I don't think Shakespeare ever ran a business, but if he did, that likely would have been the question; not the infamous one he posed. If you're a business owner or CEO who has tried to recruit a key producer--or hold on to the premier talent you have--you've inevitably been asked this question: "Can I have equity in the company?" When faced with that query, you have probably struggled with how to respond. You don't mind giving away stock if it means a bigger "pie" will be created but you worry about the immediate impact of diluting the present shareholder value. And what if a bigger "pie" doesn't materialize?
You also wonder when it's appropriate to share stock and when it's not--and how to manage the expectations of those requesting it. In that musing, you might have asked yourself if there are alternatives that will satisfy the people making the request. If so, what are those options and how do you decide which is best for your circumstance?
Let's face it, it's a difficult issue. I feel your pain. Let's see if I can assuage your anguish a bit.
The first thing you want to understand about a request someone makes for equity is that the approach is simply revealing a broader question on the employee's mind. The underlying issue he or she is trying to address is whether you have a mechanism in place to share value with those who help create it--and a philosophy that defines how and with whom that value sharing will occur. In other words, it's less about whether or not someone gets stock and more about participation in the success and growth they help fuel.
Criteria
In that context, often it isn't necessary to share equity. Phantom stock, SARs, profit pools, strategic deferred compensation and their variations are sometimes better alternatives, particularly in a private company. But let's address the question of equity first. When is it appropriate to share equity? I'll answer that question with a series of queries you should pose to determine whether it's right in your circumstance:
- Are you a public company that needs to share stock or options to compete for talent?
- Are you a private company competing against public companies for talent?
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Have you reached the point where sharing ownership is needed to attract or retain vital contributors?
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Do you have employees whom you feel have earned the right to ownership in the company?
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Are there means for transferring and repurchasing stock?
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Are you prepared for the immediate dilution of your equity?
If stock options are being considered, additional issues should be weighed:
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Do you feel there are employees who should participate in future growth but not in present value?
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Will the employees be in a position to fund the purchase?
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Are there means for transferring and repurchasing stock?
The answers to those questions should help you determine whether or not equity sharing is a realm into which you should venture.
Alternatives
So, what if you decide that distributing stock is not a good option but you still want to create a means for sharing value with those who help create it? Well, ultimately there are at least six other different types of long-term value-sharing arrangements to choose from. What you need is a means of learning about each of them and a process for determining which is most suitable. We use a decision tree process for that purpose--which is shown in the adjoining picture.
If you click on that graphic, it will take you an interactive tool on our site. The tool poses questions to which you respond by clicking on the alternative answers. As you work through the tree, it helps you understand the kinds of plans that are available based on the criteria you're considering and guide you to the ones that are most suitable for your circumstance--whithin the realm of what's possible.
The reality is there are lots of ways to reward people for creating value in your business without sharing stock with them. In most private organizations, those alternatives are usually better both for the shareholders and the key producers. The most common types of plans that are used in non-public companies where business leaders want to mirror the effect of giving equity are phantom stock and SARs. In each of these, a future payout is tied to the value increase in the business. They have the effect of stock without actually giving away real shares.
Phantom stock plans have risen in popularity as the talent wars have heated up and private businesses are competing more and more with public companies for talent. But whether it's phantom stock, a profit pool or some kind of deferred compensation, just remember the core issue is that premier talent wants to participate in the success it helps create. You don't have to share stock to accomplish that.
"To share equity or not to share equity?" Well, you'll need to decide--but hopefully this information makes that choice easier.
