Posts Tagged ‘profits’

This post is about the Role of Stock Appreciation Rights in retaining key employees; which goes a long way in increasing the value of your company. One of the least understood, but most valuable, strategic assets of any privately held company planning to sell is the quality of management, including its breadth and depth.

Put yourself in the position of the buyer.  Would you pay a lot for a company the executive corps of which consists of the founder/CEO and a cast of minor characters?  Of course you wouldn’t, and for one very sound reason.  If something were to happen to that individual (illness, injury, death or, simply, loss of motivation) your return on investment would be in serious jeopardy.  So, you would reduce your risk by reducing the price.

Therefore, it is critically important that ownership find effective ways to retain key employees.

Fewer Practical Options (Pun Intended)

Financial incentives have always played a key role.  However, because IPOs are much harder to come by in today’s market, one of the traditional favorites (stock options) has lost much of its appeal.  Not to worry.  Riding to the rescue is a great alternative: Stock Appreciation Rights or SARs.  This vehicle conveys no equity ownership.  Instead, the employee shares in the financial success of the company through what amounts to cumulative deferred income, with a vesting schedule that can take nine years or longer to play out.

Advantages and Disadvantages

There are several distinct advantages of SARs over traditional stock options, including:

1. The value of the SAR shares is directly related to critical measures of company success, such as Pretax or After-Tax Profit, or Net Worth.
2. The bases for the (hopefully increasing) value of the SAR shares are strictly a matter of management discretion.
3. There are none of the nettlesome issues associated with employee equity ownership, such as membership on the Board of Directors.
4. All SAR shareholders have a common goal, which encourages cooperation among sometimes competitive individuals and/or departments.
5. The vesting schedule provides a powerful incentive to stay with the company – the whole point.
6. When the company repurchases vested shares, these payments are fully deductible.

The principal disadvantage is common to stock options; namely, inadequate short-term incentives.  This problem can be very effectively addressed with cash bonuses.

The next post will discuss the logistics of setting up and managing an effective SAR program, as well as how to structure a cash bonus program that it actually benefits the company, and not just the employees.

Make it a great month!
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This article has been contributed by Steven D. Popell. Steve has been a general management consultant since 1970. Steve is a Certified Management Consultant, business valuation expert, and inventor of ExiTrak®- a process designed to assist the privately-held company owner/manager to build an attractive strategic acquisition candidate

Tagged as: Business Strategy, Business Valuation, Employee stock options, executives, exitrak, profits, SARs, steve popell, stock appreciation rights

There are broadly three phases of entrepreneurship

1. The Beginning

2. The Journey

3. The New Beginning ( Yes, It’s Not the Destination )

Now, the quick outline of the elements in each phase:

1. The Beginning

The five elements for the beginning phase are:

1. Purpose: Knowing why you are in this will help you keep going when the going gets tough

2. Passion: Doing what you love will make it feel like you are not working

3. People: Building together with the right people will make it look easy

4. Problem: Solving a real problem will help as people will pay to solve a real problem.

5. Plan: Having a plan even when you know that it’s going to change along the way

2. The Journey

The five elements of the journey

1. Patience: Everything takes longer and costs more. Patience is a MUST

2. Persistence: Sticking to the course of action even in the face of difficulty

3. Perseverance: Sticking to your beliefs even in the face of no successful outcome

4. Pain: Ability to handle the “pains” of entrepreneurship along the way

5. Politics: Knowing how to navigate in the sea of politics. You may not want to play politics but surely you should know how to survive and thrive in the politics that already exists

Last phase is what I call the “New Beginning.” I purposely did not call it the destination because rarely I see entrepreneurship “ends” with something – it’s usually a stepping stone to begin something new.

3. The New Beginning

So, here are the five elements of the new beginning

1. Pride: The satisfaction that comes with taking a concept to a completion

2. Profits: If executed well, there is money to be made. There are also profits in terms of personal growth and fulfillment.

3. Power: Since nine out of ten companies go out of business, if you are part of the one that succeeds, you automatically have more power.

4. Possibilities: New possibilities open up as you have more credibility

5. Philanthropy: You can make a bigger difference to the world as you have “extra” capacity

For those of you who are starting on this wonderful journey, wish you the very best.

Rajesh Setty is an entrepreneur, author and speaker based in Silicon Valley. He maintains another blog called Life Beyond Code and tweets as @UpbeatNow

Tagged as: Entrepreneurship, pain, passion, patience, people, perseverance, persistence, philanthropy, plan, politics, possibilities, power, pride, problem, profits, purpose