Equity Alternative Plan

Our Equity Alternative Plan overcomes some of the challenges posed by traditional stock option and other equity-based plans, and can be used in lieu of or to augment such plans.

For many privately held companies it is not feasible to give minority ownership stakes to employees for several reasons:

  • A desire to keep ownership privileges with the current ownership group.
  • Difficulty to properly value the awarded equity.
  • Added expense to book the correct future liability since IRC 123(r) was passed.
  • Very limited secondary market for most privately held company stock.
  • No diversification for executives from company equity often leading to out of the money equity plans.

The intent of most equity plans is to reward key performers for a job well done and to incentivize them to drive long-term growth of the company's value. With our Equity Alternative Plan we accomplish the same goals by using company discretionary contributions in a Nonqualified Deferred Compensation arrangement.

The amount of the discretionary contributions can be equal to the amount of equity compensation that would have been awarded otherwise. Company and individual performance goals are typically taken into account for the contribution formula. Through the use of vesting schedules we can create incentives for key executives to remain with the company and continue to drive company growth.

The value of an executive's account can be tied to the value of company stock, but also to other crediting options in order to make diversification a valid option for key executives. Unlike traditional equity plans, the executives do not take ownership of any actual company stock, therefore avoiding the numerous issues that come with multiple minority owners.

One main issue is the redemption of any vested stock when a participant separates from service.  With our Stock Option Alternative plan there is no need for an active secondary market as any distributions to participants are made in cash and are based on an easy to value liability account.

The Equity Alternative Plan is a viable way to mimic the benefits of traditional stock-based plans while avoiding many of the challenges that those plans present.

Considerations surrounding Equity Alternative plans should include, but not be limited to, funding requirements and the potential impact of market volatility on account values. 

 

 

Watch this video to learn how the Equity Alternative Plan can help avoid the pitfalls of traditional equity or stock-based plans.