Sweet equity is the investment by management in a specific category of instruments issued by the acquisition vehicle ("Newco").

Sweet equity entitles its owner to potentially high returns, but only if certain conditions are met:

sweet equity is only "in the money" if a minimum return is realized by the investor (hurdle rate). This means that, below such return for the investor, the sweet equity instruments are worthless;
sweet equity is only "earned" if there is no breach of the shareholders agreement;
capital gains on sweet equity are gained at exit (and not before).
Sweet equity is structured through (i) implementing an envy ratio or (ii) granting ratchets.

Phantom stock is an alternative to sweet equity.