I'm coming from a software background and employee equity pools are common. Has anyone ever seen or setup employee equity in one form or another (whether ISO/NSO or just a simple profit share) in a local service business? Thoughts on pros/cons?
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Basically they are shares that entitle holders to a share of profits without being actual equity. Reason being giving actual equity to a bunch of folks who may or may not stay around for the long haul can create issues around voting rights and shareholder dilution. Keep your cap table simple.
With that said, I would opt for a simple profit share bonus at end of year which is tied to some key business metric. In my old life in consulting, the metric was staff utilization.
Most folks in SMB are not going to be interested in the intricacies and tax implications of equity/options. They are just looking for $$$ whatever you call it, and communicating how the profit share bonus calculation works can create the alignment you're looking for.
My gut reaction is the following:
- Start-ups historically (before the bubble the past few years) paid below market, with equity as the carrot to get you to join.
- Start-ups are backed by VCs who like to have a liquidity event within 7 years of their initial investment. Thus, there's a time bound on that equity having a chance to be worth something.
- With an SMB, you're not selling that dream of the exit (IPO or acquisition) as the owner may not sell the business for 40 years. Thus, you need to pay market rate, and if you're paying market rate, why would you give up equity?
I'd be interested in hearing about some profit share set-ups, as I think this properly aligns employee and owner incentives.