“How to request ‘ownership interests’ from Private Equity employers.”

Question: My husband has been offered a position in another state. The company owners are what is called “Private Equity,” and as almost all “Private Equity” owners, they are looking to grow revenue by 30% in 3 years, and sell the company in 3 to 5 years. Their plan is to offer new services that my husband will develop for them. 

In the informal discussion around compensation they did not mention any kinds of ownership. However, ownership of a piece of the company – or at least the division he develops – is a must for us to consider this venture. 

This will be our first time negotiating ownership. My husband wants to be knowledgeable and prepared when he brings up the subject of ownership. Where do we start?

Maggie
Corvallis, Oregon 

Answer: Dear Maggie: From my perspective, your husband is in a “good spot,” meaning that he has a skill that someone seems quite eager to use, and is asking him to take a big gamble – leave his present job and leave his family’s hometown. That should be a source of great pride for him, and a potentially great opportunity, but also a source of anxiety that it not be done carelessly. Let’s see how I might be able to help.

1. First and foremost, in his communications, discussions and negotiations, your husband should stress his great value, impress with his unbounded enthusiasm, and express his dedication to making this venture a success. The first “rule” of workplace negotiation is to create or enhance in the mind of the employer a strong perception of your value to the employer. So, your husband should make sure that the Private Equity owners know – and hear from him – such things as “I am confident I can increase revenue by even more than 30%,” “I can’t wait to get started,” “I’ve got lots of great ideas,” and “I view this to be an opportunity and adventure of a lifetime.” Skill, enthusiasm and vision in an employee are incredibly powerful motivators for employers, indeed, they are almost irresistible.

2. Second, your husband should stress that he can more likely achieve – if not surpass – those lofty goals if he is “in the same boat” and motivated in the same way as are the Private Equity owners – by the significant rewards of an eventual sale. Private Equity owners of companies engage in their efforts with one major goal in mind: selling the company in 3 to 5 years, at a large profit. That is their driving motivation. Your husband should share with them that he is “one of them” at heart, and is just as excited as they are, and motivated by the same things, too. It is what negotiators, strategists and motivational experts call “alignment of interests,” and in workplace negotiations is usually an “easy sell.” After all, don’t we all think that others should think and feel as we do? The unspoken message is “I am one of you, and I want to be treated that way, as well.” 

This is a strong rationale – “In order for me to do my best for you, I need you to do your best for me.” Again, it mentions the other guy’s interests before mentioning your own, which is supremely important in negotiating.

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3. Third, your husband should stress that the very substantial risk he is contemplating taking – leaving a job where he is secure and taking his family from their home town should entitle him to some ownership interests, or as they are frequently called, “equity.” In business as in other areas of life, we pay a premium when we want others to take risks for us. That is why and how we buy life insurance, auto insurance, homeowners insurance, health insurance, and even flood insurance: we are asking someone to assume a risk for us, and in return they ask for a “reward,” or to use a more precise word, a “premium.” 

So, too, can it be presented in a truly business-like fashion, “If you want me to take a very significant risk, or several risks, there must be a very significant reward in order for me – and my family – to do so. Trust me, the Private Equity employers will fully understand and appreciate this line of reasoning.

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4. There are four elements of an “Equity Ask” to submit to a Private Equity employer that your husband should bear in mind. Although I cannot in this answer to you delineate and describe all of the words, phrases and provisions to ask for – and to watch out for – when making an “Equity Ask” to a Private Equity employer, but there are four elements he should include when he does make his “Equity Ask” request:

(i) Same Class of Ownership Interests as Senior Management: To put it simply, if the company’s CEO, COO and other “c-suite” executives are being given Class K stock, Class W Units, or Class X Interests, then your husband would like to be awarded the same class of stock, units, or other forms of “equity” as they are. The idea is this: these others are highly valued people, and presumably pretty good negotiators, themselves. Chances are your husband will not be able to get a better kind of ownership interests than they did, and at the same time – considering his importance to the venture – he deserves nothing less.

(ii) Relative Number to Others: When people write to me and say, “Is 100 shares a good offer of ownership or equity?” I must answer “I don’t have the foggiest idea.” If others each received 100 thousand shares, then 100 does not seem that good. When negotiating a bit in the “dark” as to the number of shares or units your husband should receive, a number like “no less than 50% of the number of Units (or Shares) the Chief Marketing Officer received, or will receive” is a much better idea. 

(iii) No Less Favorable Terms and Conditions: When do the ownership interests vest? Might they be diluted by the issuance of 10 million additional units? Are they forfeited if the employer terminates your employment without there being “cause” to do so? Here, too, we are wise to consider that others “near or at the top” of the company probably received about the best set of terms and conditions as anyone can get. So, we ask for “no less favorable” terms and conditions of all kinds as the “top dogs” received – or might receive in the future – even if new managers are brought on board later, as it is quite common that “big names” are hired to carry forward any company sale or initial public offering.

(iv) Continued Vesting if Terminated Without Cause: What good does it do for an employee if the “ownership” gained through negotiation and hard work is later lost by a termination without “cause” months, weeks or even days before the sale of the business in 3 to 5 years? I do not want to disillusion anyone, but I have seen that happen several times by employees working for Private Equity-owned employers.

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5. When dealing with Private Equity employers, Employment Agreements, Ownership (or “Equity”) Agreements, and Limited Liability Company (“LLC”) Agreements all need to be carefully reviewed by an attorney with considerable experience in this area. One last thing to look out for is the absence of simplicity and clarity in the agreements that lawyers for Private Equity-owned employers tend to draft. In no other area of my law practice over the last 30-plus years have I seen such ambiguity, uncertainty, “potholes,” pitfalls, and even sometimes outright chicanery as I have seen in this context. 

I sometimes say to myself when reviewing such materials, “I can’t believe the way these attorneys are trying to give their Private Equity clients ‘wiggle room’ that can – and often does – be used to hurt the hard-working employees whose hard work make the Private Equity owners an awful lot of money.” It calls to mind the refrain in an old Tom Waits song, “The large print giveth, and the small print taketh away.” 

That said, I have also seen many employees do all the right things, and “win and win big” as a result, if they: (a) acquire the information and insight they need, (b) make their requests known in the right, reasonable and respectful way, (c) “stick to their guns” and decline to accept job offers from such employers without equity and some good legal protections, and (d) not permit themselves and their families to be taken advantage of in this context. This is a sure recipe for success. These opportunities are considerable, and “the world belongs to those who persevere.” And, I hope such success is what you and your husband will come to enjoy. 

Maggie, you and your husband are quite wise to “look before you leap,” and I commend you for making the effort to learn what you need to know before you go forward. As an advertisement for a men’s clothing retailer used to say, “An educated consumer is our best customer.”

My Best,
Al Sklover 

P.S.: If you would like to speak with me directly about this or other subjects, I am available for 30-minute, 60-minute, or 120-minute telephone consultations, just [click here.] Evenings and weekends can be accommodated.    

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