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How to Finance a Business While Minimizing Debt Risks
Explore business financing options and learn strategies to help manage debt risk, cash flow, and capital planning for long-term growth. Explore...
Learn how equity compensation can potentially support business growth, retain talent, and prepare for transitions. Explore strategies for structuring effective equity plans.
Building Equity Plans that Align with Business Growth Goals
Equity compensation gives employees and executives a stake in the business. It can help retain key talent, reward performance, and support growth by tying compensation to company success. When structured with clear goals, equity plans can also prepare a business for future transitions, such as an acquisition or leadership change.
Before building or revising an equity plan, consider the following:
- Define what you want equity to achieve—retention, performance, or succession readiness
- Choose the right equity vehicles based on company structure and stage
- Align vesting or payouts with growth and liquidity goals
- Consider tax treatment at grant, vesting, and exit
- Communicate clearly with recipients to support understanding and engagement
- Coordinate equity planning with broader wealth, succession, and business planning strategies
Let’s take a closer look at how these elements come together.
The Strategic Role of Equity Compensation
Equity compensation goes beyond base pay and bonuses. It offers participants a stake in the value they help create—and for business leaders, it creates alignment around growth.
Whether your company is planning for expansion, preparing for sale, or aiming to retain leadership during volatile phases, equity compensation can play a role in:
- Encouraging long-term thinking
- Incentivizing performance tied to enterprise value
- Supporting succession or transition planning
- Providing potential liquidity opportunities for key stakeholders
Common Equity Vehicles and When to Use Them
Different equity tools serve different purposes, and the right fit depends on the company’s structure, size, growth stage, and ownership goals.
- Incentive Stock Options (ISOs) and Nonqualified Stock Options (NSOs)
Often used in early-stage companies, these offer upside potential but require careful tax planning. - Restricted Stock Units (RSUs)
Common in public companies or later-stage businesses where valuation is more predictable. - Phantom Stock / Stock Appreciation Rights (SARs)
Provide economic benefits of ownership without granting actual equity. - Profits Interests
Used in LLCs to share future gains with employees or partners without affecting current capital ownership. - Performance-Based Equity
Vesting or value tied to specific business results, like revenue targets, EBITDA growth, or exit milestones.
Designing for Growth and Liquidity
Equity plans can reinforce your business trajectory when they reflect how and when growth is expected to happen. Consider:
- Vesting schedules linked to performance rather than just time
- Payouts structured around valuation events, such as M&A or recapitalization
- Flexibility to modify grants in response to evolving strategy
- Consideration for dilution if future fundraising or exits are planned
Aligning equity incentives with how your business actually creates value helps focus your team’s energy where it matters most.
Tax Planning and Timing
Tax implications of equity compensation are often overlooked until they create friction. Whether you’re granting new awards or planning a liquidity event, it helps to anticipate:
- Whether a Section 83(b) election makes sense for early-stage grants
- The potential tax exposure at vesting vs. exercise vs. sale
- How to manage equity in a way that avoids unexpected liability for recipients
- When a private company may want to consider early liquidity or repurchase programs
Equity Planning for Different Ownership Models
The type of company you lead will shape how equity is used and what it needs to accomplish.
Private Companies:
- Often rely on profits interests, phantom stock, or SARs
- May face challenges offering liquidity to employees or diluting ownership of founders
- Need to communicate clearly on valuation, timing, and payouts
Private Equity–Backed Firms:
- Typically use equity as part of broader incentive programs for leadership
- Alignment with sponsor goals and exit strategy is key
- Governance and compliance considerations are more formalized
Public Companies:
- Use RSUs and options with more standardized terms
- Have established liquidity, but also face market volatility
- More emphasis on transparent communication and public disclosures
Communicating Value to Participants
Equity can be powerful, but only if the people receiving it understand what it’s worth and how it works.
Tips for effective communication:
- Use plain language in grant documents
- Provide examples of how vesting and payouts work
- Clarify what happens in different scenarios—resignation, termination, sale, etc.
- Reinforce how equity ties back to company performance and shared success
Without clear communication, equity incentives risk being undervalued or misunderstood entirely.
Integrating Equity Into Broader Planning
For many founders and executives, equity awards are a significant portion of their net worth. That makes integration with estate planning, liquidity planning, and succession strategy essential.
Planning considerations include:
- Coordinating equity with buy-sell agreements and ownership transitions
- Exploring tax-efficient ways to transfer equity to heirs or trusts
- Considering charitable giving strategies tied to appreciated equity
- Evaluating how equity exposure affects personal risk and asset allocation
Working with a financial advisor can help you evaluate the full picture, aligning business growth with personal financial goals, exit timelines, and long-term planning. Contact an advisor near you to discuss your needs.
DISCLOSURES
- Information presented is general in nature and should not be viewed as a comprehensive analysis of the topics discussed. It is intended to serve as a tool containing general information that should assist you in the development of subsequent discussions. Content does not involve the rendering of personalized investment advice nor is it intended to supplement professional individualized advice.
- Hiring a qualified financial advisor and/or financial planner does not guarantee investment success and does not ensure that a client or prospective client will experience a higher level of performance or results. No guaranty or warranty is made that any direct or implied results or projections being represented here will be met or sustained.
- The need for a financial advisor or financial planner and/or the type of services required are specific to the uniqueness of each individual’s circumstances. There is no guarantee or warrantee that the services offered by EP Wealth Advisors, LLC will satisfy your specific financial services requirements. Services offered by other advisors may align more to your specific needs.
- EP Wealth Advisors, LLC. is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level of skill or ability
- Request an appointment with an EP Wealth Advisor when you have a minimum of $500,000 in investable assets – which includes qualified retirement plans (IRA, Roth IRA, 401(k), taxable brokerage, cash (savings / checking) and CDs. Investable assets do not include your home, vehicles, or collectibles.
- The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisors. Before making any decision or taking any action, you should consult with a professional tax advisor who has been provided with all pertinent facts relevant to your situation. EP Wealth Advisors is not in the business of providing legal or tax advice. Please consult with a CPA, tax professional, and/or attorney regarding your specific situation.
