Stock Appreciation Rights

Stock Appreciation Rights

January 26, 2019

Picture a closely-held, family-owned company that has non-family members in key management roles. These non-family key managers (key managers) add tremendous value to the company both in day-to-day management and building long-term value.

These key managers want some form of ownership in the Company for which they have devoted their careers.

The owners want to assure owner and management goals are aligned as well as needing to assure the key managers are tied to the Company.

The Company also desires a mechanism that can attract key managers as the Company grows.

Stock ownership is an answer to attracting, rewarding and retaining key management but there are great complications to physical ownership. Some of these complications include 1) how will the key manager afford to acquire the stock; 2) how will the stock ownership be handled at death, disability or leaving; 3) how will buy-sell and restricted stock agreements be structured – just to name a few.

Stock Appreciation Rights (SARs) can be a better option to actual stock ownership. An SAR plan grants to key managers the increase in value of a certain number of shares from a specific date to and end date – which is typically the end of the key manager’s employment. At the grant date the value of the Company is established – typically through a valuation – and to the extent that the company increases in value, measured annually, the key manager will enjoy the increase in value. It is important to note the key manager is not paid the increase in value until the they either leave the employment of the Company or the Company sells.

Typically, there is a vesting period – say five years – and should the key manager leave the Company, any vested increase in value will be paid out over a pre-determined number of years.

SARs are a way for a Company to give key managers the ability to enjoy the growth in value of a company to which they dedicate their careers. SARs are a great tool for attracting, rewarding and retaining key management.

As a non-qualified employee benefit, there are many options in designing an SAR plan. Please call Tom Decosimo at 423-266-4000 or email him at tomdecosimo@dcf-llc.com.

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Decosimo Corporate Finance, LLC

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(423) 266-4000

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