By Marc Rosenberg
How to Bring in New Partners
There are reasons to have both equity and non-equity partners.
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Let’s run down both and then look at a comparison.
Five reasons for equity partners
- Equity partners are a means of raising working capital.
- If a partner has a significant financial investment in the firm, then he or she is likely to have a greater commitment to the firm.
- It is reasonable to expect a new partner to pay for his/her acquisition of a share of a valuable asset – the firm.
- Many firms find that the status of non-equity partner is considered by partners and staff as more of a senior staff person than a junior partner. Hence, many of the advantages of a two-tiered partner system are lost.
- Equity partners provides a means for senior partners to gradually sell out to younger partners.
Eight reasons for non-equity partners
- It’s a way to keep senior staff who are valuable to the firm and who feel that, from an ego standpoint, they need to call themselves “partner.”
- It enables a firm to recognize the stature and contributions of someone who does not meet all the criteria for being a partner.
- It provides a means of easing a partner candidate into full partner status.
- Where dramatic differences in stature and contributions exist, it helps to establish a formal demarcation for profit sharing. Non-equity partners, for compensation purposes, are essentially senior employees and are paid as employees. This doesn’t mean that they should be underpaid. But it does mean that they should not share in profits that they don’t create.
- It satisfies existing partners who have built up the value of the firm to such a great extent that they don’t wish to part with it and/or lose control of it.
- It recognizes that some partner candidates are unable or unwilling to purchase equity.
- It provides a way to give senior staff incentives and a voice in firm management issues, without getting into equity partner issues.
- For lateral hires, it provides both sides with an opportunity to “test the waters” before fully committing to an ownership arrangement.
Comparison: Equity to Non-Equity Partner
Types of non-equity partners
- A longtime staff person who meets most partner criteria except bringing in business. When this person becomes active in marketing with some results, then they move up to equity partner
- Partner in training; could serve as a one- to three-year trial period for the firm and the staff person to test out the new relationship
- Person doesn’t want to be an equity partner (i.e., can’t afford buy-in, doesn’t want liability)
- A non-CPA
- A flex-timer (note: nothing prohibits a firm from making a flex-timer an equity partner)
- Valuable, longtime employee who will never become an equity partner (most common reason: inability to bring in business)
- Lateral hire (non-equity status serves as a trial period for both parties)