Shape Powerful Equity Models via Sell·Pay·Convey®

Equity models are strategic because: “Who gets What” defines “Who You Are!” That is, the way owners share value with those who create it has a profound impact on the firm and the owners’ ability to attract, retain, and reward senior talent.

Private companies often use a variety of innovative tools, individually or in combination, to navigate and conquer major changes brought on by the urgent concerns of affordability, competency, and succession or “equity inflection points”.

That is, they use equity to gain a strategic advantage when addressing challenges such as:

• Affordability: “Our success has driven up the price of ownership. Key executives can’t afford to buy-in and we may lose our best people.”
• Competency: “Our core markets and strategies are shifting fast, and we don’t have the right people in place. We need to realign our leadership.”
• Succession: “Some of us are ready to retire, but our equity model is getting in the way of our exit strategies. Our succession plan is at risk.”

Many business owners and boards turn to equity as the default technique to attract, retain, and reward senior members of their team. But they do not always use it to their best advantage. The following 5 Equity Rules help to design an equity model that best serves owner needs:

1. Confirm that equity is the right tool. Equity awards are “all-for-one and one-for-all” and so are less effective than rewards tied to individual contributions, such as improvements in a function or business unit.
2. Know the full cost of an equity program. Cash is king and equity awards look like a non-cash expense but equity is often the most expensive value-sharing alternative and entails a near-permanent transfer of value to an executive. As such, it usually is not the best option for rewarding growth over a short time period.
3. Ensure that the equity model aligns with owner exit plans. Different exit paths are best served by different reward strategies. If owners plan to sell to insiders, an equity program may be appropriate. A family business that plans to keep the business in the family may be better off with intra-family trusts.
4. Ensure that equity follows engagement, not vice versa. If an executive team is not highly motivated, throwing equity at them is not likely to make a difference.
5. Make the Sell·Pay·Convey^® equity transfer framework core to company strategy. The Sell·Pay·Convey^® decision framework helps owners know how and when to: sell equity (typically via an installment note); pay equity (as a compensatory bonus); and convey equity (at no cost to the executive). Variations on the Sell·Pay·Convey^® spectrum can be combined into self-correcting equity models that drive leaders to perform and grow using a variety of approaches. See examples below.

• Sell: Transfer ownership to new owners by selling them a stake in the company. Sell examples include:
  • Valuation discounts
  • Affordability financing
  • Non-recourse debt
• Pay: Transfer ownership to new owners by paying equity via a grant. Pay examples include:
  • Compensatory stock grants
  • Restricted stock grants with 83(b) election
  • Nonqualified stock options (NSOs)
• Convey: Transferring ownership to new owners with no out-of-pocket cost to executives. Convey examples:
  • Profits interests in a partnership
  • Stock bonus with a tax true

The Equity Rules white paper provides a case study illustrating the full power of the Sell·Pay·Convey^® framework to simultaneously get key executives to put skin in the game, reward superlative performance, and encourage entrepreneurial behavior.

Please contact us to learn more.