Last time we looked at the possibility of granting restricted shares to Sally, the head of your national sales team. We pointed out some of the pitfalls. What other approaches do business owners take to get stock in the hands of their leadership teams. After all, creating an ownership connection with employees sounds like a great idea.
Second approach: Sally could buy stock. Now she’s putting her own money into the deal. Investing her own capital will tie Sally more closely to the success of the company. Hopefully so. It’s not the worst of ideas. But, you still have many of the same problems discussed last time. The open books. The discussion about your compensation. The little chat about the size of dividends. Redemption issues. Buy-and-sell agreements. Termination-of-employment loose ends. And does Sally even have the cash to buy in? If she was going to be concerned about the taxes on a grant, how is she going to come up with the full amount needed to purchase the shares?
Maybe you’ll think it’s a good idea to lend her the money. Think about that one. You’ll loan her the money that she can give back to you (to buy the stock) so that you can have all the headaches described above? Some employers envision allowing her to use her share of company dividends to repay the loan. How is this any different than giving her stock in the first place—you’re paying yourself back for helping her buy some of your stock by reducing the dividends you would otherwise have been entitled to? That’s quite a partnership!
There's gotta be a better way! Next time: Approach #3.
