Before Accepting Stock, Know Why You Want It

Executive Roundtable is a weekly column by TEC Worldwide, an international organization of more than 7,000 business owners, company presidents and chief executives. TEC members meet in small peer groups to share their business experiences and help one another solve problems in a round-table session. The following question and answer are a summary of discussions at a recent TEC meeting in Southern California.

Question: I’m a “hired-gun� chief executive of a small, family-owned company. After five years of working for salary and bonuses, I have been offered stock as part of my compensation package for next year. Every year I have asked for stock in the company, but now that the opportunity has arrived, I’m not sure I want to make that kind of commitment. In order to get fully vested in the stock, I have to stick around five to seven more years.

Owning some equity is important to me, but the more I think about it, the more those golden handcuffs are starting to look like iron shackles. What should I do?

Answer: Many professional CEOs see the attainment of equity as the holy grail of their position. To own a piece of the company they work for somehow symbolizes that they have “arrived.�

However, keep in mind that minority shares in a private company have no value on the open market. So before locking yourself into a specific course of action, make sure you understand all the issues.

Carri Johnston, president of Pep Threads in Orange, says to first become clear on what ownership means to you and how it will affect you financially.

“Ownership sounds great,� she said, “but it does have its drawbacks and limitations, especially when you hold a minority position in a privately held company. What looks like a good deal on paper may not look so good five years down the road when it comes time to cash out. I would do some soul-searching to determine why ownership is so important to you. I would also explore whether you can accomplish your financial goals by some other means.�

Suzanne Frindt, a principal at consulting firm 2130 Partners in Villa Park, agrees.

“Your job is to build value for the owners,� she said. “However, there are many ways to get compensated for doing so, of which stock options represent just one. Start looking into phantom stock and other types of deferred compensation plans. Then sit down with the owners and get creative about how you can best meet both of your needs.�

Jo Hunt, president of DeLyon-Hunt & Associates in Redondo Beach, believes there is a deeper and more important issue involved--your reluctance to commit to the job for five more years. Before making any decisions regarding the stock offer, she recommends evaluating your personal and professional goals and your future with the firm.

“The first thing I would do would be to explore why accepting the stock would cause you to feel trapped or locked in,� she said. “Do you have a tenuous relationship with the owners? Does the job still challenge you personally and professionally? Does the direction the company is going in excite you, or has the time come for a change of scenery? If you can’t commit yourself 100% to the job, don’t take the stock options. Instead, start looking around for something that will rekindle your sense of passion and commitment.�

If you decide to stay put and accept the stock offer, Wes Phillips, CEO of Hunter Barth Advertising in Costa Mesa, says, you should make sure the deal is structured properly.

“Pay close attention to how the stock will get valued, how it will get converted to cash and all those technical aspects,� he said. “In addition, if the stock options depend on growth, revenue or profitability targets, make sure they don’t require too much of a stretch for you or the company. Why bother with stock options if you have no chance of achieving the goals?

“Also, you might want to consider retaining professional counsel, someone who knows all the issues and will look out for your best interests in the deal. The last thing you want is to get stuck with 25% ownership that you can never get anything out of.�

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If there is a business issue you would like addressed in this column, contact TEC at (800) 274-2367, Ext. 3177. To learn more about TEC, visit www.teconline .com.