Small Business

Cementing Loyalty


By Karen E. Klein Q: I have a subcontractor who has worked for my management consulting company for five years on a part-time basis. She is starting to bring in clients, and I am concerned about her spinning off her own company to compete with mine. I don't want to ask her to sign a noncompete agreement since I think that would turn her off. She would like to have part ownership of my company, but I'm not sure I want to share that with her just yet. How can I motivate her to continue with me?

-- L.W., Green Bay, Wis.

A: Good question, and good for you for recognizing the value of this subcontractor. If you don't want to lose her expertise -- and maybe her clients, too -- you should start by hiring her as a full-time, permanent employee and give her benefits. While she's still a subcontractor, she's more likely to start her own company or be lured away by a job offer. Once she's on board with your firm, you have several ways you can cement her loyalty -- with or without letting her share ownership.

One avenue that might be attractive -- especially considering that she has already expressed an interest in co-ownership -- is holding the equity carrot out for her, but building in a vesting period. Set up a stock-option or other equity-sharing plan that would allow her to acquire ownership over time. "You should use an attorney to draw up the plan, but it shouldn't be costly to do that," says financier Peter Cowen of Peter Cowen & Associates in Westwood, Calif.

YOUR SHOTS. He says you shouldn't be worried about losing control of your company. You'll be giving away minority ownership -- and if it's less than 5%, she won't have access to the company's financial records. As long as you're the majority shareholder, you'll still call the shots. But a savvy partner who's invested in the company and can give you a sound second opinion on business decisions might turn out to be a wonderful resource, in fact.

"A typical plan might have a four-year vesting period with the first year as a 'cliff' that they have to get over before they get any equity," Cowen says. "Having the time to work with them for several years before they are vested gives you a chance to gauge their effectiveness."

If you're not interested in stock options, you can look into other incentive programs, such as profit sharing, pension plans, and deferred compensation. They can be set up to include specific revenue targets, bonuses, noncompete agreements, and long-term vesting. Any of these could serve as powerful motivation for her to stay with your firm.

Consult a financial planner or an attorney who specializes in helping small companies with retirement planning. Make sure you use a qualified professional to structure the details, because such plans have legal parameters and tax implications that you'll want to navigate wisely. Have a question about running your business? Ask our small-business experts. Send us an e-mail at smartanswers@businessweek.com, or write to Smart Answers, BW Online, 46th Floor, 1221 Avenue of the Americas, New York, NY 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.


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