# Participation Structure — Step-by-Step Walkthrough

> **Status:** v1 (2026-10-09). Plain-language walkthrough of `rm-participation-structure.md` v2 with worked examples, for user review. All figures verified by simulation.

---

## Step 1 — The two separate tracks (this is the key to understanding it)

An RM who joins receives **two different things**, governed by two different rules:

| | What it is | How the amount is set | Changes over time? |
|---|---|---|---|
| **Cash share** (salary-like income) | 50% of all client fees their book generates | Their book's revenue × 50% (60% first 24 months for founding RMs) | Follows their CURRENT book. Book shrinks → cash shrinks immediately |
| **B-shares** (ownership) | Real shares in the firm — dividends come ONLY through the profit pool below, and real value comes at exit | % set ONCE at entry, from book size at that moment. Bought at a fixed price | **Never re-derived.** Fixed for as long as they hold. This is what they own |

**Why two tracks:** the RM's *income* must track what they contribute *this year* (your anti-milking requirement — a shrinking book must shrink their compensation). But their *ownership* must stay fixed (otherwise it isn't ownership — it's a bonus plan). The two rules do different jobs and don't contaminate each other.

## Step 2 — The profit pool (annual income layer)

Every year:
1. Firm collects fees from RM books → pays RMs their 50% cash.
2. The firm **retains** the other 50% of RM-book fees.
3. **30% of that retained amount goes into the pool.** Crucially: the pool is funded ONLY from RM-channel money — the founders' direct books never pay into it.
4. The pool is split among the equity RMs **by their current book revenue** — not by their shares. (Book shrank this year? Smaller pool slice this year. Automatically. No discretion.)

So each equity RM's annual income = 50% of own fees (or 60% in founding band) + their current-contribution slice of the pool.

## Step 3 — B-shares at entry (the ownership layer)

Formula at entry: **B-share % = (their book revenue − 500k) / 32m** (32m = 4B × 0.8%, the target-firm revenue reference).

| Book at entry | Revenue | B-share % | Buy-in price (× CHF 500k firm value) |
|---:|---:|---:|---:|
| CHF 80m | 744k | 0.76% | CHF 3,800 |
| CHF 100m | 930k | 1.34% | CHF 6,719 |
| CHF 150m | 1,395k | 2.80% | CHF 13,984 |
| CHF 250m | 2,325k | 5.70% | CHF 28,500 |

Vesting: 3–4 years. If they leave before full vest, unvested shares bought back at cost (they can't lose, they just don't gain).

## Step 4 — What happens year by year (worked example: RM-1, CHF 150m book at entry)

- **Year 0:** signs. Buys 2.80% of the firm for CHF 13,984. Founding band: cash 60%.
- **Years 1–2:** book CHF 150m → fees CHF 1,395k → cash @60% = CHF 837k + pool slice ≈ CHF 209k → **~CHF 1.05M total (75% of own-book revenue)**. (Firm is small; pool is small in absolute terms.)
- **Year 3:** founding band glides to 50% cash. Book CHF 150m → cash CHF 698k + pool CHF 209k = **CHF 907k (65% of own-book revenue)** — assuming their book holds steady.
- **Year 3, scenario A — book grows to 250m:** cash CHF 1,162k + pool slice CHF 349k = **CHF 1.51M (65%)**. Note: their SHARES didn't change (still 2.80%) — only income moved. If a new RM joins with a bigger book, the pool splits differently, but RM-1's shares are untouched.
- **Year 3, scenario B — book shrinks to 100m:** cash CHF 465k + pool slice CHF 139k = **CHF 604k (65%)**. Income fell with the book — exactly your "dividend reduced accordingly" requirement — but they still OWN 2.80%.
- **Year 10:** firm at CHF 4B (see paths below). Their slice of the pool: CHF 209k/yr (if book stable at 150m — the pool grew with the firm's RM channel).

## Step 5 — Exit (where the equity finally pays)

Firm has the **first buyback right**. Price = **max(buy-in floor, formula value)**, formula e.g. 4× the firm's average retained earnings (3yr). Worked:

- Firm stays small (CHF 600m, modest earnings): RM-1's 2.80% exit ≈ **CHF 0.23M** (17× their CHF 14k cost).
- Firm reaches CHF 4B with healthy earnings: exit ≈ **CHF 2.65M** (190×).
- Optional protection for you: cap the multiple (e.g. max 100× cost → CHF 1.4M ceiling). Decide with the lawyer.

The founders' direct book makes the firm valuable — the B-share RM participates in that upside only through their small fixed %. That's the right incentive: they helped build the platform, they share the outcome, but you don't give away the engine.

## Step 6 — Where the money goes (the founders' side)

Every franc of firm revenue splits into exactly four destinations:

```
RM-book fees:   50% → RM cash | 15% → pool (to equity RMs by current contribution) | 35% → firm
Direct fees:    100% → firm
Then:           firm pays opex → remainder = founders' income/dividends
```

## Step 7 — Ten-year outcomes, three realistic paths

Assume 2 founding RMs (books 150m + 100m at entry → B-shares 2.80% + 1.34% = **4.14% combined**; founders keep 95.9% and **100% of votes**).

**PATH 1 — Target case: RM books stable, founders built a CHF 3.75B direct book (their original clients + new direct clients + later non-equity RMs' retained halves)**

- Firm revenue CHF 37.2M, opex CHF 12M (staff, compliance, systems, salaries).
- RM-1 earns CHF 907k (65% of own-book rev); RM-2 earns CHF 604k (65%).
- **Founders: CHF 23.7M** (direct-book CHF 34.9M + RM-channel net CHF 0.8M − opex) = **64% of firm revenue**.
- RM combined ownership: 4.14% of firm value (~CHF 3.9M at formula value) — but their annual income never depends on it.

**PATH 2 — Modest case: firm CHF 600M (books didn't compound; lean opex CHF 2M)**

- Revenue CHF 5.6M.
- RM-1 CHF 907k, RM-2 CHF 604k — **unchanged** (their income tracks their books, not firm size — by design).
- **Founders: CHF 2.1M** (37% of revenue — lower % because opex is heavy relative to a small direct book). RMs still earn 65% of own-book revenue.
- Exit values small (CHF 0.23M/0.11M) — the equity only pays big if the FIRM got big, which is the point.

**PATH 3 — RM-heavy case: 3 equity RMs (250m + 150m + 100m), founders' direct book CHF 500M**

- Firm CHF 1B. RM channel = CHF 4.65M fees. Pool CHF 700k split by current contribution.
- RM-1 (250m book): CHF 1.51M. RM-2: CHF 907k. RM-3: CHF 604k — all at 65% of own-book rev.
- **Founders: CHF 3.3M** (direct CHF 4.65M + RM-net CHF 1.6M − opex CHF 3M) = 35% of revenue. Lower % than Path 1 because direct books are small — but note the RMs' books ARE the firm here, and the founders still net CHF 1.6M from books they don't personally manage.
- If a 4th RM joins later (non-equity, 55% cash), they get no pool — the ladder stays intact.

**The invariant across all paths (this is what makes the structure sound):**
1. Every equity RM's annual income = 60–65% of their own book's revenue — **never more, at any firm size**. The v1 design's 148–234% outcomes are structurally impossible now.
2. Founders keep 35% of every RM-book franc + 100% of direct-book francs. The RMs can never earn into control of the economics.
3. Ownership is fixed at entry; income is current. A stagnant-book RM keeps shares but stops growing income from the pool. A growing-book RM earns more without needing more shares.
4. Control never moves: 4.14% combined B-shares vs founders' 10× votes — even at a 25% pool cap, founders hold every vote.

## Step 8 — The knobs still open (decide with lawyer or before first conversation)

1. **Exit formula & cap** (4× retained earnings vs AuM-multiple; 100×-cost cap or none).
2. **Contribution-sustainability test** (e.g. book shrank >30% over 24 months → exit price × 0.8) — your shrink-trigger, implemented at exit instead of as a forced buyback.
3. **Pool rate** 30% of retained RM-channel revenue (could be 25% conservative / 35% generous).
4. **Vesting period** 3 vs 4 years; whether the glide from 60%→50% is stepped or smooth.
5. **Later-RM access to equity**: hard no (pure ladder), or earn-in (e.g. eligible after 3 years + CHF 150m book, board discretion).