The Double Edged Sword of having Future Partners within Your Firm

The Double Edged Sword of having Future Partners within Your Firm
Many firms would probably die to have this problem.

All too often when we discuss the future succession options for a firm, we hear two predominate comments; ‘no-one currently in the firm wants to be a future partner’, or our favourite, ‘there is no-one of partnership material within this firm’. Now we could continue to talk about these very comments, but let’s leave that for the moment.

So let’s presume that your firm currently has one or more senior employees who would like to acquire equity. Firstly, you should be so lucky, or perhaps it’s as a result of sound planning. This occurrence may have come about through the gradual development of these personnel or as a result of a direct hire with the promise of a future equity opportunity.

As a result of this scenario, we typically see one of two or possibility three approaches by the firm in dealing with this situation:

1. The current equity holders completely ignore that this situation exists, they put their heads in the sand and hope it will all go away which generally results in the employee leaving the firm. Whilst the employee may have expressed their desire to be an equity holder, the current partners avoid engaging in any discussion around this topic or flat out refuse the likelihood of such an event occurring.

2. The current equity holders acknowledge the desire of the employee to acquire equity, vaguely proclaiming that there will be a future opportunity to acquire equity in however many years time. Where the period is too far away or doesn’t eventuate, this candidate will likely be off to greener pastures. While the partners would no doubt like to control when this departure takes place, non-genuine communications around such subjects has the potential for longer term detrimental impacts upon the firm.

3. The firm is so concerned about potentially acknowledging the desire of the employee to acquire equity, vaguely proclaiming that there will be a future opportunity to acquire equity in however many years time. Where the period is too far away or doesn’t eventuate, this candidate will likely be off to greener pastures. While the partners would no doubt like to control when this departure takes place, non-genuine communications around such subjects has the potential for longer term detrimental impacts upon the firm.

So, as is evident, whilst many firms long to have future equity holders within their senior employee ranks, having such personnel can also cause headaches when the timing of such transitions are not in sync between the various parties.

Get the timing wrong and either the future equity holder walks or the seller of equity may not be pleased with the value received from their sell down.