united-states, equity, startup-costsSay a holding startup company is interested of opening up an office, or a subsidiary, in a new market in order to “fortify” their expansion. In order to limit their risk and/or attract talent they offer up to 40% of “sweat” equity in this new subsidiary to a director and his managers of said subsidiary.
In this model, at the outset, 20% of all revenue generated by each subsidiary is automatically redirected to the holding company.
Even though the Director of this subsidiary may receive up to 25% of sweat equity of that company, is he not better demanding some type of interest and/or equity in the holding company? Especially if this market is new and undefined and he’s coming in at the beginning of said expansion? It appears, said Director is taking lots of risks, and not necessarily reaping lots of rewards.
This is a similar situation to the “investing in a subsidiary” dilemma.
It can be attractive to the Director to receive a share of the local operation, because if he trusts his work, he will see the local result, which maybe higher than the result of the consolidated operation (from the Holding itself, encompassing all operated markets). But this represents a higher risk investment.
On the other hand, the dilemma comes in the form that said Director will be subjected to eventual strategy changes by the holding company. His market might have been once a strategic market but in some years time the company might decide to pull back from that market and abandon operations altogether. In this situation, the Director will be left with nothing, even though he might have given his best. Of course there might be a strategic buyer for that operation, and in that case the director will cash-out and receive money for it.
A better option might be have some of both: some participation in the global holding company, meaning lower risk and some on the local company, a higher risk asset, but with the possibility of higher returns. This will probably bring the best of both worlds to the Director.
One other thing to consider when choosing: when you have a local shareholder other than the holding company, it is not a wholly owned subsidiary any longer, and you might have to abide to local regulations on minority shareholder rights, which can be something hard to deal with, because you might not have the complete control you would when the subsidiary is wholly owned.
All content is licensed under CC BY-SA 3.0.