Dear Alex:
My spouse and I own a family business, and we want to reward one of our best employees. We thought that granting her an ownership interest or a stock option would be a great way to accomplish this goal. What do you think?
At one point or another, most business owners probably ask this question. The idea of a stock grant or a stock option seems like a perfect way to offer the employee something of value with the potential for growth, while also becoming more vested in the success of the business and loyal to the owners. These are real advantages and have no immediate cash cost to the company.
The purpose of offering ownership interests to employees is to motivate the employees (unless the company is in need of cash equity, which is an entirely different situation). Other than the symbolism of offering ownership interests to your employees, however, the same motivation can almost always be accomplished by direct financial incentives such as performance bonuses.
For the employee, although stock ownership may appear to have value on paper, there is no market for fractional ownership interests in your business. This means that the employee will be unable to realize the cash value of her company ownership interests unless the company or other shareholders buy back her shares, or the company is sold. Unless your company has a very clear exit strategy, this can be frustrating for the employee, and lead to unnecessary conflict.
Furthermore, there are myriad operational consequences associated with adding another owner. The company’s board or managers will owe a fiduciary duty to your new co-owner; she may develop and press for her own goals for the company which differ from your own; she may request access to the historical books and records of the company, including information that you consider proprietary or personally sensitive; and there are complex tax issues that will likely result from the transaction.
Not all of these issues are bad, but they can be disruptive, difficult to accommodate, and require changes to your business.
If an equity interest is granted, the employee should enter into an agreement with the company and owners, granting them a right of first refusal to purchase such shares if she attempts to transfer them to a third party, and an option to purchase if she should die, divorce, become disabled or terminate her employment for any cause.
Setting the price and terms for such a purchase can be complex, and requires the input of a qualified attorney.
Dear Alex:
My spouse and I own a family business, and we want to reward one of our best employees. We thought that granting her an ownership interest or a stock option would be a great way to accomplish this goal. What do you think?
At one point or another, most business owners probably ask this question. The idea of a stock grant or a stock option seems like a perfect way to offer the employee something of value with the potential for growth, while also becoming more vested in the success of the business and loyal to the owners. These are real advantages and have no immediate cash cost to the company.
The purpose of offering ownership interests to employees is to motivate the employees (unless the company is in need of cash equity, which is an entirely different situation). Other than the symbolism of offering ownership interests to your employees, however, the same motivation can almost always be accomplished by direct financial incentives such as performance bonuses.
For the employee, although stock ownership may appear to have value on paper, there is no market for fractional ownership interests in your business. This means that the employee will be unable to realize the cash value of her company ownership interests unless the company or other shareholders buy back her shares, or the company is sold. Unless your company has a very clear exit strategy, this can be frustrating for the employee, and lead to unnecessary conflict.
Furthermore, there are myriad operational consequences associated with adding another owner. The company’s board or managers will owe a fiduciary duty to your new co-owner; she may develop and press for her own goals for the company which differ from your own; she may request access to the historical books and records of the company, including information that you consider proprietary or personally sensitive; and there are complex tax issues that will likely result from the transaction.
Not all of these issues are bad, but they can be disruptive, difficult to accommodate, and require changes to your business.
If an equity interest is granted, the employee should enter into an agreement with the company and owners, granting them a right of first refusal to purchase such shares if she attempts to transfer them to a third party, and an option to purchase if she should die, divorce, become disabled or terminate her employment for any cause.
Setting the price and terms for such a purchase can be complex, and requires the input of a qualified attorney.
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