Management Incentive Plans (MIPs) Legal Advice for SMEs and Management Teams

Clear, commercial advice on equity incentives in private equity and growth transactions for founders and senior management.

Management incentive plans, commonly referred to as MIPs, are a central feature of most private equity and growth capital transactions. They are designed to align the interests of investors, founders, and senior management by rewarding value creation over time. However, MIPs are also one of the most complex and frequently misunderstood aspects of an investment deal.

Jonathan Lea Network advises SMEs, founders, and management teams on the structuring, negotiation, and implementation of management incentive plans across private equity, growth capital, and strategic investment transactions. We focus on ensuring incentives are genuinely aligned, commercially fair, and clearly understood, while avoiding structures that can materially dilute founder or management economics on exit or expose individuals to unintended risk.

As a growing UK corporate and M&A law firm with a strong transactional practice, we combine technical expertise with clear, practical advice tailored to the realities of SME and lower mid-market businesses.

Who We Act For on Management Incentive Plans

Advising management, founders, and investee companies.

We typically act for management teams and investee companies rather than investors, often negotiating MIPs opposite private equity and institutional investors whose documentation is drafted to protect their return profile.

We regularly advise:

• Founders rolling equity into a private equity transaction
  We help founders understand how retained or growth equity operates alongside a MIP and how structures such as ratchets or preference stacks can affect founder returns on exit.
• Senior management teams receiving equity incentives
  We advise managers on the commercial, legal, and downside risk implications of MIP participation, ensuring they understand both potential upside and personal exposure.
• SMEs implementing incentives as part of an investment
  We support businesses in implementing MIPs that motivate management while remaining workable, sustainable, and aligned with existing shareholder arrangements.

What Is a Management Incentive Plan?

Understanding how MIPs work in practice.

A management incentive plan allows management to participate in the future growth and exit value of a business, usually by holding a class of equity or equity-like interest that delivers returns once certain value or performance thresholds are achieved.

• Alignment with investor objectives
  MIPs are designed to align management incentives with investor exit goals, typically over a three to five-year horizon, depending on investor strategy.
• Risk and reward
  Management may invest alongside investors, meaning there is both upside potential and downside risk, with arrangements differing between sweet equity structures and purely option-based plans.
• Exit-driven value
  Value is usually realised on an exit event such as a trade sale, secondary buy-out, IPO, or other liquidity event agreed with investors.

Common MIP Structures in SME Transactions

Choosing the right incentive model.

There is no single MIP structure. The appropriate approach depends on the business, the investor, and the management team.

• Growth shares
  Growth shares participate in value above a defined hurdle, often set by reference to investor capital plus a preferred return, allowing management to benefit from future growth without paying full market value upfront.
• Sweet equity
  Sweet equity involves management acquiring shares at a discounted price reflecting performance conditions and risk, typically ranking behind investor preferred instruments.
• Options and option-like arrangements
  These include EMI options or bespoke option arrangements, where tax treatment is often a key differentiator for UK SMEs.

Tax Considerations in Management Incentive Plans

Understanding tax risk and opportunity.

Tax treatment is a critical element of any MIP. Poorly structured plans can result in unexpected income tax or national insurance liabilities.

• Capital versus income treatment
  We work closely with specialist tax advisers to help structure incentives to achieve capital gains treatment where possible.
• EMI and other tax-advantaged schemes
  Where available, we advise on alignment with EMI and other UK tax-efficient arrangements, noting that eligibility is subject to statutory conditions.
• Valuation and HMRC considerations
  We advise on the importance of supporting valuations and robust documentation, and where appropriate, engagement with HMRC to reduce tax risk.

Leaver Provisions and Vesting

What happens if management leave.

Leaver provisions are often the most contentious aspect of a MIP, as they determine what happens to management equity if a participant leaves the business.

• Good leaver and bad leaver definitions
  We advise on how leaver categories are defined, including grey-area scenarios such as performance-related departures, as these definitions directly affect value.
• Vesting schedules
  We explain time-based and performance-based vesting, how vesting operates over time, and how it interacts with exit timing.
• Commercial fairness
  We negotiate outcomes that are proportionate and reflect real-world circumstances rather than rigid or punitive drafting.

MIPs and Exit Scenarios

How incentives operate on exit.

Understanding how a MIP performs on exit is critical to assessing its true value.

• Trade sales and secondary buy-outs
  We advise on whether MIP interests accelerate, roll into new structures, or cash out on different exit routes.
• IPO and other liquidity events
  We explain how incentives convert or crystallise on flotation or similar events.
• Continuation funds and secondary transactions
  We advise on MIP treatment where private equity investors roll into continuation fund structures, a common and increasingly sophisticated scenario.

Interaction with Shareholder and Investment Documents

Ensuring documents work together.

MIPs do not operate in isolation and must align with shareholder agreements, investment agreements, and articles of association.

• Consistency across documents
  We ensure leaver, transfer, drag and tag, and exit provisions align across all transaction documents.
• Governance and consent rights
  We advise on whether MIP holders have direct voting rights or participate through pooling or nominee arrangements.
• Avoiding unintended consequences
  We identify and resolve conflicts such as inconsistent transfer restrictions or information rights that can undermine incentives.

Managing Risk for Management and Founders

Protecting individuals as well as the business.

MIPs can expose management and founders to personal risk if not carefully structured.

• Downside protection
  We advise on managing the risk of capital loss, including limiting cash investment and negotiating more balanced leaver outcomes.
• Restrictive covenants and obligations
  We explain how non-compete, non-solicitation, non-poaching, and confidentiality obligations interact with incentives, noting that enforceability depends on scope, duration, and legitimate interest.
• Transparency and understanding
  We prioritise clarity so management fully understands the economic and legal implications of the MIP before committing.

Why Jonathan Lea Network for Management Incentive Plans?

Clear advice on complex incentive structures.

Jonathan Lea Network is trusted by founders and management teams to advise on MIPs that are commercially fair, legally robust, and clearly explained.

• Partner-led advice throughout
  Clients deal directly with experienced corporate lawyers.
• Focused on SME and lower mid-market transactions
  We understand how MIPs operate in real-world growing businesses.
• Plain-English explanations
  We explain complex structures without unnecessary jargon.
• Commercial and cost-conscious
  We focus on efficiency and value for money.
• Experienced with private equity counterparties
  We regularly negotiate MIPs opposite institutional investors.
• Integrated advice
  We work collaboratively with tax, employment, and corporate advisers to deliver joined-up solutions.

Speak to Our Management Incentive Plan Lawyers

Protecting value, incentives, and outcomes for management teams.

If you are being offered a management incentive plan, rolling equity into a private equity transaction, or implementing incentives for your management team, Jonathan Lea Network can help. Ideally, involve us before terms are finalised so we can help shape the structure from the outset. Contact us today to discuss your position before you commit to any MIP terms.

Call us on 01444 708640 or email wewillhelp@jonathanlea.net to arrange an initial consultation and discuss how we can support your next stage of growth.

FAQs: Management Incentive Plans