28 Oct Rewarding Key People Without Giving Away Equity: Smart Options for Business Owners

You’ve got that one employee. The one who’s been with you through thick and thin, who runs the shop when you’re away, who knows your customers by name. He’s loyal, competent, and you know you need to keep him happy.

But here’s the problem: he’s starting to hint about “ownership.” Maybe he’s even asked outright: “When do I get a piece of this place?”

You feel the tug of loyalty. He’s earned something, no doubt. But giving away equity . . . or worse, selling to someone who might not be ready . . . can put your business at risk.

The good news? There are smarter, safer ways to reward a key person, without handing them a deed to your life’s work.

Why Not Equity?

Equity sounds simple: cut them in, let them own a slice. But it can come with  headaches:

• Loss of control over decisions you’ve built your reputation on.
• Divided interests if they leave, get divorced, or pass away.
• Valuation disputes when they want out . . . or their heirs do.
• Entanglement that can limit your ability to sell the company down the road.

Once you give it away, you’re stuck with each other.  They’re not merely an employee anymore.  And a break-up can be painful.

Smart Alternatives to Equity

Here are alternatives, in no particular order, to giving away equity:

Performance-Based Commissions

Instead of a flat salary, tie part of their compensation to measurable performance:

Company performance metrics (e.g., EBITDA growth, revenue milestones, new client acquisition).

Individual performance metrics (e.g., closing deals, operational savings, retention rates).

This aligns their interests with the company’s success, without giving them legal rights of ownership. If the business thrives, they thrive. If it doesn’t, you’re not locked into an obligation.

Quasi-Equity Structures

These are tools lawyers design to feel like ownership to the key person, without actually giving it:

Phantom Stock – the employee earns “units” that mimic stock value but are paid out in cash. They never own actual shares, so there’s no voting power or transferability.

Stock Appreciation Rights (SARs) – they benefit financially if the company’s value increases, but again, no actual stock changes hands.

Profit-Interest Units (in LLCs) – a way to grant upside participation without traditional equity ownership.

All of these reward contribution and growth while leaving you firmly in control.

Deferred Compensation Plans

Promise to pay future benefits like retirement-style payouts, lump sums, or installments, based on loyalty and performance. Done right, this becomes a powerful “golden handcuff” to keep your key person motivated and tied to the business for the long haul.

Annual or Multi-Year Bonus Plans

Bonuses can be structured in ways that mimic the financial upside of equity without handing it over.

Profit-sharing pools – tie bonuses to a percentage of annual profits.

Multi-year “stay bonuses” – rewards that vest after 3–5 years, encouraging loyalty.

Discretionary bonuses – keep flexibility to adjust based on market conditions.

Bonuses can be structured as contracts with clear formulas.  Or they can be kept discretionary so you stay in control.

Tailored Perks That Feel Like Ownership

Sometimes what a key person really wants is recognition and status. You can deliver that without equity:

Leadership titles and expanded authority.

Access to profit participation in their division or product line.

Perks like car allowances, executive insurance, or even travel opportunities tied to business performance.

It’s amazing how far thoughtful perks go in cementing loyalty.

Why Legal Structure Matters

Here’s the danger: many owners “wing it.” They promise a commission plan, a bonus, or some other compensation, but never put it in writing. That’s a lawsuit waiting to happen.

You need to protect yourself with written agreements and plans that are enforceable, tax-efficient, and fair.  Guard against unintended equity or partnership claims.  You also must ensure that any reward structure doesn’t undermine your eventual sale or succession plan.

The key is alignment. You want your key person to feel like a partner in success . . . without the constraints and restrictions that come with becoming a partner in ownership.

You can, and should, reward your best people. They’re the ones who make your company thrive and protect its value. But don’t fall into the trap of giving away equity just because it feels like the only option.

Apply to Work With Us

At Garza Business & Estate Law, we help owners with all types of legal challenges they face when running and growing their business . . . including designing compensation and retention strategies that reward key people without giving away the farm.We only take on a select group of business owners each year. If you want to explore if you’re a fit, apply here: https://lgarzalaw.com/schedule-online/