Envy Ratio

The envy ratio shows how much more cheaply management invests in a company compared with the financial investor. It compares the prices both sides pay per share. A high value means that management receives significantly more favourable participation than the investor. It is calculated by dividing the amount the investor has committed per percentage point of its stake by the corresponding amount for management.

If a fund invests 90 million euros for 80 percent and management 2 million euros for 20 percent, the investor pays 1.125 million euros per percentage point and management 0.1 million, giving a ratio of about 11. The difference is possible because the investor contributes most of its capital not as ordinary equity but through a senior instrument, such as a shareholder loan or preferred shares carrying a fixed return, while management takes a disproportionate share of the junior ordinary equity. This construction is called sweet equity and is economically not a gift but leverage with risk: because the investor's preferred capital is served first on exit, management's stake is worth little in a moderate outcome and only takes effect above a certain value threshold. Typical values sit in the low to mid single digits depending on structure, while markedly higher ratios indicate a very aggressive incentive design. This is a guide value that can differ from deal to deal.

For tax purposes it must be noted that an entry price set too low can be treated as a benefit arising from employment. It is also relevant how much management invests in absolute terms, because an amount that is economically meaningful for the individuals concerned binds differently from a symbolic sum. A multiple of annual salary is a common reference. How that contribution is funded also deserves thought, since personal risk depends on whether a loan must be repaid regardless of investment performance or recourse is limited to the investment.

Note: This explanation is for general information only and does not constitute tax advice. Tax treatment depends on the individual case and may change with new legislation. For a binding assessment, please consult a qualified tax adviser.