Top staff are being given equity and profit shares by family offices in a competitive fight for talent.

• Top family office attorney reveals that family offices are increasingly providing lucrative shares of equity and deal profits to staff as a growing competition for talent intensifies.
• Private equity firms and venture funds are facing increased competition from family offices, which are growing in size and number.
• Single-family offices typically compensate their staff through deal and equity arrangements in one of three common ways.

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Top family office attorney reveals that family offices are increasingly providing lucrative shares of equity and deal profits to staff as a growing competition for talent intensifies.

To attract top talent and compete with private equity firms and venture funds, family offices are enhancing their compensation plans. In addition to salaries and bonuses, many are providing equity stakes and profit-sharing arrangements to motivate employees.

Family offices must adapt to a more competitive job market, according to Patrick McCurry, a partner at McDermott Will & Emery LLP in Chicago who specializes in working with single-family offices.

"Family offices are competing for talent against each other and traditional private equity, hedge funds, and venture capital, as stated by McCurry."

Single family private investment arms, known as family offices, are increasingly adopting profit shares to align staff incentives with the family's interests.

McCurry stated that it aids in aligning everyone towards the same objective.

According to McCurry in the latest UBS Family Office Quarterly, single-family offices typically compensate staff through deal and equity plans in one of three ways.

1. Profits interest

An employee's profits interest in a deal or basket of deals provides them with a share of the upside, typically calculated as a percentage of the profit above a target or "hurdle." If there is no profit, the employee receives no share. According to McCurry, "Essentially, they only participate if there is growth."

Capital gains tax rates are typically lower than ordinary income tax rates, with the long-term capital gains rate capping at 20% compared to the maximum ordinary income rate of 37%.

2. Co-invest

An employee or group can invest in a deal alongside the family through a co-investment, which involves putting their own money into the investment. The family may lend a portion of the money to the employee for the investment, known as a leveraged co-investment. As a result, an employee may put $100,000 into an investment, borrow another $200,000 from the family, and get a $300,000 stake.

If co-investments are not profitable, employees may lose their investment and potentially have to repay a portion of the loan. Family office owners prefer co-investments because they motivate employees to make less risky deals. To create both upside and potential downside for staff, family office owners often pair co-investments with profit shares.

Co-investing can come with a downside, which means you may miss out on high-risk "moonshot" deals.

3. Phantom equity

If a family office is too complex with numerous trusts, partnerships, and funds, it can be challenging to issue profit shares or co-investments. In such cases, they may offer phantom equity, which represents notional shares of a portfolio of assets, funds, or companies that mimic performance without actual ownership.

Phantom equity can be similar to a 401(k) plan that offers tax-deferred growth, but when it's eventually taxed, it may not be as appealing to employees due to the higher tax rates.

McCurry stated that while it's not as common, its primary use is for simplicity.

Family offices, serving a single family, have greater flexibility in designing pay plans compared to many companies. However, McCurry emphasized that family offices seeking to attract top talent must offer more forms of equity.

"The more family offices provide it, the more employees expect it. To avoid being the exception, you should offer it too."

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