An equity offer from a private contractor is worth what its documents say and no more. Find out which instrument it is, how the company is valued, how it vests, and when and how it pays. Then ask about personal guarantees to the surety. Real shares in a bonded contractor can come with your house attached.
“We want you to be an owner here.” It is the most flattering sentence in construction hiring, and it usually arrives without a document. A vice president of operations in Atlanta heard it, accepted a salary below market on the strength of it, and learned eighteen months later that his equity offer was a phantom stock plan valued by a formula the founder could adjust, payable over ten years, forfeited if he left. None of that was hidden. He had never asked.
What forms does an equity offer take at a contractor?
Five, and they differ more than the word “equity” suggests. Real shares make you an owner with a vote and obligations. Phantom stock and appreciation rights are cash promises tied to company value. An ESOP holds shares for you in a retirement trust. A profits interest gives a share of future growth only.
| Instrument | What you hold | Do you pay? | When it turns into money |
|---|---|---|---|
| Purchased shares | Actual ownership | Yes, often through a company loan | On sale, retirement or buyback under the shareholder agreement |
| Phantom stock | A contractual right to cash | No | On the plan’s trigger: sale, retirement or a fixed date |
| Appreciation rights | The increase in value only | No | As for phantom stock |
| ESOP account | Shares held in a retirement trust | No | After you leave, on the plan’s distribution schedule |
| Profits interest | A share of future growth | Usually not | On sale or distribution |
Most mid-size contractors use the second or the fourth. Phantom plans are popular because they reward leaders without changing who owns the firm, which matters to founders and to sureties. Our note on phantom stock explains why an owner chooses it. A sale is the trigger many of these plans wait for, and the note on a company sale covers what to read before signing the retention papers that follow one. An ESOP works through a retirement trust: the IRS describes how ESOPs are structured, and the Department of Labor’s benefits agency oversees them. Our note on the ESOP transition covers what one does to a contractor’s leadership. When there are two letters on the table, the method for comparing offers line by line applies before the equity is weighed.
Knowing the instrument tells you what kind of promise you hold. What it is worth is a separate question, and it has its own arithmetic.
How do you value a construction equity offer?
Start from the plan’s own valuation formula, apply the vesting schedule, then apply the payout terms. Private contractors are commonly valued at or near book value, well below the earnings multiples people remember from other industries, so the grant is usually smaller than it sounds and slower to arrive.
Work an example. A contractor valued by its plan at $20 million grants you 2 percent in phantom units. On paper that is $400,000. The units vest over five years at 20 percent a year. Leave at the end of year three and you have vested 60 percent, or $240,000. The plan pays vested amounts in five equal annual installments, so you receive $48,000 a year.
A real $48,000 a year is worth having, and it is a long way from $400,000. Compare it with the salary you gave up to get it.
Three things move the number:
- The valuation method. Book value, a multiple of earnings, or an outside appraisal. Ask who sets it and whether they can change the method.
- Dilution. If new units are granted each year, your 2 percent shrinks unless the plan says otherwise.
- A bad year. Contractor equity can fall. One loss-making project can remove a year of growth, and your units fall with it.
Payments under these plans are generally taxed as ordinary income when you receive them, and deferred compensation rules are strict about timing, so have an accountant read the plan. The tax treatment of shares you buy is different again. If a sign-on bonus comes with the grant, read its clawback as well, because bonus repayment is often owed on the gross figure, including tax already withheld.
Which questions should you ask about an equity offer?
Ask for the plan document, and then ask what happens in each of five situations: you resign, you are let go, the company is sold, the founder retires, and the company has a bad year. A plan that reads well in all five is a good plan.
- Can I read the plan document and the most recent valuation before I accept?
- What happens to vested and unvested units if I leave, or if I am terminated without cause?
- Is there a non-compete attached, and do I forfeit vested value if I breach it?
- What happens on a sale of the company? Do unvested units accelerate?
- Who has received payouts under this plan, and were they paid on schedule?
- If these are real shares, what does the shareholder agreement say about buyback price and timing?
- Will I be asked to sign a personal indemnity to the surety?
Question four carries the most weight at a private-equity-backed contractor, where the equity plan pays when the firm is sold. The last question is specific to this industry and catches people out. A surety bonding a closely held contractor commonly asks the owners, and often their spouses, to guarantee the bonds personally. The Small Business Administration’s surety program describes how bonding works for smaller contractors. If you become a real shareholder, ask in writing whether indemnity will be required of you, and talk to your spouse before you answer. Our note on bonding capacity explains how sureties look at ownership and leadership.
When equity is worth a lower salary
Sometimes it is. Take the trade when the plan is documented, the valuation method is fixed, the vesting is reasonable, and a founder is within sight of a transition that has to be funded. Leaders who bought into well-run contractors in Texas and the Southeast before an ownership change have done well.
Decline the trade when the promise is verbal, when “we will sort out the paperwork after you start” is the answer to question one, or when the salary discount is certain and the equity is not. A fair offer pays market salary and adds equity on top. An offer that asks you to fund your own equity through a pay cut is a loan from you to the firm.
Selah Talent Partners works on confidential executive search for mandates that cannot be publicly posted, for contractors across the United States. When an offer includes equity, the plan should be asked for before the candidate has to ask, because a promise that survives being written down is the only kind worth weighing. The candidates page is where to start a conversation.
Ask to see the document. A contractor who means “we want you to be an owner” will have it ready for you.
Sources and further reading
- ESOPs, Internal Revenue Service, employee stock ownership plans
- Benefits agency, US Department of Labor, Employee Benefits Security Administration
- Surety program, US Small Business Administration, surety bonds