Equity Plans Part I – The Sooner the Better

“The time has come, the time is now . . . ” quote from the book “Marvin K. Mooney Will You Please Go Now!” by Dr. Seuss

Hopefully many of you remember this fabled line and for me, it is what comes to mind when I think of the right time to finalize most equity plans. (I am using equity plans to cover anything which resembles ownership – from stockholder agreements to shadow equity plans.) Sooner is almost always better as delays always seem to have unwanted complications. To confuse matters further, my next blog is Equity Plans Part II – Are We There Yet? So before you conclude I have probably gone off the deep end (a concept constantly reinforced by my family) let me begin with a true story.

In the early 90s, leveraged buyouts (or LBOs as they were known) were the rage and I participated in my fair share. I was called in to help one group of four very qualified managers who were buying a half dozen plants from their parent company. The four covered different disciplines and were great at what they did – – they were just lacking in the skill set needed to buy and set up a separate company / operation. So we focused on the deal for about three straight weeks; long days with hard tasks and two days before closing, the five of us went to lunch. I brought up the subject of equity plans and shareholder agreements among the four. The CEO let me know that considering what was pending, bringing this up at that time was the “dumbest thing he ever heard.” I backed off but shortly after the close, I persisted and we finalized the equity plans. Six months later the CEO called with the heartbreaking news that one of the four had passed unexpectedly. While distraught over the loss, he came to appreciate the fact that all settlements related to ownership had been concluded during a less emotional time and he came to appreciate that fact.

Here is another situation which highlights why it is best to conclude on any equity plans as early as possible. Going through a transaction is stressful, and I have had a handful of situations where trying to finalize an equity type bonus when a sale was pending almost cratered a deal. Owners see the chance at monetizing their lives’ work becoming a reality while key employees believe they were responsible for creating that value and should be rewarded. Incentive and reward plans go from a thank you with benefits to a hard fought negotiated settlement and at times, transactions suffer. All of this stress can be avoided by addressing this issue earlier in the process when a sale is hypothetical and parties are more prone to have a logical view of how an equity plan should work.

So the punchline is that when you have concluded on the sharing portion of any equity plan, be it shares in the company, options, stock appreciation rights, etc., then the time is right to finalize the plan and complete the documents to avoid the hardships and risks that delay can bring. If you are an owner thinking of this issue, the time is now to address it.

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