In 12 years of FMCG service work, I have seen too many distributors encounter equity cooperation problems, commonly in a 'gather and scatter' pattern—at the company's founding, partners handle relationships with emotion and loyalty, with systems and equity either undefined or vague. Once the business reaches a certain scale, they start 'arguing over contributions, quarreling over spoils, and forming factions,' leading to internal strife or the scattering of members like heroes of Mount Liang. This is the so-called 'buddy-style partnership, enemy-style dissolution.' In business, when dividing equity, the entry mechanism is important, but the exit mechanism is even more important! 1. Definition of Equity Incentives Equity incentives refer to various ways to make employees (especially managers and core technical personnel) own the company's stocks or equity, allowing employees to share benefits with the company, thereby establishing an equity-based incentive and constraint mechanism between operators, employees, and the company. Operators and employees participate in sharing the company's residual claim rights with their equity, and bear the company's operational risks, thus serving the company's long-term development. Equity incentives are a method that gives operators economic rights by granting them company shares, enabling them to participate in corporate decisions as shareholders, share profits, and bear risks, thereby diligently serving the company's long-term development. 2. Differences Between Joint Stock Companies and Limited Liability Companies Differences between 'joint stock companies' and 'limited liability companies':

  1. Limited liability companies are 'human-capital dual companies'; their operation involves not only capital combination but also trust relationships among shareholders. In this regard, they can be considered between partnerships and joint stock companies. Joint stock companies are purely capital companies, based on capital combination, not on trust relationships among shareholders.
  2. Limited liability companies have a limit on the number of shareholders, ranging from 2 to 50, while joint stock companies have no upper limit, as long as there are at least 5 shareholders.
  3. In limited liability companies, shareholders transferring shares to outsiders is restricted and requires approval by more than half of all shareholders. In joint stock companies, shareholders can freely transfer shares to outsiders without restrictions.
  4. Limited liability companies cannot publicly raise shares or issue stocks, while joint stock companies can publicly issue stocks.
  5. Limited liability companies do not need to publicly disclose financial, production, or management information, while joint stock companies, with many shareholders and frequent turnover, need to publicly disclose their financial status. 3. About Our FMCG Industry The vast majority of FMCG trading companies nationwide are limited liability companies. The new generation of FMCG professionals are 'starting businesses with universal partnerships.' They have weak legal awareness of partnership operations. Team management lacks theoretical guidance. The significance of equity percentage. 4. Three Types of Shareholders in Startups
  6. Those who invest and work.
  7. Those who only invest but do not work.
  8. Those who only work but do not invest. 5. Equity Holder Screening
  9. In long-term investment behavior, the best partners are those who 'invest and work'; they are relatively stable and will not easily give up.
  10. In medium-term investment behavior, the best partners are those who 'only work but do not invest'; they are talents needed for company development, have objective judgments about the company's growth, and cooperation is more stable.
  11. In short-term investment behavior, the best partners are those who 'only invest but do not work'; they are purely investors, and if there are no short-term returns, they are easily shaken, with higher risk. —For the above three types of investors, the exit mechanism should specify exit times. If they exit early, reasonable default discount points need to be negotiated. 6. Significance of Equity Percentage 67%: Absolute control. 51%: Relative control/actual controller. 34%: Veto power. 10%: Right to convene temporary meetings. 5%: Threshold for major equity changes. 7. Key Points for Equity Allocation
  12. How to allocate equity for two partners? Best formula: 1 ≠ 1 'One big, one small.'
  13. How to allocate equity for three partners? Best formula: 1 > 2 + 3
  14. How to allocate equity for four or more partners? Best formula: 1 < 2 + 3 + 4 + 5 + 6 + 7... For more than three partners, it is best to have an odd number. For multiple partners, original shareholders using the 'best formula' effectively reduces risk; improves decision-making; facilitates rapid financing; expands markets; motivates talent; and improves corporate governance. At this point, you might question me: With fewer shares, can there still be so many benefits? Here I want to explain that original shareholders in multi-partner setups use the 'best formula' because unlisted equity can also be sold. After original shareholders have worked hard to build the foundation, they can value the company. After valuation, the original 1 yuan/share can be sold at 2 yuan/share, 3 yuan/share... 8. Key Points for Equity Allocation: About Enterprise Valuation Enterprise valuation requires comprehensive analysis and assessment from inside to outside. It is recommended to hire professional firms for valuation and equity planning. Unlisted enterprise equity can be used for financing within the scope of the Company Law. Valuation is for more precise equity allocation, but equity allocation is not the goal; achieving performance is the goal. For FMCG valuation, you can refer to the loan amount from a formal bank. Formula: Valuation = (Loan amount + Loan amount * 30%) / 85% * 12 months. For example, if the bank lends you 1 million yuan: Valuation = (100 + 100 * 30%) / 85% * 12 Your company's insurance valuation is 18.3529 million yuan (this data is for reference). 9. Key Points for Equity Allocation: 15 Questions for Enterprise Valuation 10. Key Points for Equity Allocation: Why Business Models Are Also Assets 11. About Huawei I have a classmate at Huawei responsible for overseas market research projects. The following data was sent to me by him, and later I saw similar articles on Toutiao. Huawei's sales revenue is expected to reach 520 billion yuan, a year-on-year increase of 32%. 520 billion! What does that mean? It equals 5 Gree, 2 Lenovo, 5 ZTE, 5 Alibaba, 5 Changhong, 6 BYD, 7 Xiaomi, and more than 20 Konka! It means surpassing IBM and entering the top 75 of the Global 500, with the fastest growth among global companies with revenue over 100 billion! This 520 billion does not involve finance, real estate speculation, or listing, and more than 60% comes from abroad! In the first half of 2016, Huawei paid over 42.1 billion yuan in taxes in China alone. That is, if China had 100 Huaweis, tax payments could exceed 8 trillion yuan! Huawei is not listed; instead, it has opened 98.6% of its equity to employees, with founder Ren Zhengfei holding only 1.4% of the company's equity. Every penny Huawei earns belongs to everyone, to the partners. Ren Zhengfei made three classic statements about talent: 'No matter how hard an individual tries, they can never keep up with the pace of the times, especially in an era of knowledge explosion. Only by organizing dozens, hundreds, or thousands of people to strive together can you stand on top and touch the feet of the times.' According to Huawei's 2015 annual report, Huawei's total expenditure on wages, salaries, benefits, time-based unit plans, and post-retirement plans was close to 100.8 billion yuan. Adding net profit of 36.9 billion (mostly dividends and stock appreciation for employees), Huawei spent 137.7 billion on employees, with 170,000 employees averaging over 800,000 yuan annual income. In the latest Fortune Global 500 list released in July this year, Huawei ranked 129th, a leap of nearly 100 places from 228th the previous year. With revenue of 520 billion yuan, it is expected to enter the top 100 in the next list. Huawei is no longer just a simple Global 500 company. Earlier, Huawei's huge year-end bonuses were exposed! Ren Zhengfei: If you pay enough, even non-talent becomes talent! Huawei employees earning over 1 million yuan annually exceed 10,000, and those earning over 5 million exceed 1,000: Taking 2015 as an example, Huawei's virtual stock dividend was 2.86 yuan per share. The number of shares held by employees is related to their years with the company. For those who have been with the company for 8-10 years, they generally have hundreds of thousands of shares. Over 10,000 people earn over 1 million yuan annually: pre-tax dividends are basically around 700,000 yuan, plus salary, other bonuses, and labor fees, annual income exceeds one million. This group exceeds 10,000 people. If you noticed my Moments, last night I even posted a joke about my friend, saying, 'Li, you are one of the 10,000, come back and treat us to a big meal.' According to Li, in the year he got an A performance rating, the company allocated him nearly 600,000 yuan in shares. 12. Key Points for Equity Allocation: How Employees Acquire Equity You might ask, 'If you ask me to buy, borrow, or exchange, I won't do it. Even if you give it to me, I'll consider it!' Indeed, such employees exist, but this more likely points to a problem with the boss! I ask everyone: When playing music to a cow, is it the cow's fault or the person's fault? As a boss, you should consider more: Does anyone identify with the incentive plan (the 'pie') you designed? Was it fulfilled during execution? 13. Examples of Current Entrepreneurial Models
  15. Self-investment.
  16. Mutual investment in partnerships.
  17. Internal investment: internal/external enterprises. Self-investment and mutual investment require strong capabilities and higher risks. Internal investment: You work in the company, know the ins and outs, the boss can't run away, the finances are clear, and externally you are a small shareholder. 14. Plan Design and Implementation 15. Plan Design and Implementation: Basic Types Explained Virtual Stock Ø Refers to a type of 'book' stock created by dividing the company's net assets into shares of equal value through the issuance of stocks. Ø Incentive recipients can enjoy certain dividend rights and stock appreciation gains, but have no ownership or voting rights, cannot transfer or sell, and automatically become invalid upon leaving the company. Companies implementing virtual stock hire a compensation consultant annually to price the virtual stock based on certain standards aligned with their business goals, aiming to simulate the market so that the value of virtual stock reflects the company's actual performance. Ø Although the issuance of virtual stock does not affect the company's total capital or ownership structure, it results in cash expenditures, sometimes posing cash flow risks, so a special fund is generally established for virtual stock plans. Book Value Appreciation Rights Ø Specifically divided into purchase type and virtual type. Purchase type: At the beginning, incentive recipients purchase a certain number of shares at the net asset value per share, and at the end, they sell them back to the company at the ending net asset value per share. Virtual type: At the beginning, incentive recipients do not need to spend funds; the company grants them a certain number of nominal shares, and at the end, their income is calculated based on the increase in net asset value per share and the number of nominal shares. Ø The advantage of implementing book value appreciation rights is that the incentive effect is not affected by abnormal fluctuations in external capital markets, and incentive recipients do not need to pay cash. However, the disadvantage is that it requires the enterprise to have good financial conditions and sufficient cash flow. Performance Units Ø The company pre-sets one or more reasonable annual performance indicators (such as return on assets) and stipulates that over a longer period (performance period), if incentive recipients achieve the shareholders' predetermined annual goals through their efforts, then after the performance period ends, a certain percentage of the net profit for that year is used as an incentive fund for rewards. Ø This reward is often not directly given to incentive recipients but is converted into risk deposits. After a certain number of years, the risk deposits can be cashed out after assessing the behavior and performance of incentive recipients. If incentive recipients fail the annual assessment, engage in actions harmful to the company's interests, or leave abnormally, they will be punished by confiscation of the risk deposits. In this plan, managers' income depends on the value and quantity of the performance units they receive in advance. Stock Options Ø Stock options are a model for unlisted companies using stock option incentive theory. After performance assessment and qualification review, management personnel can obtain a right to purchase a certain number of company shares at the current assessed net asset value per share at a specific future time. If the net asset value per share has appreciated by then, the option holder gains potential profits; otherwise, they make up the difference with risk deposits. After incentive recipients purchase company shares, if they leave normally, the company repurchases them at the then-assessed price. If they leave abnormally, the company repurchases the shares at the lower of the purchase price and the current assessed price. Ø The above tools for unlisted company equity incentives each have pros and cons and applicable conditions. Companies need to flexibly choose suitable equity incentive tools or combinations based on incentive purposes, industry characteristics, and objective conditions. 16. One-Four-Six Principle: Choose Only One Combination There are many equity incentive tools. Different enterprises can choose suitable incentive tools or combinations based on industry characteristics and objective conditions. For unlisted companies, equity incentives mainly include stock gift plans, stock purchase plans, phantom stock plans, virtual shares, etc., with returns derived from company profits. The company needs to flexibly choose suitable equity incentive tools or combinations based on incentive purposes, industry characteristics, and objective conditions. Therefore, the first step in designing and implementing equity incentive plans for unlisted companies is to choose a suitable combination of equity incentive tools, which can be one or several, depending on the situation. 17. One-Four-Six Principle: Four Basic Principles Ø Principle of enterprise choosing shareholders: The enterprise should be able to choose its shareholders, not passively be chosen by shareholders as in the securities market; shareholders are the 'masters' of the enterprise, and only those who meet the 'master' standard have the qualification to become 'masters.' Ø Principle of employee differentiation: Distinguish 'unique employees' from 'dependent employees,' and 'knowledge-based employees' from 'general employees.' Focus incentives on 'unique employees' and 'knowledge-based employees.' Ø Principle of dynamic equity allocation: Not only should distribution according to work be dynamic, but distribution according to capital should also be dynamic. Adjustments in company strategy and tactical goals will affect the organizational structure, job value weights, and professional compensation. Equity allocation also has different emphases at different stages of the enterprise. Ø Principle of tilted equity allocation: Equity allocation should tilt toward the core and middle layers. Use equity power to form the company's core and backbone strength while maintaining effective control. 18. One-Four-Six Principle: Six Elements Implementing equity incentives requires solving two basic problems: first, how to grant equity; second, after granting equity, how to build an ownership culture. On the issue of how to grant equity, the focus is on determining the following six incentive elements: Ø 1. Who: i.e., to whom equity is granted. First, distinguish historical contributors from future creators. For historical contributors, granting equity recognizes their historical contributions, helping founding members be willing to support and nurture new talent. For future creators, granting equity aims to mobilize their enthusiasm and potential to create greater value for the company. Second, from international practice, equity incentive targets generally fall into three categories: managers, core technical personnel and those with outstanding contributions, and general employees. When determining incentive targets, factors such as position, performance, and ability can be considered comprehensively. Ø 2. How much: i.e., the quantity of equity granted. The total amount of shares granted must be controlled. The total shares granted should vary by industry, scale, and development stage. Additionally, the total shares should be divided into current incentive shares and reserved shares, and it is best not to use up all available shares at once. Ø 3. Pricing: i.e., the grant price and exit price of equity. For unlisted companies, the exercise price of equity incentives is usually based on net asset value per share, with discounts or premiums. Share repurchase or transfer needs to set different price guidelines based on various situations such as voluntary resignation, layoff, death on duty, or death from illness. Ø 4. Timing: i.e., determine the grant date, validity period, waiting period, exercise date, and lock-up period. Usually, the interval between the grant date and the first exercise date should not be less than one year, and exercise should be phased. Ø 5. Source of shares: i.e., the source of shares for equity incentives. For unlisted companies, shares for the first equity incentive usually come from major shareholder transfer or gift, or capital increase. Existing shareholders need to carefully determine the proportion of shares to transfer, as this will affect the future governance structure and control relationships. Ø 6. Source of funds: i.e., the source of funds for incentive recipients to purchase shares. Mainly direct payment by incentive recipients, deduction from wages/bonuses/dividends, and enterprise subsidies. Determining the source of funds requires comprehensive assessment of company cash flow, incentive recipients' income, and other factors. 19. A Perspective on Equity Mechanisms Equity incentives are a systematic and complex project that requires thorough research and design, as well as sufficient investigation and communication with the current state of the enterprise and incentive recipients, to be targeted. If equity is simply given without considering the design before granting and communication after granting, equity incentives will hardly achieve the intended purpose. As long as the enterprise strictly follows the 'One-Four-Six' equity incentive design method—choosing one set of equity incentive tool combinations, adhering to four basic incentive principles, and determining six equity incentive elements—it will certainly be able to design a systematic and applicable equity incentive plan. 20. Case Introduction of Equity Mechanisms Huawei has now become a banner for China's private enterprises, and its position in the communications equipment industry has made those multinational companies that once looked down on it tremble. In fact, Huawei has only been around for about twenty years. At its inception, like other similar companies at the time, it was merely an agent for Hong Kong telephone switches. However, unlike many agency companies, it was not satisfied with agency margins; instead, it invested the money earned into developing the C&C08 switch, which established Huawei's industry position. In the end, it succeeded, but its path to success was full of hardships and enormous risks. A private enterprise with no background, relying only on its early accumulation to bear huge development investment, and also paying high salaries to attract and retain development talent, seemed almost impossible to many, but Huawei succeeded. Huawei's success was not accidental; it was the result of many factors combined. The employee stock ownership plan implemented in the early days is widely recognized as one of Huawei's success factors. 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