Ownership Rewards – You Can’t Always Give What You Want

“You can’t always get what you want” – lyrics by The Rolling Stones

Today’s blog comes fresh from two recent experiences with problematic ownership issues.  My not-so-clever play on words from one of my favorite groups really captures the essence of an all-too-frequent discussion with owners regarding sharing equity. This blog will, once again, point out the issue impacts new as well as established businesses.  The first case is an early stage company and the second, a 15-year-old established service business.  Both have the same issue – looking for ways to get equity to employees.

The starting points seemed simple enough.  The early stage company had just raised a small round of financing and wanted to issue equity and the service business just wanted to get some ownership to key employees as part of a retention and succession plan.  I have blogged in the past about the need to always have ownership sharing as part of a periodic review of current state – where are you now and where are you going?  So, as Mona Lisa Vito would say, “So, what’s your problem?”

Well it seems both had what some might call “old baggage.”  The early stage company had made some informal commitments to employees regarding the price per share they could “get in at” but, had failed to execute documents and the recent round had set an indication of value far in excess of that informal promise. You really can’t get equity to someone at $0.10 a share when you just raised a round at $2 a share without some adverse tax consequences.

As part of the succession/retention planning process, the service business had come to an agreement with both current and future shareholders that the business was now worth $6mm.  While that’s a good start, (by the way, no valuation was done to support this) the current owners had already recently given 8% of the business to one of the key employees for no consideration.  Once again, giving an employee or advisor something of value for minimal or no consideration creates the potential for significant tax issues.  As you might imagine, a stock certificate accompanied by a notice of taxable income with no cash does not quite fit into the definition of an incentive benefit.

So, what started as a well-intentioned gesture by two thoughtful organizations became an exercise in futility as time and fees were wasted trying to both fix what had been done and reconfiguring what they wanted to do.  Not only did it show that you can’t always give what you want, but it focused again on a constant theme related to equity – that owners must stay vigilant regarding timing and good advice when considering any equity sharing.  With those two “friends” in your corner, as The Stones would say, “but, if you try sometimes, you just might find, you get what you need.”

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