We regularly meet business owners who use a variety of methods to attract, retain, and motivate their employees.
One of the most common techniques we see is providing employees with company stock so that they feel like they have an ownership position in the business. The goal of this method of motivation is great, however, when it comes to the eventual sale of your company it comes with one huge downside: Your employees get to vote!
That’s right, every employee that has received even a single share of the stock in your company is required by law to vote and approve any ownership changes. Can you imagine how complicated this becomes? We do, because we see it all the time.
In fact we recently completed the evaluation of a company whose majority owner decided that, based on a variety of factors, now would be a great time to exit. When we created the engagement agreement, we had to point to him that the 17 minority shareholders, all current employees, would not only need to sign the agreement they would also need to be involved in approving the sale. Needless to say, he was not pleased to hear that information as he was keeping the potential sale completely confidential.
Fortunately, there is an alternative method you can use to give your employees the feel and pride of ownership without giving them voting rights.
Phantom stock or phantom equity is a method that allows you to give your employees shares of non-voting stock which they can redeem later, usually when the company is sold or when the employee retires (assuming the employee is fully vested). And unlike traditional shares, that need to be repurchased when an employee leaves or is terminated, phantom shares “essentially disappear upon certain triggering events”.
There are also a number of tax advantages to both the employee and the company via the use of phantom stock. The most important is that a company can classify phantom stock as an expense and use it as a write off in the year given.
Create an Exit Plan that Protects Your Interests
From our perspective as an M&A advisory firm to privately held companies, phantom stock is a more favorable method to use as an incentive to retain employees.
It allows you to reward your key employees upon the sale of your company without being forced to disclose to them very early in the process that you are considering the sale of your business. Doing so would force you to deal with all the potential complications that may arise from that news.
Generational Equity does not provide tax and stock structure advice. Before you consider doing any sort of stock sharing plan, you need to consult with your CPA and attorney. But while talking with them, bring up the subject of phantom equity as an option. It is not widely known and has many benefits.
If you would like to learn more about phantom equity, here are links to online sources on the topic for you:
The most important issue for you is this: be sure to grow your company with the end game in mind.
The end game should take into account what you want to do with your business to maximize your eventual ROI (return on investment). Many of you will spend years and years building a great business. As you do so, be sure to consult with experts on the best ways to motivate and retain your employees that do not detrimentally impact you.
Again, we do not propose to be experts in the appropriate corporate structure for you and your company. Talk to your CPA and attorney for that. We are skilled in helping business owners monetize their largest asset and find optimal buyers.
If you are interested in eventually exiting your company and you have not developed an exit strategy, you need to attend one of Generational Equity’s M&A workshops. These are designed to help business owners learn more about their options regarding when and how to exit their companies for the most profit.
And keep this in mind that the choices you make today regarding how to retain and motivate your employees could have a HUGE impact on you later when you decide to sell. Be sure to carefully weigh your options and talk to experts on these topics before taking the plunge and setting up any stock sharing program.
© 2012 Generational Equity, LLC All Rights Reserved
The information we learn from customers helps us personalize and continually improve your experience at gencm.com. Here are the types of information we gather.
Information You Give Us: We receive and store any information you enter on our Web site or give us in any other way. We do not sell or rent your personal information to others without your consent. We use the information we collect only for the purposes sending promotional information, enhancing the operation of our site, serving advertisements, for statistical purposes and to administer our systems. We DO NOT use third parties to provide customer service, to serve site content, to serve the advertisements you see on our site, to conduct surveys, to help administer promotional emails, or to administer drawings or contests, but reserve the right to do so in the future without advance notice. Our computer system protects personal information using advanced firewall technology.
Information from Other Sources: For reasons such as improving personalization of our service, we might receive information about you from other sources and add it to our account information.
Generational Capital Markets LLC may license the use of its intellectual property including but not limited to its name, likeness, and logo for the use of affiliated offices. Such affiliated offices may not be owned, controlled, managed, supervised or staffed by employees, officers, or agents of Generational Capital Markets, L.L.C. Affiliated offices may be independently owned and operated. For more information about a particular office, please contact Generational Capital Markets LLC at is office in Dallas, Texas.
This page may contain other proprietary notices and copyright information, the terms of which must be observed and followed.
INFORMATION ON THIS WEB SITE IS PROVIDED "AS IS" WITHOUT WARRANTY OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR NON-INFRINGEMENT. SOME JURISDICTIONS DO NOT ALLOW THE EXCLUSION OF IMPLIED WARRANTIES, SO THE ABOVE EXCLUSION MAY NOT APPLY TO YOU.
Information on this web site may contain technical inaccuracies or typographical errors. Information may be changed or updated without notice. Generational Capital Markets may also make improvements and/or changes in the products and/or the programs described in this information at any time without notice.
Generational Capital Markets does not want to receive confidential or proprietary information from you through our web site. Please note that any information or material sent to Generational Capital Markets will be deemed NOT to be confidential. By sending Generational Capital Markets any information or material, you grant Generational Capital Markets an unrestricted, irrevocable license to use, reproduce, display, perform, modify, transmit and distribute those materials or information, and you also agree that Generational Capital Markets is free to use any ideas, concepts, know-how or techniques that you send us for any purpose.
Information Generational Capital Markets publishes on the World Wide Web may contain references or cross references to other products, programs and services that are not announced or available in your country. Such references do not imply that Generational Capital Markets intends to announce such products, programs or services in your country. Consult a Generational Capital Markets representative for information regarding the products, programs and services which may be available to you.
Generational Capital Markets makes no representations whatsoever about any other web site which you may access through this one. When you access a non-Generational Capital Markets web site, please understand that it is independent from Generational Capital Markets, and that Generational Capital Markets has no control over the content on that web site. In addition, a link to a non-Generational Capital Markets web site does not mean that Generational Capital Markets endorses or accepts any responsibility for the content, or the use, of such web site. It is up to you to take precautions to ensure that whatever you select for your use is free of such items as viruses, worms, trojan horses and other items of a destructive nature.
IN NO EVENT WILL Generational Capital Markets BE LIABLE TO ANY PARTY OR ANY DIRECT, INDIRECT, SPECIAL OR OTHER CONSEQUENTIAL DAMAGES FOR ANY USE OF THIS WEBSITE, OR ON ANY OTHER HYPERLINKED WEBSITE, INCLUDING, WITHOUT LIMITATION, ANY LOST PROFITS, BUSINESS INTERRUPTION, LOSS OF PROGRAMS OR OTHER DATA ON YOUR INFORMATION HANDLING SYSTEM OR OTHERWISE, EVEN IF WE ARE EXPRESSLY ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
Furthermore, all information contained within this website is the property of Generational Capital Markets.
Honored to win Investment Banking Firm of the Year 3 years running.
Over 50 awards and counting.
Sign up to receive regular email updates, industry-leading insights and details on complimentary M&A executive conferences in your area from our award-winning team
Success, you have been added to our list.