Situation: The CEO of a privately held company wants to share company success with employees. An option that she is exploring is phantom stock. The objective is to engage employees in company success. Does a phantom stock plan make sense?
Advice from the CEOs:
Why would you use phantom stock options instead of real stock?
Phantom stock options are popular in the tech sector. Phantom stock confers the right to receive cash at a future point in time, typically a share of the proceeds received upon the sale of a company.
The principal difference between phantom stock and real stock, is that real stock must be issued in exchange for cash, property or past services. There is also a tax consequence to the receipt of real shares. When shares are issued in exchange for past services the employee must recognize taxable income, just like wage compensation. Employees may be disappointed to learn that they may face taxable income based on the fair market value of their shares received without compensating cash to pay the tax.
Let’s assume that the objective is to increase employee engagement as they observe the value of the shares increasing with company success over time.
Under phantom stock programs the value of the company is pegged on a periodic basis, based on a pre-set formula developed by the company.
In some cases, employees can “sell” their phantom stock back to the company for the differential between the price when they were awarded the stock and the current pegged price.
The structure of the program is determined by management based on company objectives.
Employees frequently don’t have the cash to purchase real stock or options at a fair price given the value of the company. Using a phantom stock plan, a company can offer the rewards of stock ownerships without a purchase requirement or tax implications at the time of award. Employees can be apprised of the value of their phantom stock based on a periodic internal accounting exercise.
Situation: A company has contracted with a broker to sell the company. At the minimum acceptable sale price to the founder, the commission would be 2.5%. Is this reasonable? How should the founder think about earn-outs, residual payments, and role post-sale? What is a reasonable broker commission?
Advice from the CEOs:
The proposed commission structure looks reasonable. To validate this, ask merger and acquisition experts what they think reasonable commission rates on a sale of this size looks like in the current market.
Beware of earn-outs – don’t take them if offered, at least not without a fight. The challenge with earn-outs is that it may tempt the buyer to report the books in a way that minimizes your share. This will depend upon the terms, but experience advises against this alternative.
Similarly, you don’t want a residual payment conditioned upon your remaining with the company for a period following the sale. The buyer will ask because they see you as important. Counter with an employment agreement at twice your current salary.
Your job following the sale is assuring a smooth transition, not company growth. Growth is the new owner’s responsibility. They wouldn’t be talking to you if they didn’t see a growth opportunity.
Understand that their vision for the company is not yours. Accept this gracefully. Once the company is sold it is no longer your company.
Situation: A company has been approached by a larger company that may be interested in acquiring them. The prospective acquirer is a current customer. Absent an extraordinary offer, the company isn’t interested in selling. Nevertheless, a conversation could be valuable. How much information about the company should the CEO share now? How much do you share with a potential acquirer?
Advice from the CEOs:
The key term here is potential. At this point, there is no commitment, and you really don’t know the other company’s motivation. As you start this process, don’t share confidential details about your plans or prospects, or your pipeline. Just broad information. If things get serious, slowly open the kimono.
Make sure that you have an NDA in place covering anything that they ask you to disclose for this possible transaction.
Given your current situation, a standard offer probably won’t be appealing, so be open to a creative option.
Decide ahead of time what your price is. If they are in the ball park, keep talking.
For example, Say you want $XX. Would you be attracted to 50% of that now, 50% later? Under what terms?
Put a low valve on future payouts, particularly if you are not in a position to call the shots.
Be open and creative. You never know what can happen. You could sell to them now at the right price. Then, if the acquisition doesn’t work out, buy the company back in 2-3 years at a discount!
If you get into higher level negotiations, employee retention will be critical. Make provision for this as part of the deal.
Hire a disinterested professional negotiator you who you can trust.
If things get serious, bring in an investment broker to assist. It will cost you 5% but they are helpful in the negotiation and could bring in competing suitors to up the ante.
Situation: A company’s top customer has approached one of the company’s suppliers with a request that the supplier sell directly to them rather than through the company. The supplier normally does not sell directly to OEMs, and has neither the sales force nor the customer service capacity to work with these companies. Nevertheless, following the customer’s request, the supplier has asked the company’s CEO for a meeting. How should the CEO plan for this meeting? How do you address a customer-supplier end run?
Advice from the CEOs:
You need well-placed advocates both within the customer company and your supplier company. These advocates can help you to better understand what is behind the customers approach to your supplier, and what the true issues are. You will also better understand how the supplier is reacting to this request.
Talk to the boss of the purchasing manager who initiated this and let him know how this will impact your ability to supply other critical parts for their operation.
Ask for fast track approval as a preferred supplier.
Try to cut this off before the supplier representative arrives for your meeting.
You know from your history with this customer that you have had to make frequent delivery adjustments to meet their needs. Further, as a value add you make modifications to the parts supplied to meet the customer’s engineering specs. This level of flexibility is not part of your supplier’s business model. When you meet with the supplier, paint a picture of the downside of working directly with this customer to convince them that they don’t want to take this business direct.