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Dear Oaklyn Consulting,
I’ve been in business for 10 years and have an employee who is a valued member of the business and would be hard to replace. How can I incentivize him/her to stay and become part of the equity in the business, while best protecting my interests?
From Oaklyn Consulting
You have two separate issues at work here: incentives for a key employee and what it means to be “part of the equity of the business.”
It’s not unusual for people to mix the issues of ownership and employment. However, in our experience, it’s hard to get to solutions when entrepreneurs don’t think about the issues distinctly. This isn’t to say that you can’t solve a compensation need with ownership, just that one topic isn’t necessarily related to the other.
For partnership and team-building questions, I respect the perspective of Greg Alexander, author of The Boutique: How to Start, Scale, and Sell a Professional Services Firm and the founder of Capital54. Greg says, “An employee who has been with you for 10 years is unlikely a flight risk. Ten years is a long time, and he/she has proven to not be a mercenary lured away by the highest bidder. Be careful not to create an issue where there isn’t one. If the employee is a flight risk, dig into what has changed in his/her life. Loyal employees don’t wake up someday after a decade and say ‘I am outta here.’ Something changed. By understanding the root cause, you can address the issue accurately. For instance, maybe equity is not the answer. It could be the employee is bored and instead of granting equity to retain him/her, maybe a new role would be more effective.”
From the perspective of capital decisions, we would add, regardless of why you want to add an incentive component to the employee relationship, be careful that “part of the equity” will actually create the alignment you want. The aspects of a company’s business that accrue to equity holders reflect both the operating and non-operating decisions about the company, and specifically decisions about capitalization (how much debt to take on our pay off), taxes (how to account for revenue and capital expenditures), voting rights in the event of a major dispute, and successor ownership in the event that an owner dies. If engagement in these aspects of the business are not the ones that will motivate your employee, maybe try something else, like bonuses, profit sharing or as Greg advises, a role change.
