Before Offering Equity To Staff, Consider This.
If you are contemplating offering one of your team equity in your business I’d ask one thing of you.
Stop for a second and ask yourself one major question.
All too often businesses owners get caught up in the thought of locking in a key team member with equity without really thinking through the consequences.
This generally results in one of two things. Either the deal never gets done and the team member gets fed up and leaves. The second is the deal does happen but without proper planning and ends in divorce. Both pretty ordinary outcomes.
So how do you avoid this?
Before starting any conversations about equity with anyone in your team I’d suggest you and any other directors, sit down with a trusted advisor and ask yourselves a lot of questions of yourself and the business. Basically you need to prepare a Strategic Plan of the business.
The outcome will give you a better idea of what the next step should be. The questions below are a starting point.
- What are your long-term plans for the business?
- How much of your business are you willing to give away?
- Is this team member really so special you have to give up some of your business to get them to stay?
- Have you considered other types of incentive scheme?
- Should they have to pay for the equity? If so, do you want that cash, is it for a retiring shareholder or does the company?
- What should the team member achieve before getting the equity?
- What additional, complementary skills can they bring to the business?
Once you’ve done that, you’ll want to find out some info from the team member in question to ensure your goals align.
It’s probably wise to have someone independent interview your team member rather than doing it yourself.
Consider it a SWOT analysis on the team member. You’ll want to ask things like:
- What are your long-term plans?
- Where do you see the business in ten years?
- How do you see the business supporting your long-term plans?
- What can you bring to the business to take it to the next level?
It’s only once you’ve gathered all of this information you can start to consider the type of offer you’d like to make to your employee. If you come away from this exercise with a perception of poorly aligned goals, then the likelihood of the new “partnership” working is low.
Let’s say you and your key team member see eye-to-eye, for example you both agree there’s lots of value to be added, they want to drive it, and you to double the business within five years.
It’s at this stage that you should probably bring in an experienced advisor (if you didn’t already back at step one) to run you through the different scenarios available so you can select one that best suits all involved.
Outside of commercial advice, you’ll also need tax advice as many of these scenarios have tax complications associated with them, and you’ll want legal advice when it comes to drafting the deal documentation, including the contract, shareholders agreement, etc.
If all of this sounds like a lot of work, well, that’s because it is.
Your business is a big deal and inviting someone in to be an equity partner should also be treated as a big deal.
If you would like to discuss this further with one of our team, please contact us.