How many times have we hired sales personnel only to have them flame out after only a few months? Or if they became successful, they “outgrew” their job (in their own mind) and either demanded more pay or threatened to leave and take their accounts with them?
What if you considered offering an equity position and perhaps even eventual ownership of your business? A potential exit strategy, if you will. This may not be a fit for many firms especially if you have a family member planning to take over the business or if you feel you need to cash out with a sale. However, a total cash out is not in the cards for many smaller firms.
What are the advantages of offering an equity position?
You potentially attract a much higher caliber candidate who eventually wants more than just a sales position.
You get someone that is willing to act like an owner of the business rather than just having a job.
You put “golden handcuffs” on them, making it difficult for them to leave.
You change the dynamic of how they behave with other staff and clients. What are the disadvantages of offering an equity position?
You determine the person is not working out and have to unwind the deal.
It causes problems with other staff members who might have aspired for the same thing.
It prevents you from selling/cashing out.
You do not work well with “partners.”
How can you deal with these issues?
Start with an employment agreement that provides equity only after the first year. Then set up a program for equity awards as a part of their compensation or for them to buy in if they have the financial capability.
Talk to your employees first to find out if this would cause problems.
Have an employment and buy-sell agreement that gives you the right to terminate and buy out of the agreement if it does not work out. If you get the opportunity to sell the business, the buyer either accepts the equity partner or he/she gets the same buyout you get.
I believe that there are many firms that are unable or unwilling to pay the price to hire and attract the caliber of person that can succeed in today’s marketplace. Many more sales hires fail than succeed.
A Personal Experience
I set up an equity program for a young person and eventually sold the entire business to him. The entire process took about 15 years. He had no cash but lots of talent and willingness. We started slow and accelerated in later years. I got full price for the business, receiving my money over time and with interest. It was an exit strategy that worked for me, and it gave me a dedicated employee who helped make the business very successful.
It might just make business sense if you are experiencing sticker shock or have had trouble hiring and attracting qualified sales or management talent.
Carl Gerhardt is a 30-year veteran of entrepreneurship and is retired chairman of Alliance Franchise Brands. He is currently a consultant with FranNet a company that matches individuals wanting to own their own business with franchise opportunities. cgerhardt@frannet.com. Carl is also a volunteer with SCORE offering free counseling for small business entrepreneurs. www.score-reno.org.
