Allocating equity between siblings: entitlement vs reward!


Allocating equity between siblings: entitlement vs reward!

How do family companies allocate equity between siblings considering the work done in the company and their entitlement to a “hereditary” share of the company?

At dVT Strategy, we have been working with several family companies around setting up their businesses for generational change. This has resulted in some very interesting family dynamics being highlighted.  The most interesting one being that of “entitlement versus reward”.

Those working in the company rightfully want to be acknowledged and rewarded for sacrifices made and the skill they bring in having developed the business. Those siblings that may have been too young to contribute or were out working to help contribute to the family’s income whilst the company was being established may also be entitled to a valid claim.

The younger ones would have endured times where their parents and siblings were simply not around.  Whilst those working and helping prop up the family finances would also feel a sense of loss of opportunity. How do you balance this against the siblings who worked on and in the business putting in extraordinary hours for little pay to build on a dream?

Unfortunately, there is no hard and fast rule for resolving these issues.  They are very much emotional issues that need to be aired and properly handled through open and constructive discussions.

Too often such discussions become toxic and lead to ill feeling between family members.  This is because internally the family is often unable to resolve all the issues confronting them as there is a feeling of bias and a hesitancy to openly discuss all the issues with other family members.

One strategy that can help in these situations is for the family to use an experienced and trusted advisor to guide them through this delicate process.

We, at dVT Strategy, have found that workshopping these issues with the ability to have breakout sessions for one on one discussions has proven to be a very effective way to reach a workable resolution.

Further, to be successful, we have found it imperative that the partners and spouses of siblings are included in these workshops.  This avoids the frustration of spending time reaching an outcome that is accepted by all present, only to then have it undone when one of the participants talks to his partner or spouse and wants to restart the process.  This could result in much animosity and could make the process even more difficult to conclude satisfactorily.

Once an agreement has been reached, it is imperative that a shareholders/participant agreement is drafted and executed by those involved.  This formalises the process and allows the emotions to be parked and all the participants can then get on with their respective roles in the knowledge that their position has been clarified and rules have been set.

In completing the process, the need for ensuring “entitlement versus reward” is extremely important.  As if it is skewed one way or the other, it could seriously impinge on the continued operation of the enterprise.  So, the agreement becomes a way forward as much as a reflection of the past.

If you would like help or advice, give Riad Tayeh from dVT Strategy a call on 02 9633 3333 to have a chat about your family business.