why equity incentivizing your key employees can improve equity value

Confidential© Equiteq 2016 equiteq.com

Growing equity, realizing value

Jason ParksDirector Strategic Advisory Services

Why equity incentivizing your key employees can improve equity value


Our presenter

Jason Parks

Jason is a senior member of Equiteq's Growth & Sale Preparation group based in the US. He works with shareholders to accelerate revenues, profits and equity value, in order for their valuation targets to be reached in months or years

Jason conducts equity growth and exit strategy planning workshops, building route-maps to achieve sustained growth and above average valuations by the time their firms are ready for a liquidity event. Beyond the planning stage, he supports client management teams in executing change to build momentum towards reaching shareholder objectives

Significant experience “in the trenches” building profitable, high-performing consulting practices

Change agent adept at bringing together sales and delivery teams to define actionable plans that drive revenue growth on a unified front

Detailed knowledge of operational best practice in consulting firms


Designing equity plans that align shareholder objectives with their team’s success will accelerate growth and reduce missteps


Contents of today’s webinar

Getting clear on the purpose of equity incentive plans

Identifying key employees to participate

Key Takeaways and Questions

Sharing equity without giving up

ownership


Getting clear on the purpose of equity incentive plans

Why shareholders consider giving out equity

To grow and realize maximum value in people dependent businesses requires a high degree of shareholder and management team alignment as well as strong financial performance

Awarding shares (or options) to the right people in the right proportions is one of the most powerful tools at the founding shareholders disposal

To retain and attract key talent

Shift responsibility for the company's success to senior leaders

Confidential© Equiteq 2016 equiteq.com 6

Why planning for equity sharing is so critical to successful programs

A well thought out plan… In order to avoid

Articulates the purpose of the incentive plan and how it will support shareholder objectives Giving away income rightfully belonging to shareholders

Defines quantitative measures for success that are clear and transparent Subjective evaluation of a job well done

Includes a mechanism for feedback and correction of plan design

Incentives which are no longer aligned with ever changing business conditions


Attract and retain talent

Balance incentives with shareholder gains

Motivate and reward achievement of short- and long-term performance goals

Everybody has different perspective on equity schemes that needs to be taken into account

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Shareholders Organization Employees

Link shareholder and management short- and long-term interests

Control cash flow to shareholders before making incentive payments

Limiting dilution of earnings per share

Need to know details such as eligibility, T&C’s

Need to know how they are measured

Recognition and compensation for key contributions


Equity schemes which improve employee retention are top of mind for shareholders anticipating an exit (and their potential buyers)

Based on RBS Citizens’ annual Middle Market M&A 2015 report, “Losing key employees during/after acquisition” is the #2 concern for buyers

Access the report here

https://citizenscommercial.com/58/Citizens%20Commercial%20Banking%20M&A%20Outlook%202015.pdf


Identifying key employees to participate in equity sharing

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5 key questions to ask

What’s their current value to the business?01

What are their current compensation issues?02

What else is important to them?03

How attractive a hire would they be to a competitor?04

What is the likelihood that they would leave? 05


Sharing equity without giving up ownership

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Phantom shares instead of stock options

Phantom stock allows firms to share the economic equivalent of equity, without assigns shares themselves

01

Phantom stock aligns employees' motives with yours 02

Incentivizes employee contribution to share value, and encourages the retention or continued participation of contributors

03

Doesn’t have the same level of cost, complexity, administration overhead and risks associated with a share scheme

04


Example of sharing equity without giving up ownership

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Purpose

Acme Consulting wishes to grow the equity value of the firm from $3M to $10M They want incentivize their Practice Director, Julie, to share the load in meeting business objectivesTo want to allow Julie to benefit from the increased value in equity that she helped drive, without giving ownership outright

Performance Measure:Julie will receive 10% of the increase in equity value when the company valuation exceeds $3M

ResultAcme’s valuation increases from $3M to $5M over two yearsThe founders equity value has increased from $3M to $4.8MJuile’s phantom shares then vest at a value of $200K

Acme Shareholders 2016 company valuation ($ m)

Share values in 2016 ($ m)

2018 company valuation ($ m)

New share values in 2018

Total share value in 2018

Founders$3m

3,000,000$5m

1,800,000 4,800,000

Julie - 200,000 200,000


Impact of sharing equity on shareholder value

Sharing Equity Value

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 202302468

1012

Tota

l Equ

ity

Valu

e $(

M)

Founder Value Founders plus Julie Founders plus two Founders plus three


When sharing equity isn’t the right answer, there are other options

Variable/BonusEquity Salary Benefits

Implement variable pay that aligns with company goals

Increase salary and wages Add benefits that align with determinants of motivation, i.e., autonomy, mastery and purpose


Key principles for sharing equity in a consulting firm

MD, CEO, Managing Partner entirely focused on shareholder value01

As equity increases, share that with senior staff who help build it02

Aim to make 25% of equity value beyond the founders shares available to qualifying staff

03

At Director level strike a balance between annual GM of an individual’s practice and company performance

04

Graduate the fixed and variable to reflect level of control Partner/Director 50% fixed, 50% variableMore junior staff 80% fixed, 20% variable

05


As you get closer to exit, it’s important to consider buyer retention programs

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Most M&A financial models include a retention plan line item

Concerns about retention are greater for companies where specialized knowledge, intellectual property and talent are critical to deal success

Buyers typically determine whether a retention program is necessary early in the due diligence process

Buyers often have a typical design that they use for most deals

The closer you are to a transaction, the more important it is to lock down your key staff critical to success


Key takeaways

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Strategic and tactical plans influence the structure and content of equity plans

Giving equity isn’t always the answer, every business is unique

Plans can’t be successful without a basic appreciation of the organizational and “people” effects

Tax and legal advice are important but should not dominate


Immediate next steps

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Define the purpose for the incentive plan – how does it support shareholder objectives?

01

Develop a clear understanding of what a shareholders agreement can be used for and develop the key commercial themes that will govern shareholder relationships before finalizing

02

Identify key staff and the criteria used to determine who gets what03

Obtain a current valuation of the firm04

Seek advice from experts who advise on shareholder and business strategy05


Our contact details

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Jason Parks, Director Strategic Advisory Services

Sophie Lewis, Marketing Executive

T: +1 347 273 9398M: +1 917 526 1547E: [email protected]

T: +44 (0)203 651 0600E: [email protected]


More resources

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why equity incentivizing your key employees can improve equity value

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