If you’ve followed our DSO blog series thus far, I’m sure you’re excited for this installment. This is always a big topic for clients who are forming DSOs. Here’s the premise – Today’s economic climate is such that dentist with growing practices are hard pressed to find talented dentists (aka associate dentists) to expand their practice. If you do find a talented dentist to employ, equity is often a part of the conversation. Instead of equity at the clinic level, here, we are talking about earning equity at the DSO level.
First and foremost, research is required into the regulatory requirements of the state in which the DSO exists. As we’ve mentioned before in other posts, the regulatory environment is dynamic right now, and legal research into the state in question is important to ensure we don’t run afoul of state regulation and/or case law on this topic.
Once that is clear, the steps to incentivize with equity at the DSO level involve:
- Ensure that the DSO’s Operating Agreement (if you are a LLC) or Shareholders’ Agreement (if you are a corporation are built with provisions governing equity issuance. Often, we will need to amend those agreements to build in the right provisions.
- Evaluate whether or not the incentives require an umbrella Incentive Plan that governs the administration of the equity incentives, and if so, we will draft one for you.
- Create the Employment Agreement (typically at the clinic level) for the individuals that will receive the equity incentives.
- Build the Award Agreement (often with milestone vesting) granting the equity incentives.
We’ve touched on a number of these concepts in other blogs (equity incentives in general, employment agreements, profits interests, and award agreements, etc.), so today, we will spend a little time on Restricted Stock Units (RSUs).
RSUs are an earned equity model, allowing associate dentists to earn equity upon certain milestones and vesting cliffs. Those milestones and vesting cliffs are tailored to the specific practice or DSO usually through work with a DSO consultant who can build the financial model for growth and incentives. That financial model forms the basis for showing the associate dentists how their equity will increase in value and potentially provide distributions over time.
These tools together allow growing dental practices to recruit and retain talented individuals to fuel their growing practice.
If you’re considering a DSO and want more information or legal counsel, please contact us! We’re prepared to meet your timeline.
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