Equity management is an important aspect for running a successful business. It includes allocation, management and application of the ownership interests of the company. Just like other things today, equity management has its own share difficulties since it deals with different complex ownership agreements and commitments.
In this article, let’s look at the best practices for efficient equity management while also paying attention towards the challenges involved and suggesting techniques to deal with them.
Equity & Equity Management
To put it simply, equity represents ownership in an organisation. Generally, it is divided into shares and the people who hold them enjoy some rights and responsibilities in the organisation. Equity is of great importance since it helps in determining who has influence on company’s decisions and who enjoys their share in financial gains.
The allocation, management and appropriate utilisation of these ownership interests in an organisation is referred to as Equity Management. It is a strategic process that helps ensure that both allocation and utilsation of equity is in line with the firm’s future plans.
Challenges in Equity Management
Equity management has its own set of problems, recognising and addressing these problems is essential to promote fairness and ensure growth in an organisation. Some commonly faced challenges in equity management include:
- Dilution: As an organisation thrives, it attracts new investors, for which the company issues new shares which may dilute the position of existing shareholders. It is important to maintain balance to ensure justice.
- Equity Incentives: It may be a difficult task to create an equity incentive program that both motivates and retains important people while also fulfilling the company goals.
- Human Errors: to err is human, and so is the case with equity management. Such errors can pose a great threat and may result in inappropriate payments, switched ownership records and other different financial inconsistencies.
- Valuation: determining the worth of a firm in its early stage can create a different picture and can become a reason for disagreement among shareholders.
- Legal Compliance: Equity requires commitment to follow legal rules and regulations. Not following these laws can pose problems for both companies and stakeholders.
Best Practices for Effective Equity Management
An integrated approach is required to carry out equity management effectively, it involves the processes of strategising, compliance, commitment and also justice.
Some of the best practices are mentioned below; they can help create a fair & transparent equity management practice that is aligned with your business.
- Option Pool Size: Depending on the hiring goals and growth opportunities, a company can decide its option pool size. You should remember to continuously make changes in the option pool as and when the hiring and retention strategies of the company develops and changes.
- Vesting Period: Use vesting period to reward long-term dedication and performance of your employees. A company can consider vesting in advance to recognise and retain employees & staff with exceptional performance. A vesting period of 3-4 years is very common.
- Performance Metrics: In order to align company goals with the performance of the employees, equity grants can be tied to clearly defined and measurable performance indicators. In order to motivate employees, you can make the performance indicators very specific and tangible.
- Clawback Provision: Include clawback provision in the stock agreement for any ethical misconduct or violation, so that the company can reclaim its shares.
- Acceleration Provision: In order to preserve the rights of employees in case of any future M&A, you can consider acceleration provision.
- Equity Award Mix: Try and maintain a balanced mix of equity awards like stock, RSUs (restricted stock units) and preference shares in order to meet different employee choices.
- Grant Timing: Choose appropriate time to issue equity grants, it includes times like new hire, annually and also to reward performance milestones.
- Equity Valuation: In order to avoid any disputes in tax agreements, use appropriate valuation processes to analyse fair market value.
- Equity Buyback Policy: Set up very specific buyback rules for retiring employees and shareholders, who wish to sell their shares back to the company.
Equity management does not work in the same way for every company and so every company should employ what works best for them. Equity Management calls for a very thorough planning, continuous evaluation and commitment to your company’s specific vision and goals. The use of aforementioned equity management techniques will help in creation of an efficient equity management strategy that promotes growth, fairness and stability to all parties in the company.
Schedule a demo with Trica today, and let us help you to take the next step for optimising your equity management plan.