How to Choose Employee Ownership ConsultantsShakespeare may have promised that "the first thing we do, let's kill all the lawyers" (King Henry VI, Part 2), but in setting up an ESOP, equity compensation plan, or other employee ownership plan, first you will hire them. And, depending on the type of plan, you will hire valuation consultants (appraisers), plan administrators, and possibly others as well. This assemblage of expertise will not come cheap, but these experts will save you the hassle, time, and unwarranted risk of trying to figure this out yourself.
- Gauging Someone's Qualifications
- Choosing a Lawyer or Plan Design Expert
- Choosing an Appraiser
- Choosing an Administrator
- Other Parties
Where to Find ExpertsOur Service Provider Directory lists hundreds of NCEO members who provider services in this field. (NCEO members also have access to our ESOP Lender Directory in the members-only area of our site.) Although these are all NCEO members, we do not vouch for their qualifications or approaches. For that you need to probe further, as described below.
Who You Need for ESOPsWhen setting up an employee stock ownership plan (ESOP), you need at a minimum:
- A law firm with experience setting up ESOPs.
- A qualified business appraiser with ESOP experience who is independent, having no contractual relationship with the company or the other advisors involved in the transaction. (However, there is no appraisal requirement if your company's stock is readily tradable on an established securities market.)
- Due to the administrative complexity inherent in ESOPs, a qualified third-party administration firm is a must.
- As discussed in the section of this article on choosing the lawyer, it is best if the same law firm does not represent more than one party to the transaction. So if the company hires and is represented by the law firm that drafts the ESOP, the plan itself should have its own counsel, and the selling shareholder(s) may in turn hire their own counsel.
- Companies may want to hire an expert in feasibility assessment to help determine whether and how a deal can be structured.
- Depending on the company and the situation, the company may hire an investment banker, a financial advisor, an outside trustee, and so on.
- Selling shareholders who elect the tax-deferred Section 1042 "rollover" often hire investment advisors with specialized expertise in 1042 rollovers.
- Aside from the technical aspects of running the plan, companies often find it a very good idea to hire ownership culture consultants to help communicate what the plan is about and create employee participation structures.
Be sure to read our article on Red Flags in ESOP Transactions, which provides a list of key issues to watch out for and ways to avoid them.
Who You Need for Equity Compensation PlansThe guidelines for stock option plans, stock purchase plans, and the like are not as strict as for ESOPs, but you will still need qualified people:
- The plan should be prepared by (or at a bare minimum, carefully reviewed by) a law firm with experience setting up equity compensation plans, preferably not only executive plans but broad-based ones as well. The company may be advised by compensation and human resource consulting firms as well at this stage.
- Closely held companies often hire a business appraiser to determine (1) the value of the options for accounting purposes and/or (2) the fair market value of the stock itself for purposes of setting the price for option grants (especially in the pre-IPO period) and buying shares back from employees.
- Public companies usually hire a brokerage firm to handle option trades.
- The company may outsource administration. However, unlike the case with ESOPs, there are software packages designed for in-house administration of stock option and stock purchase plans.
- As with ESOP companies, an ownership culture consultant can help communicate the plan and build a feeling of ownership among the employees.
Outside the U.S.The above comments apply to U.S. plans. If you are setting up a plan outside the U.S., then the very type of plan you have will depend on what is possible in that country; for example, the U.S. ESOP is largely unique to the U.S. However, stock options, for example, are more alike from country to country.
A multinational corporation wishing to set up a stock plan or plans covering employees in multiple countries must be careful to comply with the host of tax and regulatory issues that will arise; working with experienced legal counsel is crucial here.