I'm a prior searcher turned operator running a franchise with multiple territories. I'm in the early stages of hiring a GM (someone with strong industry and local connections) to run the business for me, enabling me to pursue other acquisitions. I want the GM to be incentivized by the growth of the company and I also want some level of protection against them setting up shop next door, given that non-competes are not too powerful in California. The only other possibility is to make them a partner and have them also sign the FDD. The franchisor requires 25% equity to consider them an operating partner and being eligible to sign the FDD. I primarily only want to do a profit share incentive with the GM instead of giving up equity.
Now from an owner POV, what if the GM hire is not a fit or leaves the company? Then I will want to hold call ptions on their 25% shares such that I get the right to execute if they are separated from the company. I can make the 25% shares non-transferable and my call options will never expire.
To clarify - I'm NOT trying to mislead the potential GM hire. I will be upfront with them that their incentive is a nominal base pay ($80K-$100K is standard in this location) and the 25% profit share above a certain cashflow threshold and not the equity being assigned to them. I will not be giving the 25% equity right away but will have an initial period of 3-6 months with them working under base+bonus and then transitioning to equity once there is good mutual fit. I will be clear with them regarding this as well. Yes, I do know about the tech startup standard of 1 year cliff and 4-5 year equity but I personally prefer profit share and the equity here is only in play to have the GM sign the FDD.
- Does this seem like a feasible plan?
- Have you or do you know of anyone who has done something similar to this?
- All of the shares in the company are common shares. So if I give 25% equity then is the GM entitled to 25% of all cashflow instead of my proposed 25% of cashflow above a certain threshold?
- Anything else obvious that I could be missing here?
