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How to ditch the raise, and ask for a stake in the business

Forget a bump in pay. Talking to your boss about investing in the business could be a much more satisfying and lucrative move, especially in the long run.

It would go something like this. You walk into your annual performance review and, just as your boss begins talking about whether or not a salary negotiation is on the cards, you switch the conversation. You don’t want a raise, you want to invest.

For fairly obvious reasons, negotiating a stake in your employer's business is a frequently overlooked idea. Shares don’t help with the rent, and they don’t have the same “I’m getting ahead” feeling of a pay bump.

On the other hand, wages in Australia have been stagnant for a while. And a full 65% of businesses are planning on increasing salaries by a mere 3% or less – that’s not much higher than inflation, if you’re lucky.

What’s more, in a few years' time a stake in the business could really pay off. And it doesn't matter if you work for a private or listed company, says the CEO and Founder of Director Institute Next Generation Directors, Kylie Hammond.

“If it's an ASX listed company you have the opportunity to cash in your share options at certain points in time and that can amount to hundreds of thousands of dollars in additional bonuses effectively,” says Hammond.

“With equity in other vehicles, often these companies are being grown for some form of an exit – a trade sale, management buyout or listing. So over a period of 3-5 years there could be a very substantial financial exit.”

A stake may not only make sense for growing your wealth, it may also boost job satisfaction, says Hammond who has extensive experience in executive career coaching, salary negotiations and employment contracts.

“It changes your mindset from being an employee to being an owner and part of the business's success,” she says.

But how do you do it? Here's what to consider before knocking on the boss's door.

1. Timing

Equity (a stake in the company) is generally a long-term employee incentive and is very rarely just given away, Hammond says.

“Once you've got some runs on the board it might be something to explore. Find out if there's a precedent of others being offered equity,” she advises.

And just as you would for any other significant investment, start doing your due diligence long before making any decisions.

“Even with privately listed companies plenty of information is publicly available,” Hammond says. She recommends getting a credit report on the company before you ask your boss for anything, they can be sourced online and usually cost less than $200.

Also before you say anything, work out what you're prepared to invest personally.

“If you're bringing investment to the table you might be able to negotiate a very good price for shares,” says Hammond.

Be really clear about your personal value and what you bring to the organisation.

2. Know your value

Approach negotiations with a well-constructed pitch around the value you've already brought to the business and how you plan to contribute to its ongoing success, Hammond advises.

“Be really clear about your personal value and what you bring to the organisation,” she says.

“Ask yourself: Are you really making a strategic difference? Have you negotiated a critical contract? Are you opening doors that the company otherwise couldn't? Are you developing intellectual property that they're able to commercialise?”

Start documenting these things early.

3. Speak to an external adviser

Calling on the expertise of an external adviser who is aware of current trends and has the right experience is highly recommended.

“You're looking for someone who understands private equity, venture capital, growing businesses, and taking businesses through to exit,” she says.

“That's probably a senior executive, a trusted adviser, a business or career coach.”

This person will also be able to help you structure the deal. You might consider outright equity, a small stake with the option to buy in instalments, or allocating future bonus payments to equity.

4. Softly, softly

Don't expect things to happen as a result of the first conversation, Hammond cautions.

If you're looking to purchase a stake in a private entity, be prepared to speak to the owner or major shareholders about how they value the company.

“If you think you're going to be cute and go out and get a different valuation you're never going to get anywhere,” Hammond says.

It's also important to be clear about what would happen to your shares if you leave the company.

“You may think the owner will buy them back but often they don't have the capacity or inclination to,” Hammond notes.

“Try and reach an agreement that as a shareholder you receive regular reporting. And that should not change if you leave the business.”

Final word

Essentially, by negotiating for a stake in the business you're trying to achieve a win-win outcome for both you and your boss.

“You're looking for an opportunity to get in on the ground floor of a business that you know is going to be successful, win contracts, go national or international,” Hammond says.

“You really want to treat it like a marriage – particularly if it's a private company it's very difficult to unravel an investment so you definitely want to be in for the long haul.”

Disclaimer
Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (Colonial First State) is the issuer of the FirstChoice range of super and pension products from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557. Colonial First State also issues interests in products made available under FirstChoice Investments and FirstChoice Wholesale Investments. This document may include general advice but does not take into account your individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement (PDS) and Financial Services Guide (FSG) carefully, assess whether the information is appropriate for you, and consider talking to a financial adviser before making an investment decision. The PDS and FSG can be obtained from colonialfirststate.com.au or by calling us on 13 13 36.