To Owners Who Want to Offer Equity: Owner Beware!

We had yet another discussion in a monthly Acumen team regarding a strained partnership. It was a classic case of miscommunication, false expectation, finger-pointing, lack of communication, clarity, and uneven value working in the business.

Equity ownership shouldn’t be taken lightly.

My business partner (notice the irony), Dan Cooper, recently wrote a blog about partnerships. In his write up he noted the great Dave Ramsey quote, “The only ships that don’t sail are partnerships.” Dan and I both realize that the odds are not in our favor for success. People change. Circumstances change. Priorities change. Economic conditions change. Life stage and life cycles change.

Change is inevitable and as a result, maintaining a healthy business partnership is difficult.

True equity ownership is frequently an inappropriate instrument of reward, retention, or incentive for a highly valued member of a company. It’s often misunderstood, encumbering and unsatisfying, and frankly, some people should not be owners! In fact, many people should not be.

Will they understand the risk, responsibility, duty, obligation, burden, tax implications, cash call possibilities, personal guarantees, dilution, or liabilities that accompany true equity ownership? Or will they want all the glory and status (and distributions), but desire none of the responsibility?

Do they have an appreciation for the grit it truly takes to create a successful and profitable business? This is not to say in absolute terms that equity ownership should not be extended to key paradigm shifting people. But, owner beware!

It’s a marriage. Is this person someone you want to figuratively be married to? If the answer isn’t a resounding yes, what other options can you evaluate for retention and reward incentives? Phantom stock, profit sharing, stock options, and incentive/deferred compensation models, etc. could be better options and be more satisfying and meaningful.

Equity ownership comes with encumbrances that can often taint the well. Take time to carefully examine and communicate clarity of your expectations and all of the responsibility. Give careful consideration to whom equity is offered.