Equity for President - Looking for ideas
April 13, 2020
by a searcher from Case Western Reserve University - Weatherhead School of Management in Cleveland, OH, USA
Hello, I would appreciate your thoughts on equity for a president that will stay on after close. I’m evaluating a deal where the owner (one owner at 100% ownership today) has a small role and the company has a president who is highly involved in the day-to-day. The president is interested in owning some of the company, but I understand he may not have the financial means or risk tolerance to purchase the company. Today, he plays a key role in developing and executing business plans and brings subject matter expertise. I have met the owner so far and I expressed that I’m open to the president having some ownership, but no details have been discussed yet. Meeting the president is a next step. The owner wants to exit fully in 2020.
My initial thought is the president “buys” some equity alongside me in the 3-5% range, then has the opportunity to “earn” another 3-5% if certain financial hurdles are met. I’m thinking only revenue to make it simple, but should profitability also be included? This would vest quarterly over 3-5 years.
If I go SBA, is there anything special I should consider? What would be the pros/cons of other options - i.e. an annual bonus vs. equity after close? Anything else I should think about asking? Thanks everyone!
from University of Virginia in New York, NY, USA
I'd be cautious about giving or even letting the employee buy real equity in the deal out of the gate. You don't know this person and are immediately limiting your flexibility if that individual doesn't turn out to be the person you thought they were. If the person is critical in the future success of the business then I would suggest a clearly defined road map to profit participation based on simple hurdles. You can always award real equity in the future as it will only be relevant when a sale comes around.
As a side note on a lot of the responses I see on Searchfunder I think people over complicate the issue. This is not a billion dollar buyout and I'd venture the president doesn't even know what EBITDA means. Sometimes our finance brains get the best of us when an easy to understand revenue hurdle works best. If the formula is complex and can be easily gamed by either party then immediate trust issues will result. As owner you have the ultimate remedy if revenue is achieved at the sake of profits......termination.
from Walsh College of Accountancy and Business Administration in Detroit, MI, USA
Not sure of the industry, but I would not recommend vesting based on revenue. While it is easier to measure, you don't want bad business decisions to be made solely based on achieving a revenue number. For example, accepting a client/project at a sales price that is less than it should be but gets over the revenue hurdle.
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