Knowledge
How ordinary share classes work in PE structures — alphabet shares, sweet equity, management incentive plans, ratchets, and how ownership percentage is calculated.
Ordinary shares represent the residual equity interest in a company. After all creditors have been repaid, preference share coupons and principal have been returned, and any shareholder loan balances have been settled, whatever remains belongs to the ordinary shareholders. This residual claim is why ordinary shares carry the highest risk — and, in a successful exit, the greatest reward.
In a private equity acquisition, ordinary shares are typically issued at the TopCo level and sit at the bottom of the capital structure. They carry voting rights (unless structured otherwise), entitling holders to participate in major decisions such as disposals, refinancings, and board appointments. In practice, the fund documents and shareholders' agreement govern much of this governance rather than the articles alone.
Because ordinary shares only participate after senior instruments have been satisfied, the equity value is highly sensitive to exit multiple and leverage. A fund investing at 10× EV/EBITDA with 60% debt financing sees its ordinary equity doubled or halved by relatively modest movements in enterprise value — the classic leveraged buyout dynamic that underpins PE return profiles.
Most PE structures do not issue a single class of ordinary share. Instead they create multiple classes — commonly referred to as alphabet shares (Ord A, Ord B, Ord C and so on) — to give different investor groups distinct economic rights within the same instrument type. Each class can carry different participation ratios, hurdle rates, or distribution preferences, allowing the structure to incentivise management separately from the fund without using entirely different instruments.
The table below shows a typical allocation of ordinary share classes in a mid-market buyout:
| Share class | Typical holder | Purpose | Voting rights |
|---|---|---|---|
| Ord A | Fund / MasterCo | Primary equity return; majority economic and voting interest | Yes — majority |
| Ord B | Management / MIP vehicle | Sweet equity — disproportionate upside above a return hurdle | Limited or none |
| Ord C | Co-invest / Rollover | Pari passu with fund on economic terms; aligns co-investors | Yes — pro rata |
The exact rights attached to each class are defined in the articles of association and the investment agreement. It is common for Ord B shares to be structured so they only participate in distributions once Ord A has received a specified return — effectively building the management ratchet into the share class mechanics rather than into a separate instrument.
Sweet equity is the term used for the disproportionately large share of upside that management receives relative to their cash investment. In a typical buyout, management may invest 1–2% of the total equity cheque but, through a separate share class or a management incentive plan (MIP) vehicle, receive 15–25% of the equity proceeds above a return threshold.
This is not a gift — it is a deliberate structure designed to align management's financial interests with those of the fund. If the business performs well and delivers a strong return, management benefits substantially; if it underperforms, management's equity may be worth little or nothing, having ranked behind the fund's preferred return.
In Luxembourg-domiciled structures (the most common European PE jurisdiction), sweet equity is often held through a dedicated MIP LuxSarl or similar nominee vehicle, which in turn holds Ord B or equivalent shares in TopCo. This creates a clean separation between management's economic interest and the fund's holding, simplifying reporting and exit mechanics. Individual managers subscribe through the MIP vehicle rather than holding TopCo shares directly, which also facilitates leaver and good leaver provisions.
A management ratchet is a mechanism that adjusts the proportion of equity proceeds received by management depending on the fund's actual return. Rather than fixing management's share at the outset, a ratchet allows management to earn a larger slice of the proceeds if performance exceeds a target — typically expressed as a money-on-money multiple (MoM) or an IRR hurdle.
A simple example: management holds Ord B shares that participate in exit proceeds once Ord A has received 1.5× its invested capital. Above that threshold, management's Ord B participates at 20% of incremental proceeds. At a 2.0× MoM exit, management earns 20% of the gain above 1.5×. At a 3.0× exit, the same 20% participation applies to a far larger pool, substantially increasing management's absolute return.
Ratchets can also work downwards — some structures include a reverse ratchet that reduces management's share if the fund falls short of a minimum return, protecting the fund's economics on lower-performing investments. The precise mechanics are always deal-specific and will be set out in the shareholders' agreement.
Dilution occurs when new shares are issued — for example, on a bolt-on acquisition funded partly by equity, or when a management option scheme is exercised. Each existing shareholder's percentage holding decreases unless they participate in the new issuance pro rata. Cap table software must track every issuance event as a transaction to maintain an accurate record of the diluted ownership position at any point in time.
The ownership percentage shown on a cap table is almost always calculated with reference to ordinary shares only — not preference shares or shareholder loans. This reflects the economic reality: prefs and SHLs have a fixed contractual return and do not participate in the residual equity upside. Including them in the denominator would dilute the ownership percentage without reflecting any meaningful change in the equity distribution.
The standard formula is:
Ownership % = investor's ordinary shares ÷ total ordinary shares in issue × 100
Where multiple ordinary share classes exist (Ord A, Ord B, Ord C), all classes are typically aggregated in the denominator, and each investor's holding across all classes is summed in the numerator. If certain classes carry different economic rights, a fully diluted or economic ownership analysis may present weighted percentages alongside the raw share count percentages.
Cap table percentage in CapTab: Ownership percentages displayed on the cap table are calculated from ordinary shares only, unless the view is explicitly set to show all instruments. Preference shares and shareholder loans are tracked separately and do not affect the equity ownership percentage. This is consistent with standard fund administration practice.
The best way to understand CapTab is to see your fund structure modelled in it.