When I’ve spoken with RIA founder/owners at various industry events over the years, our discussions have inevitably turned to equity sharing. And often I hear the same thing: "Why should I do that? I built this business from the ground up. I worked nights, weekends and holidays—whatever it took to make it a success. I don’t think my employees appreciate all that went into building the firm."

On many levels, it's only natural many CEOs may feel this way. At the same time, there are some misperceptions about equity that are worth sorting out. Consider the following:

Equity sharing doesn't mean giving it away for free. Entrepreneurialism is all about taking risks. If your idea or venture fails, you pick yourself up and get working on another one. If it succeeds, you get to bask in the rewards. This, in many ways, is the defining ethos of our industry, which is why so many founders/owners balk at sharing equity, equating it with a handout, even when it could help them attract top talent.

Yet there are many ways to share equity with G2 advisors that don't involve giving it away. Among the most common are providing stakes in lieu of a cash bonus or creating a structured program whereby they can buy into the firm according to a predetermined formula.

Pride of ownership creates more enterprise value. Sometimes when you buy a new car, you'll take extra notice of others on the road who drive the same one. In some cases, they may give you an appreciative nod or even a wave, almost as if they want to revel in the experience of ownership with you.

On a much grander scale, the same thing happens within an RIA firm. When team members become equity owners, a much stronger sense of pride, validation and shared responsibility begins to emerge.

Naturally, the structure of certain compensation programs could be a huge component of that. When the firm does better, so do the employees, which means they have added motivation to perform at a high level. Another factor is human nature. Most people want to be a part of something larger than themselves and to rally around a common cause.

Considering both the financial and intrinsic rewards associated with equity, it makes sense that the most efficient and professionally run firms are the ones that offer it. Accordingly, firms that share equity also tend to have higher margins and loftier valuations—all of which benefit majority-holding founder/owners.

Sharing equity doesn't prevent a sale to an outside buyer. One of the industry's dirty little secrets is that many founders/owners don't want to set up an internal succession plan because they can get more money by selling to an outside buyer. What founders need to realize is that providing equity to employees doesn't prevent them from selling externally down the road.

In many cases, next-generation advisors may prefer that someone else will manage the firm, as long as the successors exchange their current equity for new shares as part of the transaction with the original owner. That's because such next-generation advisors might not necessarily have the same entrepreneurial instincts as their bosses.

External sales, therefore, can benefit everyone: By offering equity, founders are able to attract the best talent and still get top dollar for their firms, while G2 advisors can continue to play to their strengths while still enjoying the opportunity to participate in the successor firm’s long-term growth.

Nearly 30 years ago, the Red Hot Chili Peppers sang, “Give it away, give it away, give it away now.” When confronted with the prospect of sharing equity, that is what many founders think about, so they dismiss the idea—the industry’s succession planning conundrum be damned.

They’ve put in all the work. They’ve assumed all the risk. Why should others get to participate in their success?

Yet, what founders need to realize is that equity sharing isn’t about giving it away. Just as often, it’s about what they can gain: a compensation structure that rewards outstanding performance, attracts top talent, creates efficiencies, boosts value and helps to ensure they will enjoy the rewards associated with all the sweat equity they’ve put in over the years.    

Carolyn Armitage is a managing director with ECHELON Partners, a Los Angeles, Calif.-based firm that provides investment banking, valuation, and consulting services to registered representatives, IBDs, hybrids and RIAs nationwide.