Calculate the payout from your profits interest units (PIUs) using the company exit value, the threshold (hurdle) value set at grant, and your ownership share.
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Profit Interest Units Formula
PS = (V - T) * (U / TU)
Where:
PS is the payout to the profits interest holder ($), V is the total company exit or sale value at the liquidity event ($), T is the threshold or hurdle value set when the units were granted ($), U is the number of units you hold, and TU is the total number of units outstanding on a fully diluted basis.
The term (V – T) is the appreciation created after your grant date. Profits interest units only share in this appreciation, not in the value that already existed at grant, which is what the threshold protects. The term (U / TU) is your ownership share. If V is less than T, the appreciation is zero and the payout is zero. To find the exit value needed for a target payout, rearrange to V = T + (PS / ownership share).
Profits Interest Payout Reference
The table below shows the payout for a 5% holder under different exit values when the threshold is $6,000,000.
| Exit Value | Appreciation Above Threshold | Payout at 5% |
|---|---|---|
| $6,000,000 | $0 | $0 |
| $8,000,000 | $2,000,000 | $100,000 |
| $10,000,000 | $4,000,000 | $200,000 |
| $16,000,000 | $10,000,000 | $500,000 |
Because the threshold removes the value that existed at grant, two holders with the same ownership share can receive very different payouts depending on the threshold set on their units.
Example Problems
Example 1. Your company sells for $10,000,000. The threshold on your units was set at $6,000,000 at grant. You hold 50,000 units out of 1,000,000 total units. The appreciation above the threshold is $10,000,000 – $6,000,000 = $4,000,000. Your ownership share is 50,000 / 1,000,000 = 5%. Your payout is $4,000,000 * 0.05 = $200,000.
Example 2. You hold a 2% profits interest with a threshold of $20,000,000. The company exits at $15,000,000. Because the exit value is below the threshold, the appreciation is zero, so your payout is $0. Profits interest pays nothing when the company does not grow past its grant date value.
FAQ
What is a threshold or hurdle value?
The threshold is the company value at the time your units are granted. Profits interest units only share in value created above this amount, which is what keeps them treated as profits interest rather than a capital interest for tax purposes.
Why did my payout come out as zero?
If the exit value is at or below the threshold, there is no appreciation to share, so the payout is zero. Your units pay out only when the company value rises above the threshold set at grant.
Does this calculator give the fair value of my units before a sale?
No. This shows the intrinsic payout at a known exit value. A formal fair value of unvested or pre-exit units uses an option pricing model such as Black-Scholes or a Monte Carlo simulation, which account for time and volatility.