My sales director wants equity - should I give it to them?

If your sales director is adding significant value and is enthusiastic, committed and proactive, I would be disappointed if they didn't request some form of ownership.

The best sales directors that I know are entrepreneurial by nature. They thrive on risk and strive to create a substantial upside. Personally, I would never take on a sales director role without the potential for ownership, but that's just me. I know the value I am capable of creating and I habitually work towards a long-term plan - I believe this far outweighs most salary and bonus only roles.

But in saying that, the arrangement needs to be right and the key people involved must all align by the same values - otherwise it's just a matter of time before cracks appear.

Equity can be tricky to distribute successfully, particularly for SME's. I am usually inclined to advise against bringing in equity partners unless there is an established and proven working relationship and the fit is a resounding win-win.

There should always be, (but often is not) a well thought-out and structured legal shareholder agreement that protects all parties in the event of challenging times, dispute, exit and even over-achieving. This requires both sides obtaining professional council and the right legal advice.

If the sales director is buying-in with their own money, there needs to be an independent valuation conducted that both parties deem to be fair and reasonable. I've seen numerous equity negotiations fall over at this point. So if you're selling equity and don't really need too, chances are you're selling at a premium, which may make it prohibitive for your sales director to buy-in to the business.

Be mindful this partnership should bring you and your business greater value in the end, so perhaps pricing equity at too high a premium, rather than carving out a win-win for this particular buyer, is not the most effective strategy.

If the equity is allocated on a performance basis over time, which is common, the equity should execute as per an official share agreement document, not a handshake. In some businesses, equity is dangled as a carrot to motivate key people as a consequence of the company not being able to pay market value, or above, for staff remuneration. This does work in some cases, but be careful as the owner, not to sell the farm too early - as you may just get what you wish for. And as a buyer or new partner, ensure the limited funds in the business aren't also a reflection of the quality of the agreement.

Giving equity to an employee does boost their motivation but it also adds pressures and increases risk to both parties. However, when you get this type of partnership right it can pay enormous dividends. Most dangers can be avoided by getting professional advice and thorough planning, collaboration and spending time (not rushing) to establish and align values before making an agreement.

A good first step, if you see a long-term future with your sales director - is to make a counter-offer of 'equity with profit share only', which means they get a small percentage of company profit for a positive and predetermined performance over and above their salary and bonus. If they cease employment the agreement terminates.

This type of arrangement is far less risky for both parties, yet is a positive forward step - particularly if you see great potential in your sales director. If you can successfully move through this phase together this demonstrates a solid working relationship, and from here - you can structure a more long-term equity plan built on a solid foundation of trust and performance.

Equity arrangements based on greed and making money alone are worth about as much as the paper they are written on.