Case Study: Senderra Funding LLC
Taking the World of Employee Ownership to the World of LLCs
By Anthony I. Mathews, 2007
Conventional wisdom would have you believe that you cannot effectively create an employee ownership culture in an LLC. After all, an LLC issues no stock, so an ESOP won’t work. You can’t issue stock options if you don’t have stock. So, conventional wisdom infers, if you operate as an LLC, there is just not a good way to create that “sense of ownership” so many companies seek by using indirect ownership as a way to motivate and inspire employees. Even if you just want to give employees an interest in the company, you can’t really do that because, in an LLC (like an S-corporation) ownership comes with pretty serious tax liabilities. To most people this seems like an impossible problem to overcome.
Not to Brad Bradley and Lew Semones of Senderra Funding LLC. The startup mortgage banking firm has set high targets indeed. Their stated mission is to “shape the next generation of the wholesale mortgage industry,” and they know from the outset that achieving that goal will require both a sound business plan and a highly motivated employee group. The business plan is second nature to these entrepreneurs who have, among their senior management, about 60 years of successful experience in the mortgage industry. Brad Bradley, Senderra’s CEO, is fresh from his experience as founder, chairman and CEO of EquiFirst Corporation, which he guided from a small regional firm to one of the 25 largest mortgage firms in the country. So, they know how to take Senderra to the highest levels of their industry.
The question is what to do about the motivation and reward for all the bright and talented people who are so critical in making that happen.
Rising to those levels of success requires the sort of motivation that can only come from a combination of enlightened management practices and real shared ownership. You can learn a lot about their management practices in the fact that the highest executive staff in the company is formally referred to as the “Senior Support Staff,” acknowledging the real role of rank and file employees in getting the job done. They are looking to shared ownership to lay the foundation, but for a number of reasons, the LLC form of business makes sense for them.
So, they turned to the Beyster Institute for help in figuring out how to both share the benefits of ownership in a meaningful way and continue to operate in this very efficient form.
What has resulted from several months of design modeling and conversations is a creative new form of non-corporate equity sharing plan called the Senderra Funding LLC Equity Participation Plan. Conceptually, the plan will operate much like a phantom stock plan would operate for a corporation. Although it is not yet fully documented, the plan will allow employees who complete an eligibility period to be entitled to an allocation of equity participation units (EPUs), which would be recorded in their plan account. Each EPU will have a future value that can be measured at a given point in time based on the value of the company and the employee's length of service.
If the EPU gets cashed in during the very early period of service, the value of each vested EPU will be a fraction of the book value of an actual ownership unit of the company. After a modest period of service, EPU values will rise to the book value of an actual membership share. After a longer period of service, each EPU will be valued based on a formula that estimates the fair market value of actual ownership interests. EPUs are vested over time and can be “cashed out” by participants after they leave the company or if the company is sold or goes public.
Obviously, the legal implications of this sort of plan are numerous, but the Senderra founders felt it was important enough to the success of the new company to go through whatever was necessary to make it happen. Not only is having a motivated workforce essential to the success of the company, but giving the people who contribute the most a right to share directly in the success they are creating is just the right thing to do… whether your company’s structure makes it easy or not.
According to Lew Semones, a Senderra principal and CFO, the key to their bright future will be a business strategy that incorporates "fast," "simple" and "friendly" into everything they do. What better way to guarantee that this straightforward strategy gets implemented than to see that everyone has a real stake in the outcome?