Would you let the employees of the target co-invest in the deal ?

searcher profile

April 05, 2019

by a searcher from INSEAD in Liège, Belgium

What are your thoughts on letting the existing management of the target company co-invest in the deal ? Would you recommend it? Do you have alternative incentive strategies to suggest instead (traditional annual bonuses, phantom equity, options...).

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commentor profile
Reply by an investor
from University of Canberra in Perth WA 6000, Australia
I dont see this as a 'yes' or 'no' black or white answer. it depends on a number of things including:

1) What context are you running? Is it purely to help you fund the acquisition? Lock in talent? Make for an easier transition? to make you feel more confident? etc.

I agree with Joseph in that you need to be really sure that the existing staff are aligned to your vision. So many times they are still attached to the previous owner.."but Harry would have done it this way..." In many ways you have to acknowledge the spirit of the previous owner in a respectful way and at the same time exorcise their ghost from the place.

2)Capability: are you locking in the skills needed for now or for where you want to take it? How would you feel if you locked people in only to pivot the organisation to a totally different focus? If you've locked in irrelevant capability you are applying a handbrake to success.

In terms of structuring a lock in it depends on your jurisdiction and the pros and cons associated with different models. In Australia we need to be careful as there are some specific tax laws here that make things tricky if its not thought through with the right legal and financial advice at hand.
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Reply by an investor
from University of Canberra in Perth WA 6000, Australia
A few questions you could ask yourself around this: 1. what is the context for doing so? is it to share the burden of acquisition or to lock them in? Initially I would not offer it to anyone I am not sure of or do not know or have the confidence in the fact that they will "Match" the "Family Photograph" of what you are planning to do in terms of building the culture of your future acquisition. 2. Cold you perhaps go in with an intention to offer a staff equity plan and build the plan in the first 18 months while at the same time assessing who you may invite into the fold? 3. Ask yourself "who would I be comfortable with around my table (board room and Sunday lunch with the family) as shared equity in a SME is about a relationship first and a transaction last. 4. Am I wanting to do this out of fear (skills leakage, staff attachment to old owner, etc) or am I doing this for the right reasons?
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