in the NetSuite App right now.
Abacum sits on top of NetSuite and gives you connected planning, forecasting, reporting, and scenario modeling against live data. Strava, PostHog, and JG Wentworth already run their planning on it.
If you recognize yourself in the first sentence of this email, it's probably worth a look.
Hi, it’s CJ Gustafson and welcome to Looking for Leverage.
Today’s term: profits interests, or PIUs. The equity instrument most PE-backed companies use for their management pool, and the one that trips up every operator who came up at a VC-backed startup and assumed equity is equity.
Setting the scene
A friend of mine was negotiating a VP of Sales offer at a PE-backed company last year. The company sold B2B recruiting software. The grant letter said his pool would vest against MOIC (multiples of invested capital) hurdles tied to the sponsor’s return. He called me on a Sunday afternoon, walking through the math out loud, trying to figure out what the company would have to be worth at exit for him to make real money.
That conversation lasted about ninety minutes. The first thirty were him explaining the offer. The next sixty were both of us realizing that the equity we’d held in our careers up to that point had almost nothing in common with what he was being offered.
He’d come up at HubSpot. ISOs that converted to stock when the company went public. I’d come up at a string of VC-backed companies where every grant priced off the latest 409A, and the unwritten incentive was to join before the next round closed and the strike went up.
Neither of those models applies here. PIUs are a different animal entirely, and the longer we talked, the more obvious it became that he was about to sign something he didn’t actually understand.
The dumb version
PIUs, profits interests, are a partnership interest that entitles the holder to a share of future appreciation in the company above a “threshold value” set at the time of grant. They’re not stock. They’re not options on stock. They’re a partnership instrument that exists because most PE-backed companies are organized as LLCs taxed as partnerships, and partnerships can grant equity that has zero value at the moment of grant but participates in upside from there.
Making it real
The thing that makes PIUs feel weird if you came up at a startup is that they don’t price off a 409A and they don’t have a strike. There’s nothing to exercise. There’s no check to write at vest. The grant just sits there until a liquidity event.
Instead of a strike price, PIUs come with a hurdle, usually a MOIC hurdle on the sponsor’s invested capital, or sometimes an IRR hurdle, or sometimes both.
Here’s the difference…
When you joined a startup pre-IPO, your grant priced off a 409A valuation. That number was the strike on your options. If you joined before the next priced round, your strike was lower. If you joined after, your strike was higher. The motivation is to time your entry before funding events so your strike sits as far below the eventual exit price as possible (and to reduce the amount of cash you’d have to come up with to both exercise and pay the dreaded AMT (alternative minimum tax)).
When you join a PE-backed company, the sponsor has already bought in at some enterprise value. Call it $300M. Your PIUs come with a threshold value set at or near that $300M. You don’t participate in any of the value below $300M because the sponsor has already paid for that. You only participate in what’s built from $300M upward.
Then layer on the hurdle. Even above $300M, your pool may not vest until the sponsor hits a specific return. A 2x MOIC hurdle means the sponsor has to double their cash before your pool starts vesting. A 2.5x hurdle means the sponsor has to clear roughly $750M of equity proceeds before you see anything.
Four things follow from this that don’t apply to startup ISOs:
No cash out of pocket. PIUs are granted, not purchased - no AMT calculation in the years between grant and exit.
The flip side is that you also can’t “exercise early” to start the long-term capital gains clock the way an ISO holder can.
The 83(b) election does that work instead (more on this below).
The preferred stack is different and harder. At a VC-backed startup, the preferred stack sits above your common, and it absolutely eats into your payout at exit. But the pref is usually 1x non-participating, and a healthy exit clears the stack with plenty of room for common.
At a PE-backed company, the sponsor’s preferred return isn’t a fixed dollar amount sitting at the top of the cap table; it’s a multiple of their invested capital, and your hurdle is the mechanism that makes you wait until they’ve cleared it.
The startup pref is a wall you climb once.
The PE hurdle is a multiplier that grows the whole time you’re there.
A flat exit pays you zero. If the company sells for what the sponsor paid, your PIUs are worthless.
The threshold value sits exactly at the entry point, so a sale at that point has no appreciation to share.
At a startup, a flat exit at least returns your common stock at the price you paid for it.
The 83(b) election is mandatory, not optional. When restricted equity vests, you owe ordinary income tax on the spread between the value at vest and what you paid.
For PIUs vesting against a $600M exit, that’s an enormous ordinary income event.
An 83(b) election, filed within thirty days of grant, tells the IRS to tax you on the spread at grant instead - and because PIUs are structured so the threshold value equals current FMV, that spread is zero.
File the 83(b) and your entire eventual payout is long-term capital gains.
Miss the thirty-day window and you’re paying ordinary income rates on a potentially very large number.
The startup ISO playbook trained most of us to be casual about 83(b)s because the early FMV was negligible either way.
With PIUs, the election is functionally your entire tax outcome.
The math (with numbers)
Let’s run my friend’s situation. The PE firm bought the company at a $300M enterprise value, putting in $180M of equity and $120M of debt. The management pool is 10% of the equity. His grant is 0.1% of the company, or 1% of the pool.
The pool has a 2.5x MOIC hurdle and a full catch-up.
Three exit scenarios at a five-year hold:
Exit at $400M EV
Debt mostly paid down, equity proceeds roughly $310M.
Sponsor invested $180M, so MOIC is 1.7x.
Hurdle not cleared.
His payout: $0.
Exit at $600M EV.
Debt fully paid, equity proceeds roughly $580M.
Sponsor MOIC is 3.2x.
Hurdle cleared, full catch-up means his pool participates pro rata.
His 0.1% on the $400M of appreciation above the $180M return of capital is roughly $400K.
Exit at $900M EV.
Equity proceeds roughly $880M.
Sponsor MOIC is 4.9x.
Same math, his 0.1% on $700M of appreciation is roughly $700K.
The zero in scenario one is the part that makes many operators feel uncomfortable. Because a 1.7x return for the sponsor is a borderline acceptable PE exit. It’s not a disaster. It’s not even bad. And yet, my friend gets nothing.
When it clicked
Around the seventy-five minute mark of that Sunday call, my friend went quiet for a beat and said something like,
“So my upside isn’t really about how well the company does. It’s about how well the company does past the point the sponsor already paid for.”
At HubSpot, his equity was tied to the company’s outcome, full stop. If the company grew, he grew. At a PE-backed company, the company can grow a lot and he can still get nothing, because growth that doesn’t clear the hurdle is growth the sponsor captures.
His incentive isn’t aligned with company performance in the abstract. It’s aligned with company performance above the sponsor’s underwriting case, which means the bolt-on M&A pipeline, the operating partner’s quarterly scorecard, and the value creation plan all read differently when you’re holding PIUs.
He took the job, but knowing how his outcome was tied to his sponsor’s outcome. That reframed how he approached the short term quarterly sales grind and how it linked to value creation in the medium to long term.
What to do Monday
Three things, all of them small.
Pull your grant agreement and find your threshold value.
If you can’t find it, your grant agreement isn’t complete and you should ask.
Then find the hurdle: MOIC, IRR, or both, and at what multiple.
If the language references the LLC operating agreement, get a copy of that too. Your equity lives in those two documents.
Find your 83(b) confirmation.
If you filed one, the IRS stamped copy should be in your records.
If you didn’t and you’re still inside the thirty-day window from grant, talk to a tax advisor today, not this week.
If you’re past it, talk to a tax advisor anyway about what your eventual exit will look like as ordinary income.
Build a three-scenario spreadsheet for your own pool.
Flat exit, base case, upside case.
Use the sponsor’s entry multiple as your anchor.
The number that should land hardest is the flat-exit number; if it’s zero, you now know what game you’re playing.
Wishing you a threshold value set in the rearview mirror,
CJ
Looking for Leverage breaks down one PE term, clause, or mechanic each week, written for the CFOs and finance leaders who actually have to live with these things. If this got forwarded to you, subscribe at lookingforleverage.com. If there's a term you want broken down, reply and tell me. I read everything.
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