Philip Palaveev

At a time real equity is becoming expensive , how do you share your firm ’ s ownership ?

HE FIRST SUGAR SUBSTITUTES , LIKE SACCHARINE , BECAME commonly used during the First World War when real sugar became scarce . They weren ’ t a way to lose weight . They were a way to replace what was no longer available — real sugar .

Synthetic equity is the same : It ’ s becoming more and more common as the real equity is becoming more and more scarce and more expensive . This is perhaps great for the advisory industry . After all , sugar substitutes are thousands of times sweeter and may even have some surprising advantages . Perhaps the same is true with synthetic equity — it seems to have its place and we badly need it .

Why ? It ’ s a way for people to share ownership of advisory firms at a time that selling employees pieces of equity has become expensive .

What Is Synthetic Equity ? Ownership in a legal sense is a bit like being married . There is no gray area .

You ’ re either married or not , and you ’ re either the owner of a company or you ’ re not . Any instruments that simulate the financial or emotional or legal effects of ownership — but aren ’ t really ownership — are by definition synthetic .

The characteristics of equity ownership usually include the right to income , the right to vote and the right to appreciation of value . If I own 10 % of a company , I am likely entitled to 10 % of the profits , 10 % of the voting shares ( when votes on company decisions are needed ) and 10 % of the proceeds from the sale if we sell the firm . You can think of synthetic equity as something that loses you one or more of the three primary rights of shareholders ( when other rights are emphasized ):

No vote . You might have non-voting

OCTOBER 2024 | FINANCIAL ADVISOR MAGAZINE | 15