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3 key strategies to use when employees ask for a percentage of profit shares

Name: 3 key strategies to use when employees ask for a percentage of profit shares
Uploaded: 2022-04-21T15:00:04+00:00
Duration: 53 s
Channel: Shanli Liu, CPA, CTP
Description: In this concise advisory video, Shanli Liu, CPA, CTP outlines practical steps for business owners when employees request a share of profits or equity…

21 Apr 2022 · 1 min

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0:53

In this concise advisory video, Shanli Liu, CPA, CTP outlines practical steps for business owners when employees request a share of profits or equity. She emphasizes three core strategies: (1) start with a smaller equity offer because equity can only be increased, not reduced; (2) attach a vesting cliff—typically a one‑year cliff followed by gradual vesting (e.g., 0.25% per year over four years)—to ensure the employee proves value before receiving ownership; and (3) consider phantom equity, which grants economic benefits without actual ownership and can be revoked if the employee departs. Liu cautions owners to treat equity grants as reversible decisions to avoid unintentionally losing control of the business.

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If you're hiring employees and they're asking for a percentage of profit shares or percentages of the business, here's how to navigate that conversation. First rule of thumb is less is more. You always want to start with less because you can always go up, you can't go back down. Most people don't tend well to when you say, I'm actually going to take back some of that money. The second thing, you want to give it a cliff. So if somebody wants 1 or 2% of the business, the first thing you're going to say is you're going to say, I'm going to put a cliff in there. A cliff means they're not going to get that money for at least a year. So if you say I have a 1-year cliff, that means they're not going to get 1% for a year. So you get to see them work for a year before they get that percent of the money. Or you could even say, I a 1-year cliff, and then you get paid 0.25% for 4 years thereafter. So that's a good way to mitigate risk. And then a third option is that you can always do phantom equity. If they ever leave, if you ever terminate them, if there's any reason for them to be gone, they don't get to keep that equity. And the most— the reason that people don't want to give percent of their business away, so they don't want to lose equity in their business, just be careful about what you're doing so that it's a reversible decision.