6 Challenges to Agent Equity Plans

By Neil Ende

At the most basic level, equity arrangements allow the agent to obtain an ownership interest in an entity involved in providing service to its customers. In this respect, they allow agents to share directly in the value of the customer base itself rather than just in the revenue they throw off  and in any increase in that value at the time of sale. In concept, equity arrangements can be a very attractive option for agents. However, the advantages of an equity arrangement come with a number of real-world, practical challenges.

1. Getting Carrier Buy-In. First and foremost, it is generally very difficult to get a carrier to agree to provide equity. From the carriers perspective, such equity arrangements are a contingent liability that may be difficult to value and they could make it difficult to sell or merge the carrier with another entity. Indeed, unless you are bringing very substantial revenues or high-profile customers to the relationship, or some unique capability or proprietary process or technology, it unlikely that you will be able to craft a relationship that includes an equity participation. 

2. Establishing Enterprise Value. Moreover, even if there is a conceptual willingness to allow equity participation, the parties face substantial challenges in designing financial terms that make sense for both parties and are verifiable and workable. As an initial matter, the parties confront the task of establishing an enterprise value for the party in which equity will be provided. This can be a daunting task, particularly where the party in which equity will be provided has multiple non-exclusive agents with potentially competing claims to the same customer base, and is not publically traded and does not otherwise have an established market value. 

3. Determining Market Value. Equally, if not more difficult is establishing a market value for the end-user or other assets that the agent will be bringing to the relationship to earn its equity participation. The advice of an independent financial expert  with specific expertise in telecom valuation issues  will generally be required to make these calculations. The expert will need to calculate both a value for the agents assets at the time equity is allocated as well as a mechanism for adjusting that value over time and as the customer number and mix change. The equity participation will, to a substantial degree, reflect the percentage of value being brought by the agent divided by the enterprise value of the carrier. However, be aware, that this percentage is often subject to a number of adjustments (e.g., the goodwill value of one party), which can have a substantial impact on the percentage equity participation. 

4. Assigning Equity Class. The determination of how much equity will be provided is far from the end of the process. Indeed, of at least equal importance is the class of equity that is being provided and the rights associated with that class. The issues to be considered are far too numerous and fact specific to be addressed properly here. Suffice it to say, absent unique circumstances, you are generally safest in acquiring the same class of stock as is held by the senior, controlling, shareholders and staying far away from offers of a new class of stock designed just for agents and other outsiders.” Tie yourself to those with equity in control as it is very likely that they have the most protection and will get the best deal.

Also, make certain that you receive what are generally referred to as tag along” rights, which should help to further ensure that you are treated the same way as the senior insiders in terms of distributions or a sale. Finally, be very wary of arrangements that uniquely base your compensation on the profitability of your customer base or the company as a whole. These kinds of arrangements are exceptionally dangerous as they leave you at the mercy of operational issues beyond your control, including internal cost and staff allocations  which can be implemented to your detriment  as well as complex accountancy issues surrounding the issue of profit.”  Again, extreme caution and experienced professional assistance are required if you elect to take this route.

5. Calculating Overall Financial Impact. In considering equity participation, it is also essential that you carefully evaluate how it will affect your overall financial position. In this regard, it is essential that you keep in mind that, as an agent, you are generally entitled to be paid a commission each month regardless of the companys overall financial performance or position. As an equity participant, depending on the arrangement, it is likely that you will be required to forego at least a portion of your commissions in return for equity. This may not only result in a reduction of your short-term profits, but also the potential of a long-term reduction, or even a loss, if the company which you do not control performs poorly. Thus, extreme care is required in evaluating the comparable risks and rewards of an equity participation against a traditional commission arrangement.

6. Limiting Vendor Relationships. Equity participation may have other limiting effects on your business. For example, in some circumstances, being an equity owner in one company may limit  either as a practical or a legal matter  your ability or right to sell for other industry members, especially if they are viewed as a competitor. 

Thus, while equity arrangements do offer the opportunity for the agent to participate directly in the appreciation of the asset it has brought to the service provider, careful thought is required to balance the long-term benefits of ownership against the risks and uncertainties associated with achievement and calculation of profit and with the agents status as a minority equity holder.  The advice and guidance of competent telecom counsel with significant experience in drafting agent agreements and equity arrangements is critical.

Neil S. Ende is the founder of and managing partner in

Technology Law Group

, a Washington, D.C.-based telecommunications law firm specializing in transactional, litigation, regulatory and intellectual property (trademark and copyright) issues faced by telecommunications and technology companies. He can be reached by phone at +1 202 895 1707 and by e-mail at

[email protected]


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