Most of the business plans, except some are the brainchild of a group of members who collectively put in some efforts for the initiation of the business. Everything runs smooth, until the point of time when the business requires some more funds and capital for functioning or until when the members expect a chunk of ownership of the company due to the efforts that they have put in for its initiation. Then comes the time of sharing equity with the team running the company which can be beneficial for both the company as well as the members. The company gets its required capital and the members get chunks of ownership. The following section discusses some ways through which equity can be shared in a team. However, for more information, click on Equity Share.
SHARING EQUITY WITH TEAM IS QUITE EASY
There are two models which depict an easy equity sharing process among the team viz. direct ownership and phantom stock.
- DIRECT OWNERSHIP
This plan of sharing equity generally extends for a certain period of time and involves the selling of stocks of the business or the company to the members so that they can purchase them or simply grant them certain value of stocks. This approach aims at changing the concept of team mates to business partners which targets the benefits of both the company as well as the team members.
This system has got some advantages and disadvantages. The main advantage is that, the team members become more responsible over the time since they are the owners of the company and own the stocks. Thus, they are motivated to work for the betterment of the company since they also want their stocks to rise in value. However, the main disadvantage is that the system of governance of the company becomes more and more complicated. The owners become answerable to minor investors as well and responding them in every situation might ultimately lead to a deviation in the path of progress of the company.
From an employee point of view, this system is quite beneficial since they get shares of ownership. However, if they are granted the shares, then the stocks become taxable. There are of course certain ways by which certain discounts on the taxation can also be obtained. One thing to note is that the owner reserves his rights to buy back the stocks at any time from the employees especially at times when the employees decide to leave the company.
- PHANTOM STOCK
In this second approach, the employees are granted Stock Appreciation rights and not the stocks directly. These rights are also called as the phantom stocks and hence the name of the approach. In this approach, it is the owner of the company who still owns the stocks but the employees get a chance to earn the appreciation on the stocks. If the stocks of a company increase in value, the employees now get the increment in the value of the stocks over the original stock price when they were granted the Stock Appreciation Right or the SAR.
The main advantage is that the owners keep the stocks to themselves and thus are loyal to the team in an expectancy of better work from them. From the employee point of view, this system is beneficial since these appreciation values that the employees receive are not taxable while they still get ample incentives and motivation to work hard for the betterment of the company.
Each of these approaches have some benefits and disadvantages. It is always advisable to go through a thorough consultation before evoking the equity sharing process among the team so as to make the process smooth and efficient.