Equity Rules

One of the hardest things for an owner/founder/operator to do is motivate others to perform and grow to their full potential. Watch how the  pride and endurance of a race horse transforms a struggling team into winners in this inspiring scene from Seabiscuit.

Movie rights provided by moviecomm.com.
Click to see a short inspiring clip from Seabiscuit.

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.

In his white paper, Equity Rules: Shaping powerful equity models via Sell.Pay.Convey, Mark Bronfman outlines the rules for using equity to secure a strategic advantage. His points are especially relevant to talent-driven ventures.

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:

  • 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.”

5 EQUITY RULES FOR STRATEGIC ADVANTAGE

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.
  1. 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.
  1. 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.
  1. 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.
  1. 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-up
  • Partial redemptions
Click to download Equity Rules by Mark C. Bronfman

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.

The best practice for owners is to transfer equity distribution as a strategic company “fix, not a one-off transaction.

Be sure to read Mark’s full paper and contact intelliven@intelliven.com for an introduction or reach out directly to: Mark.Bronfman@lfg.com.

ABOUT Mark C. Bronfman

Mark C. Bronfman is a private wealth advisor with Sagemark Consulting in Vienna, Virginia. Mark founded the BOLD Value service line, which is dedicated to the issues of executive compensation, corporate benefits, capital structure, business succession and personal/legacy planning for middle market businesses.

Prior to his affiliation with Sagemark, Mark served as an equity partner with Accenture with a specialty in Strategy and Business Architecture. He earned his MBA from the University of Virginia (Darden) and his B.S. in Accounting from Penn State. Mark is a frequent writer and speaker at industry events and is a non-practicing CPA.

DISCLOSURE

The BOLD Value Service Line is dedicated to the specific needs of middle market business owners. Mark Bronfman and his team members of the Bold Value service line are registered representatives with Lincoln Financial Advisors Corp.  Securities offered through Lincoln Financial Advisors Corp., a broker/dealer, Member SIPC. Investment advisory services offered through Sagemark Consulting, a division of Lincoln Financial Advisors Corp., a registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. The BOLD Value trademark is personally owned by Mark Bronfman. BOLD Value is not an affiliate of Lincoln Financial Advisors Corp. The examples herein are not indicative of any particular investment or performance. There can be no assurances that all results will be similar. CRN-1645738-111616

SEE ALSO:

How to Drive Elite C-Suite Performance

The Profits Interest

Leave a Reply

Your email address will not be published.