If you are accessing this newsletter on its publication date of May 16th, there’s a good chance that I’m marrying my son and his fiancée even as you’re reading.
“Wait a minute,” you say. “Marrying your son and his fiancée? There must be a misprint there.”
Courtesy of William Francis Galvin, Secretary of the Commonwealth of Massachusetts, and in return for a $25 fee, I am the recipient of a one-day certificate that authorizes and validates me as the “solemnizer” of the marriage of Janine Lane and William Howe in Groton, MA today.
I couldn’t be happier and feel more honored.
Janine and Will approached me shortly after they became engaged about a year ago to ask if I would be willing to perform their marriage ceremony, citing a little-known state law that allows almost anyone the right to “solemnize” a marriage. Of course, with my $25 I had to send an application (to the Governor, no less) together with a character reference, which my wife, Anne, fortunately was willing to provide.
So I’ve been thinking about this ceremony for almost 52 weeks now. Over the years, I’ve been involved as Dad in weddings for two daughters and two sons, but this one is different. I had a role in the others, and they have all turned out well (four for four, in this day and age!). In this one, however, I have responsibilities.
Ah, forget it. I can’t go that route. If I choke just writing about it, how am I ever going to perform it? Nevertheless, it’s for certain that I’m invested in it – the ceremony, for now, and the marriage, hopefully forever.
So it goes with smaller companies. You, the founder, had passion which you shared with your partners and/or your initial employees when you established or came into the business. You were committed, for better for worse, for richer for poorer, though you certainly hoped for richer. You shared your dreams and your vision as you started down the road together.
Pretty soon the business gave birth to additional employees, and that’s when things started getting interesting. You wanted to think of them all as family but, in most cases, they just wanted a job. If you were like one of my clients, you soon began to wonder if providing one or more of your employees with some stock options might wed them to the company, especially if they didn’t fully vest for three or four years.
This particular company, which has grown nicely to $3MM in revenue during its first four years in business, now wants to reward one of its early employees as he takes on additional responsibilities. The president, who currently owns 100% of the stock, contacted me with a variety of questions about stock compensation.
His call was particularly timely given that another of my clients had just sought outside counsel from CFS Consulting, specialists in the development and implementation of total compensation systems. Chuck Schultz, who has been involved in executive compensation consulting for thirty-plus years, provided some context for a process for rewarding and retaining key executives:
- “Studies of privately-held businesses show that two-thirds of these businesses provide long-term compensation to their leadership team members. (Source: WorldatWork, “2012 Private Company Incentive Pay Practices.”)
- “Small, early-stage businesses typically utilize stock options rather than stock grants as their stock-based incentive vehicle. [Stock grants are gifts of shares which are taxable on receipt based on their value; stock options – see Alligator Bites below – provide the opportunity to purchase shares at a given ‘exercise price’ at some point in the future.]
- “Stock options…are determined by either a fixed number of options approach or a target value approach. The target value approach uses a percentage of the executive’s salary to establish the number of options to be granted. Towers Watson’s long-term compensation survey shows that private companies would use annualized option grant values of:
LEVEL MARKET % SALARY
CEO …………………………………………………… 25%
Executive Salaries $150-$250K ………….. 15%”
An executive salary of, say, $160,000 would thus command a “Market target award” of $24,000 (15%). If the company is valued at $2,400,000, then the $24,000 might command 1% or more of the stock (more, by factoring in an exercise price).
Chuck’s observation, which is consistent with my experience, was that most early stage small companies (less than $50MM annual revenue) utilize stock options rather than share grants. His findings are that “grants are at odds with good market practice because…
- “They have no vesting or restrictions.
- “Vesting and restriction features [on the other hand] promote executive retention.
- “Stock options directly incent executives to focus on stock price appreciation.
- “Executives have choice as to when to exercise their options and to pay tax. Unrestricted stock grants are taxable in the year in which the shares are transferred [and are thus] no longer subject to forfeiture.”
My client’s initial intention was to provide this lead employee with as much as 20% of the shares of the company, vested over five years. Given Chuck’s context, this effectively makes him a partner, more than just a stock-owning employee. The engagement period thus far is four years. Their relationship seems likely to last if not “’til death do us part,” then at least until the two of them can realize significant appreciation of their respective stock interests. They’re waiting for me to compose their vows – next week.
For Janine and Will’s part, their interest in one another has had the full appreciation of all of their family and friends for almost two years now. We expect them to be reaping dividends for years to come.
Congratulations, you two!!