The Inequity of Equity Part I The Employee Perspective

While Harvey Mackay was going for a Swim With The Sharks, he wrote a lesson entitled "Owning 1 Percent Of Something Is Worth More Than Managing 100 Percent Of Anything." Excuse me, Harvey. I disagree. 

The basis for my disagreement isn't founded in selfishness or disregard for the employee. On the contrary, it's because I highly regard the value of the employee. 

Following my speech to a business group, a middle-aged businessman approached to shake my hand and ask a few questions. We had a brief chat, and after several interruptions we walked to the coffee shop to continue our conversation. As we chatted over coffee, a panoramic view of his business life unfolded. 

Jim was an energetic, enthusiastic, and ostensibly capable person. He was especially proud of one accomplishment---he was not just the manager of his clothing store, he was the "managing partner.” 

I inquired about his ownership, "How much do you own?" 

Jim proudly said 10 percent. 

"How much is your 10 percent worth?" 

He didn't know, "but the major owner says he keeps track of it." 

"What happens if you find a better job that you want to take advantage of?" 

Jim reflected on that, finally telling me he thought his partner would offer him a fair amount if that ever happened. 

I then asked, "Jim, what's a fair amount?" 

Again, Jim relied on his partner to determine the amount. Our conversation totaled about 45 minutes, and when it was over I came clean. I told him what his 10 percent was worth. I told him it was worth very little, perhaps nothing.

There are thousands of managing partners in Jim's situation. Few understand what they have, or more likely, what they don't have. 

Stock ownership has its privileges–a stock certificate, a periodic valuation of a share's worth, a business continuity agreement. Unless structured otherwise, there's also a voting right-in theory an opportunity to have some control over the company. 

But chances are better than even the "major partner” was using Jim, either with intent or by negligence. Ownership not only has privileges, it has prerequisites. Among those are documentation and formalization. If not in written binding form, partnership and ownership are hollow words. Even when cast in writing, a minority interest in a privately-held firm is less valuable than most minor partners believe. 

Another alternative–business continuity agreements (discussed fully in Chapter IX)--state a value which is ideally funded by life insurance. Why life insurance? Because it provides funding at death. In the real world, the minority partner who's without documentation and formalization will receive precious little when he or she leaves the business. 

Although you are in a stronger position when appropriate agreements are in place, the full valuation of any minority ownership is always at risk. Majority owners will often negotiate the value with a departing minority partner. Usually the minority value is less than what the agreement states. That's because the marketplace accords a higher value to majority stock and because business continuity agreements concern themselves primarily with disposition at death. 

Too much of the time, minority ownership is symbolic. The reality is most managing partners don't have a legal leg to stand on. When they do, it's frequently only at death. 

Partner-employees can avoid the trap of "symbolic ownership" by requiring that formal business continuity agreements be in place. And that the agreement provide exit valuations—not only at death, but when living. 

While the minority partner-employee takes the brunt of the symbolic ownership punch, minority partnerships are seldom beneficial to the majority owner or the business. 

Ownership is a strong, compelling word. It has magic. Magic, however, is an illusion. The minority owner, the partner-employee, the managing partner-use the title you wish-should keep this in mind. Minority ownership isn't what it appears. There are better ways. Keep reading.