Many small companies want to reward their loyal employees by giving them a generous piece of the corporate pie: Ownership in the business.
Why? Because it’s a practice that helps to attract and retain valued employees, helps keep salaries in check, provides workers with a stronger feeling of camaraderie, generally boosts employee performance as workers focus on long-term goals, and may even qualify you for some tax benefits.
Here are three ways to give your employees ownership:
1) Form a Corporation and Create an Employee Stock Ownership Plan (ESOP) – This is a common way for companies to share ownership, but it entails forming a corporation and creating a structured options plan. Doing so can incur high legal fees that may be too expensive for smaller entities. The types of businesses that take this approach are usually public companies that offer liquidity to their optionees, or companies backed by venture capital firms that are planning an initial public offering or other sale to create liquidity.
2) Create Value Sharing Agreements – This approach is less complicated than a stock options plan, but more complex than deferred compensation. Typically used for non-publicly traded companies, value sharing agreements can be difficult to structure because there must be a well-defined measurement of the value of a company and how to determine the participants’ share of this value as it changes over time.
3) Create a Deferred Compensation Plan – Also known as a Long-Term Incentive Plan (LTIP), and sometimes called “golden handcuffs,” this strategy for non-publicly traded companies rewards employees who stay with the company longer and provides them with a bonus paid out over future years. It’s not exactly equity, but it works in a similar fashion.
For any of these approaches to give your employees ownership, remember to consult with your attorney first, especially before anything is communicated to your staff.