There are two basic reasons why shareholders should seriously think about sharing the wealth resulting from the sale of their company with other people in the organization:
Award those who have significantly contributed to building the success of the company (in other words those without whom the wealth-building transaction never would have happened). Motivate the key contributors to continue giving their best in order to have the company keep prospering under new ownership and management (as well as to reach the milestones defined if there is an earn-out portion of the proceeds).
And there are many ways to do it: employee stock option plans, contractual commitments, performance or exit bonuses implemented in various forms, from the comprehensive fair model to an allocation totally driven by the subjective judgment of the founder.
Whatever the shareholders may prefer to do, the model should be thought through and discussed with a tax consultant, a legal counsel and the M&A advisor as early in the process as possible.
Here are just a few of the examples we saw during more than 20 years as M&A advisors:
The majority owner gave his non-shareholding CFO a significant bonus to be paid from his proceeds upon closing of the transaction. The CFO has a most important role in closing such a deal and is one of the employees with highest likelihood of being let go post transaction.
In addition to a stock option plan in place, the founder paid significant bonuses to his key employees on a purely subjective basis at closing.
The Managing Director, who held only 5% in the company, was contractually guaranteed by the founder 30% of the proceeds (tax free at the time!).
The major shareholder set aside $750,000, which was structured as welcome bonus and retention pool paid by new owners: two-thirds immediately after closing, one-third 12 months later.
The founder carved out 5% and presented checks to surprised 17 key people at the announcement meeting with the buyer in the room. A similar amount was promised over the following 3 years if earn-out targets were achieved.
Don't let what happens to your key people be an afterthought. Think about your strategy and introduce it into negotiations early.
A version of this article originally appeared in Soft•letter and Software Success.