In
family businesses, there are two main ways stock gets diluted: it gets passed
on to employees or it’s passed down through the generations. We often see the first situation occur in
families when owners give out shares to non-family executives as part of a
compensation package.
Although some businesses are
family owned, that doesn’t necessarily mean they are run by members of the
family. And in order to get those non-family members to approach the business
with the same “family” mindset, many business owners are giving their employees
skin in the game.
The most common form of “skin”
in the game is company stock. Done right, this approach can be a win-win for
all parties involved. That said, great caution is due; beware, as described in
a recent WealthManagement.com article
titled “The Tyranny of Minority Shareholders.”
Structuring your family business
for the future is not an easy task. What of value in life is? While each
company and family is different, making a key employee a part owner certainly
can give them added incentive to run things when the family cannot or will not.
On the downside, you can create
tension between the family owners and the key employee turned minority
shareholder. For example, conflicts can arise should the majority owners (i.e.,
the family members) take actions in their own self-interests without
considering the concerns of the minority owners (i.e., non-family members). In
some cases, a minority shareholder can be protected by state and federal laws
as in the case discussed in the original article regarding the Empire State
Building IPO.
Even if you do not own an
international landmark, there are many ways you, your family, your non-family
executives, and, yes, your business, can find a happy medium. However, it takes
time and qualified counsel to structure things correctly.
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Reference: WealthManagement.com
(June 20, 2013) “The Tyranny of Minority Shareholders”