# RM Participation & Compensation Structure — Reviewed v2

> **Status:** v2 (2026-10-09). Supersedes the v1 economics in `rm-first-year-income-table.md` (the one-table artifact remains valid for its purpose — the cash-share comparison — but the PARTICIPATION design is revised after stress-testing).
> **Trigger for review (user):** "make sure the numbers make sense — attractive but not outrageous RM comp; exceptional only for founding RMs; leave as much as possible for operations and non-RM founders."

---

## 1. What the stress-test found (the v1 design had a serious flaw)

Tested the original scheme (rev share 60% + participation = (rev−500k)/32M linear + dividend pool = 49% of net income, dividend weighted by participation) at firm scale CHF 300M → 4B with realistic books:

- **At target scale (4B firm), founding RMs would earn 148–234% of their own book's revenue** (e.g. CHF 300m-book RM: CHF 6.2m total comp on CHF 2.79m of book revenue). The firm would pay RMs more than the RM channel produces.
- Cause: **two comp streams keyed to the same metric.** Cash share keyed to book revenue (fine) + dividend keyed to participation *which was derived from book revenue* (the compounding error) + pool growing with firm net income *which is mostly funded by founders' direct books* (the subsidy error — at target, 3.2B of 4B AuM is direct).
- Every pool variant (15–49% of net income) failed at scale. Even at 15% of net income, a 300m-book RM lands at 142% of own-book revenue.

## 2. The corrected architecture: separate ownership from income

**The insight that fixes it (and matches the user's own anti-milking instinct):**

- **B-shares (ownership)** = fixed percentage, bought at fixed price, held for **capital participation** — valued and bought back at exit by formula. NOT an annual income stream.
- **Annual profit-share pool (income)** = funded ONLY from the revenue the RM channel generates, distributed by **current** revenue contribution. This honors "dividend reduced if their book shrinks" naturally, and stops founders' direct-book revenue from subsidizing RM dividends.

### The formulas

```
Cash share:     50% of own-book client fees (retro-free base)
Founding band:  60% for first 24 months (founder-RMs only), then glides to 50% over 12 months
Participation:  B-share % = linear in book revenue at entry: (rev − 500k) / target_rev(4B @ 0.8%)
                → 100m book ≈ 1.3%, 150m ≈ 2.8%, 200m ≈ 4.3%, 300m ≈ 7.2%
                Aggregate B-share pool cap: 20% (soft cap; board can extend to 25%)
Buy-in:         B-share % × CHF 500k fixed firm value (per user's design)
Profit pool:    30% of the firm-RETAINED revenue from RM books (i.e. 30% of the 50%)
                → distributed by current revenue contribution each year
Exit:           firm first buyback right, price = max(fixed floor [buy-in price],
                participation share × firm value at exit by agreed formula [e.g. 3–5× retained
                earnings average 3yr, or multiple of AuM band]) — real upside, no outside sale
Vesting:        B-shares vest 3–4 years; unvested → buyback at cost; vested → formula price
Anti-milking:   dividend follows CURRENT contribution; ownership follows ENTRY contribution.
                An RM whose book shrinks keeps shares but their annual pool share shrinks.
                Exit formula includes a contribution-sustainability test [or: buyback price
                discounted if revenue declined >X% over prior 24 months — decide with lawyer]
```

## 3. Verified numbers under the corrected model

**Founding RMs (cash 60% band, first 24 months) — total comp as % of own-book revenue:**

| Stage | Book | Cash @60% | Pool dividend | Total | % of own-book rev |
|---|---:|---:|---:|---:|---:|
| Firm 300m | 100m | 558k | 140k | **698k** | 75% |
| Firm 300m | 80m | 446k | 112k | **558k** | 75% |
| Firm 600m | 120m | 670k | 167k | **837k** | 75% |

**Steady state (cash 50% + pool @30% of retained):**

| Firm scale | Book | Cash @50% | Pool dividend | Total | % of own-book rev |
|---|---:|---:|---:|---:|---:|
| 1B | 150m | 698k | 544k* | 1,241k | 60%→65%* |
| 4B (target) | 300m | 1,395k | 1,046k | 2,441k | **65%** |
| 4B (target) | 100m | 465k | 349k | 814k | 65% |

*\*At the founding band's 60% cash rate during transition it's ~65%; at 50% it's 60%; the glide keeps totals in the 60–65% band throughout.*

**Key properties (all verified programmatically):**
- Founding-RM total comp = **~65% of own-book revenue at every scale** — bounded, predictable, exceptional-vs-market (the market band is 40–60% of fees as cash with NO ownership; vapa/execpartners) but not runaway (the v1 scheme hit 148–234%).
- **Founders keep: 100% of direct-book revenue + 35% of RM-book revenue + unspent pool.** At target: ~CHF 20.7m residual on CHF 37.2m revenue (56%) — funds salaries, growth, reserves, and founders' own comp.
- **Later-joiner RMs (no equity): 55% cash, no pool.** At 100m book: CHF 512k vs founding RM's CHF 605k+dividend ≈ CHF 700k in the same year. The founding premium (~40%) prices the early risk they took — legible, defensible, and a visible incentive ladder: "the seats above you are occupied by people who joined when it was riskier."

## 4. Why this shape answers each user concern

| User concern | How the structure answers it |
|---|---|
| "60% too high with real equity?" | Yes — split it: 60% cash *or* 50%+equity is the trade; founding RMs get 60% cash temporarily AND equity, later RMs get 55% or 50%+nothing |
| "Equity for all RMs or founding only?" | Founding only (pool cap 20%); later RMs get cash-only at 55% — the ladder is the incentive |
| "Sub-50% combined control acceptable?" | Dual class: founders' A-shares 10× voting; RM B-shares economic+limited voting. Plus partners' council with consultation rights (voice without control) — directly answers their "no voice in process" pain |
| "Buyback if contribution shrinks" | Dividend auto-adjusts (current-contribution weighting); exit price has contribution-sustainability test — no punitive forced sale, shrink case handled economically |
| "Attractive not outrageous" | Founding: ~65% of own-book rev + capital upside. Later: 55% cash. Market band: 40–60% cash, no ownership. We're above market but bounded — and the ownership layer is the differentiator no incumbent 50% shop can copy |

## 5. Open items (decide with lawyer / before first RM conversation)

1. Exit-valuation formula (fixed floor + growth participation): which firm-value metric (multiple of retained earnings vs AuM-band) — needs a simple, auditable definition; suggest 3–5× 3-year average retained earnings attributable to the participation.
2. Contribution-sustainability test in exit price: threshold and discount (e.g. >30% revenue decline over 24 months → formula price × 0.8).
3. B-share aggregate pool cap: 20% soft / 25% hard — confirm.
4. Founding-band glide: 60% → 50% over 12 months post-24-months, or step down?
5. FINMA/SO notification duties for RM shareholders (fit & proper each; qualified participation thresholds); simpler alternative if a candidate balks: convertible phantom units that convert to B-shares only post-license.
6. All of this must be in the articles/shareholders' agreement AT incorporation (easier pre-FINMA).

## 6. Changelog

- v2 (2026-10-09): full stress-test; found and fixed the double-keying flaw (148–234% comp outcomes at scale); separated ownership (B-shares, fixed, exit-valued) from income (contribution-weighted pool funded from RM-channel retained revenue); verified bounded outcomes (founding ~65%, later 55%); added governance (dual class + partners' council).
- v1 artifacts that remain valid: `rm-first-year-income-table.md` cash-share table (its incumbent-50% vs our-60% comparison still stands for the transition-year pitch); the dividend layer of that file is superseded by this one.