There are more than 30 million small businesses in the U.S., and for many Americans, the equity they’ve built in these enterprises represents an outsized percentage of their overall net worth. However, to fully capitalize on the value of the business requires careful consideration, an eye toward the future and a willingness to challenge the status quo.
One of the critical, but often overlooked, ways to position a company for sustained momentum is to rethink how equity is shared. Firms that take a forward-looking approach to their equity strategy can better motivate and retain their top talent, while reaping the benefits of an entrepreneurial culture that serves as a catalyst for growth by rewarding value creation. However, the process is not without its challenges.
Knowing your goals
When I was appointed CEO of SignatureFD in 2020, more than 20 years after the firm was founded, one of my top priorities was to work with the board to modernize the existing equity structure. When we started, we didn’t have a playbook to follow and knew we would need to learn as we went. However, we were aligned on the non-negotiable beliefs about how our most valued employees approached their roles:
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- High performers are looking for purpose and need to feel as though they have a voice and vested interest in the bigger picture.
- Employees should feel that when they go an extra mile to add value for the firm, it’s also helping to build wealth for their families.
- Talented individuals often have an entrepreneurial spirit and leadership qualities that cause them to think like owners. They need to be provided with an effective outlet for these traits, or else they will look for one elsewhere.
With these goals in mind, we began the process of realigning the incentives for the top performers who were creating value for the firm.
Getting started
Before you look at your company’s equity plan, it’s essential to understand industry-specific norms and best practices. There are differences in how wealth management firms, medical practices and technology companies traditionally approach equity, and employee expectations within those fields vary accordingly.
In addition, consulting with experts on compensation and equity structures can be a valuable investment that brings a view of the complex tax and financial considerations involved in the process.
From my experience, it’s useful to map out the organization and pinpoint the essential talent and critical drivers of success. Once you have that in view, overlay it with the company’s long-term vision and the strategic objectives the organization plans to achieve.
At this point, you can look for opportunities to better align the foundational talent that will bring the company into the future with a new ownership structure. You want to ensure that the innovative individuals adding the most value have an opportunity to build their equity. When doing so, casting an organization-wide net is critical, but it is very difficult to understand how different roles and responsibilities add value.
Historically, only employees who generate revenue could participate in their organization’s equity plan. Evolving your business’ equity plan to include non-revenue-generating employees acknowledges that value and revenue don’t always go hand in hand. In addition, the process provides a unique opportunity to gut-check how reflective the organization’s ownership is of the diversity of backgrounds and perspectives of the staff at large.
Lessons learned
Reshaping your organization’s equity structure can be challenging. I went into the process with my eyes wide open and the understanding that there is no one-size-fits-all approach. However, there are some broadly appliable considerations to keep in mind.
The existing ownership structure and history of the business are important considerations. At SignatureFD, like many organizations, we now have four different generations in our workforce. Managing those different expectations when it comes to compensation structure and ownership isn’t easy, but it’s necessary.
It’s possible that long-term shareholders can adopt a scarcity mindset when opening equity to others is broached. Respecting their pride of ownership and contributions through the years and showing kindness are essential parts of the process. Providing creative structures that allow for current equity holders to transfer their interest over a matter of years — with a goal of ever-increasing valuations — can help ease the transition.
Understand tradition, embrace innovation
For businesses in sectors where equity is not traditionally shared broadly, there is a unique opportunity to become a first mover. Spreading equity broader is one of the best ways to recognize and reward top talent, and in sectors where it is not commonplace, it provides a competitive advantage and helps firms stand out among their peers.
People are often motivated by a sense of purpose and accomplishment. Effectively communicating the newfound opportunities that changes to your equity policy will provide can be a means of building trust through transparency.
The result of a broader equity strategy is an entrepreneurial culture that better aligns the present with the future. However, once you have implemented a new equity-sharing structure, it is important not to rest on your laurels. Periodically reviewing the approach to ensure that it’s still meeting your objectives and identifying areas where it can be improved is essential for continued success.
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