Definition of 'Carrot Equity'
A type of equity where current equity owners can purchase additional equity if the company reaches certain financial goals or benchmarks. Financial goals include certain net income, earnings per share, economic value added and operating cash flow thresholds.
Investopedia explains 'Carrot Equity'
Unlike a call option, the current shareholder does not have to pay a premium to purchase additional shares; they can be purchased from the company at a predetermined price without having to purchase an option or warrant.
This term is British slang and likely originated from the practice of urging an animal onwards by attaching a carrot on a stick to its head.