Why Giving Your Employees Equity in the Business Will Hurt Your Business

Written By Steps To Faculty Published October 14th, 2010

If you are starting your own business, you may feel tempted to extend an offer of stocks to your employees to compensate their paychecks. It may seem like an appealing notion at first, but unless an IPO will accompany it, it is nearly always a mistake. Here are six reasons not to give your employees equity in the business.

Step 1. The pot becomes diluted

As the person starting your own business, all the risk is in your hands. You want full reimbursement for your risks instead of having equity dispersed among employees that put nothing into the business to begin with.

Step 2. Employees with minority shares have next to worthless annual dividends

Since you, as the business owner, are the majority shareholder, you have full control so your minority partners have almost no gain. If you make the decision to sell, the worthless shares will mean very little to buyers or to you.

Step 3. Shareholders have the right to see financial statements

Before you think about handing out stocks to your employees when you are starting your own business, think about whether you want them to be able to see all the expenses you run through the business. It does not matter if outside shareholders know, but when your employees are given access to this information, many business owners find it disconcerting once it is too late to withdraw the offer.

Step 4. An acquirer looks for orderly ownership structure

If you plan on selling your business eventually, you may scare off people who might otherwise be interested in your company because of the mishmash you have created. Many shareholders, different holding companies, and complicated legal engineering will frighten some buyers away.

Step 5. A Long-Term Incentive Plan (LTIP) is more ideal

For another option other than giving your employees equity in the business, consider an LTIP plan. You will find it is better for both you as the employer as well as your employees. While no high-scale benefits are seen for the first two years after starting your own business, the third year and every year after that will result in great bonuses for your employees.

At the end of each year the employee works for you, they will be given a cash bonus. This amount will be noted in the LTIP. On the three-year anniversary each employee can withdraw a third of the plan’s total balance. This way, your employees will have high company loyalty without the need to share your valuable equity. Please visit stepsto.com for more great business advice.

Roger Due

Investing in Your Destiny® & Coaching Program - Wealth Building Summit Dallas, Texas

My name is Roger Due and I am from Albuquerque, New Mexico and I am the owner of the Monsano software company. This has been an absolutely fantastic conference. This is the best I have ever been to.