Best incentive plan for Operational Expert partnership

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by a searcher from State University of New York College at Cortland
in Durham, NC, USA

1yr ago

Best incentive plan for Operational Expert partnership

I have been learning about incentive plans through youtube videos primarily and discussing with my capital partner and the industry operational expert. I know partnerships should be built off of differing skill sets so the sum is great than the parts. The three things that we focus on is Time, Knowledge, Money. Sharing context so that you can have an understanding of my situation, I have two possible partners. One is a capital partner with time and money that we will share the responsibilities for and another is an Operational expert in the industry we are focusing on that has Knowledge that we don't have. He has limited capital to invest but expertise.

Here is the structure and questions will be down below as I am curious how people have structured similar partnerships:

Structure #1:

Capital Parter 1: 47.5% ownership
Capital Parter 2: 47.5% ownership Operational Partner: 5% ownership (Non-Voting Shares) Capital guarantees or distributions held for buying capital for subsequent acquisitions Incentive: 5% Phantom Equity 2.5% Vests over 5 years, 2-Year Cliff for 1% and then 0.125% per quarter 2.5% Vests with Milestones hit Organic-Profit-Based milestones 0.5% every consecutive year of 7% profit growth starting at the second year 0.75% if growth rate is above 10% 1% if growth is above 15% The schedule and targets are open for negotiation

Structure #2: Capital Partner 1: redacted% Capital Partner 2: redacted% Operational Partner: 7-13% 5% Ownership Equity (down payment for equity ownership with voting rights) Capital guarantees or distributions held for buying capital for subsequent acquisitions 2% Phantom Equity (operational expertise) 4 year Vesting period at .5% per year 2-year Cliff, 1% at the 2-year mark and .125% vests each quarter for the following 2-years 2-6% Phantom Equity (operational management milestone targets) 4 year Vest and 2 year Cliff .5% per year: 5-10% profitability .75% per year: 11-15% profitability 1.0% per year: 16-20% profitability 1.25% per year: 21-25% profitability 1.5% per year: 26%+ profitability Profit-share Program $50-100k SDE profitability increase 10% profit-share $100-200k SDE profitability increase 11% profit-share $200-300k SDE profitability increase 12% profit-share $300-400k SDE profitability increase 13% profit-share $400-500k SDE profitability increase 14% profit-share $500-600k SDE profitability increase 15% profit-share

1) Does this seem reasonable?
2) Am I being too generous?
3) Does this motivate a Director of Operations -> CEO sufficiently?
4) What are some other ideas for motivating this type of partner?

Thank you in advance for any tips and suggestions!

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reply by a searcher 1yr ago
in Charlotte, NC, USA

Hope this helps, interested in others suggestions as well. Overall, nice approach!

Structure #1: - Reasonableness: This structure is solid, with phantom equity tied to performance milestones. The 5% ownership (non-voting) for the operational partner might feel disempowering if they are integral to the business.

- Generosity: The equal 47.5% split for capital partners is generous but might need flexibility if one contributes more.

- Motivation: The phantom equity and vesting schedule work well for incentivizing, but consider increasing voting rights over time to keep the operational partner engaged as they transition to a CEO role.

Structure #2: - Reasonableness: This option balances equity and incentives better, offering the operational partner 7-13% ownership. The profit-share program is motivating but should have a cap to protect cash flow.

- Generosity: Equity split is fair, and the milestone-based vesting is strong. The profit-share percentages might be a bit generous—tighten them as growth scales.

- Motivation: The mix of phantom equity, profit-share, and vesting milestones will likely keep the operational partner focused on long-term growth.

Additional Tips:

- Ensure the operational partner has a clear path to CEO and possibly voting rights over time.

- Consider adding caps on the profit-share program to protect company cash flow.

- Incentives like long-term bonus pools or stock options can keep the operational partner motivated and aligned with the company’s success.

reply by a searcher 1yr ago
from State University of New York College at Cortland in Durham, NC, USA

Thanks for the detailed response. Important things to consider