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Why not share your liquidity success with those who got you there?

So, you are close to selling your company, and counting the profits a bit early. Well, that’s human nature.

Here’s a thought for you to recall later when and if the event happens.  Remember those who got you there.  And for tax reasons, remember them before the closing of the deal, so that you can do so by sharing a bit of your proceeds without paying personal income tax upon those amounts.

Formal option plans for some

Some companies, especially those financed by angel or VC investors, have good, formal stock option plans with properly priced options set to reward all employees and managers in the event of a corporate sale.  Usually, the higher the ranks, the more the options held and therefore the greater reward at exit.

And a lack of plans for others

If there have never been outside investors to organize such an option program, many CEOs never get around to creating a system for rewarding employees in a sale.

I found myself in such a situation upon a sale of my computer software company.  There was no question that each of the five vice presidents had been greatly responsible for our success and getting us to the successful exit.  Yet there was no formal reward in place other than the employee stock ownership program (ESOP) which was set to pay all employees for their accumulated shares at the exit.  So, I wrote into the final distribution instructions a surprise five figure bonus for each of the five executives.  Each was surprised, pleased and effusive.  Upon reflection, I should have given each even more.

Consider the kinds of exits

[ Email readers, continue here…] Now, there are three kinds of exits.  Those that pay off handsomely (congratulations if so), those marginal exits that selvage technology, brand and jobs – better than nothing.  And those that are total write-offs in which no one except perhaps the bank and lenders receive anything.

The marginal exit is most difficult, and it would be rare for an entrepreneur to willingly share with other managers.  But the exit we celebrate, the one where the returns will change our lifestyle, are the exits where the founders with the most gains should consider how they got to this point.  We should all recognize that we did not do it alone, and that even generous stock options may not well-enough reward those who are direct reports and have done the most amount of heavy lifting.  Why not consider a surprise addition to the payout from your (perhaps) most-generous portion for those important contributors to success?

It is rewarding and more than fair to share the success with those who got you there.

  • Neven Karlovac

    Dave, very good and useful post. I thought about this issue when we started my company (optimist as always). As an LLC we couldn’t have a stock-option plan but we instituted a “key contributor award”: it promised to award cash bonuses at liquidity as if employees were phantom part owners. We’ve had a successful exit recently and I am happy that the employees got cash awards in addition to continuing (and, hopefully, more promising) long-term employment. A happy story except there was no way to minimize income tax impact.

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