Charlotte Lacroix, DVM, JD
Veterinary Business Advisors, Inc.
The current climate of the veterinary industry consists of a high demand for veterinarians with a disproportionate number of veterinarians in the job market. Both private practices and corporations are competing to attract and maintain veterinarians at their practices. To onboard a veterinarian, employers first need to grab the attention of potential candidates with a reason to choose them over competitors, which is usually in the form of a short-term incentive. A short-term incentive is a perk or benefit that a candidate will receive immediately following the hiring process .
Once the employer is able to hire the veterinarian, their focus then switches to how to retain the vet. The average time for an associate to be integrated into the culture of the practice and staff to be connected and bonded to the vet is about a year and a half, or 18 months. Employers must maintain a veterinarian for at least 18 months to make their return on investment, so they offer long term incentives to help ensure their investment does not leave. Long-term incentives are agreed upon in the beginning of employment, but are not made available or paid out to the vet until a specified date in the future1. With such a high demand for veterinarians and a wide variety of employers to choose from, corporations are turning to new incentives to hire and maintain vets in the form of equity.
Historical Incentives
Historically, incentives offered included cash bonuses, benefit packages, scheduling priority, and mentorship. Cash bonuses could be adjusted to be a short term or long-term incentive option1. For example, signing bonuses and relocation bonuses are used to motivate people in the short term, while annual bonuses and performance bonuses are used for long term retention. Benefit packages are tools for long term retention as well, as most benefits are paid out over a period of time, not just upfront costs1. Another long-term incentive is scheduling priorities for more senior associates to have flexibility in when and how often they work. Lastly, mentorship is an enticing short-term incentive for new graduates and is a good way for practices to distinguish themselves from competitors. All of these different incentive options still play an active role in the veterinary employment process, but corporations have begun a new incentive plan with offering equity stake in the company.
Ins and Outs of Equity Incentive Compensation
Corporations have turned to offering prospective employees and current employees ownership in the company through equity shares as both a short-term and long-term incentive. Equity is the value of the corporation’s assets (what they own) minus their liabilities (what they owe) . Equity shares held by individuals give them partial ownership of the company itself and the ability to share in profits. In the context of corporate vets that are not publicly traded, equity shares are not openly bought and sold and are only offered to employees or investors/owners . Employees can be granted equity shares in the company as part of their compensation package to incentivize them in both the short and long-term. Equity shares grab vets’ attention in the short term with the captivating statement of being a part owner. This initial attention grab acts as a short-term incentive to diversify the corporation from other competitors. The equity shares are realized by the employee over a longer period of time, allowing them to act as a long-term incentive to stay1.
Employee Stock Options
One way this is structured is in offering stock options to employees. A stock option gives the employee the right to purchase an amount of company equity at a pre-determined price for a limited period of time . The terms of the option can vary, with some having the employee put their own money down to purchase the shares, or others where the company may match the amount of money the employee puts down to provide the employee with a greater number of shares4.
There are two different types of stock options, incentive stock options and non-qualified stock options. Incentive stock options can be offered to higher level employees, like medical directors or higher executives . These options come with more preferential taxation as gains are taxed only as capital gains when the stock associated with the option is sold. However, the option needs to be held onto for a specified period of time prior to exercise to reap this benefit5. Non-qualified stock options can be offered to any level employee, but the shares are taxed as ordinary income at the time of option exercise and then taxed as capital gains on any earnings associated with the sale of the stock5.
Restricted Stock Units
Another way equity shares can be offered as incentive is in the form of restricted stock units. These equity shares are granted with none of the employee’s own money needed to be put down, however, the shares are not transferred to the employee until specific conditions are met . Often the shares are granted over time with a certain amount becoming available each year. This is a form of long-term incentive to keep the employee with the company as they will not receive the full benefit until later in their future with the company6.
Vesting Schedules
Both employee stock options and restricted stock units come with a vesting schedule. A vesting schedule refers to the terms and time frame in which an employee gains rights or ownership of an asset . The vesting schedule can either be a cliff vesting schedule or a graded vesting schedule. With a cliff vesting schedule, the shares all become available at one specified time7. In comparison, a graded vesting schedule makes a percentage of the shares available each year the employee is with the company over a set number of years7.
In the terms of stock options, the vesting schedule refers to the time period an employee must wait before the stock option can be purchased4. Often, they are graded vesting schedules with a percentage of the total shares able to be purchased each year during the span of the schedule. If the option is not exercised one year, the shares that became vested that year are still eligible for exercise anytime through the expiration date of the total shares option4. For restricted stock units, equity shares also become available on a graded vesting schedule. The employee will gain issue of a percent of the total awarded shares upon performance milestones outlined in agreement or over time that they are with the company6. Once the milestones or time points are met, the shares are issued and are classified as income taxed as ordinary income5. Both methods of equity incentives need to have the vesting schedules outlined in the equity agreement.
Potential Gains and Marketing Tactics
So how does this all benefit the veterinarians being offered these incentives and what is in it for the corporations? The way these incentive options will be presented to the prospective associate will consist of promoting the fact that the equity shares are ownership into the company. The stake you have in the company is no longer just cash from the place you work, but instead you can share in the company’s success. This buy in to the company gives the employee a sense of pride in their work and skin in the game attitude since they now own a portion of the company and can benefit from its profits. The employer will emphasize how there is potential for great gain and reward down the line if the veterinarian helps grow the company to be worth more in the future . The major incentive to employees with equity shares is the ability to be deemed as an owner and share in the profits of the company.
Benefits to Corporations
Corporations are switching over to equity incentives over traditional incentives, due to the benefits that they also reap. The current owners of veterinary corporations are private equity backed without a lot of free cash flow available, so traditional incentives like sign on and annual bonuses have no benefit and can be a hinderance to the company . Offering equity shares allows the corporation to offer incentives without encroaching on their cash on hand, as compensation is delayed4. Also, the mindset shift that associates have with equity shares benefits the corporation as employees often work harder to increase profits for the whole company, since they are now part owners.
Additionally, equity shares as a long-term incentive almost guarantee a level of employee retention. Employees have to stay with the company throughout the vesting schedule to get their full reward7. This ties employees to the corporation and increases the likelihood the company will make a return on their investment with an incentive that did not hurt their pocket.
Is the Reward Worth the Risk?
For any investment, a risk is taken with the hopes that the reward in the end outweighs the initial risk. To decide if entering into the equity agreement is beneficial, investigation into the risks that are taken to enter need to be considered. Corporation equity incentive agreements come with high risks that are not as transparent to employees as the rewards are.
Liquidity Issues
Liquidity refers to the ability of an asset, such as equity, to be converted to cash. The equity incentive options outlined above discuss how the employee will obtain access to the shares and how any earnings are taxed, but fails to mention how veterinarians actually get money into their pocket. This aspect can be where great reward is realized, but also where the biggest risk is taken. Corporate veterinary hospitals are private corporations with money backing from Private Equity9. The goal of these private equity companies, in investing in veterinary medicine, is to consolidate the industry and take the company public once the practices are more efficient and make a return9. Once the company is public, employees with equity shares, earned through purchase of stock options or awarded via restrictive stock units, can sell hopefully at a higher value than the shares were worth at purchase.
The issue that veterinarians currently face with equity incentive plans, is the timelines originally presented at enactment of when corporations were going to go public, keeps getting delayed. This means that veterinarians have equity shares that cannot be easily sold to make cash. In order for the equity shares to be of any cash value to the vet, the corporation would have to personally buy back the shares. In the current climate, corporations are facing liquidity issues where they have no cash to buy these equity shares back. This leaves the veterinarians with equity shares that are fully vested but worth nothing.
Another reality, is some equity incentive plans are tied to an event, like purchase from another private equity firm, happening before pay out is allowed . In these cases, employees have equity shares that are fully vested but they cannot receive payout until the event happens. The timeline of the event is completely dictated by the corporations and can be ever changing, making this a very risky situation. Also, equity buyouts may not be offered at all, and instead rollover stock into the new private equity firm is what vets are left with10. The corporation holds all the leverage in these arrangements and can change conditions that leave the veterinarian with illiquid equity.
Restrictive Covenants
The biggest caution in these equity incentive plans is looking at what restrictive covenants are tied to them. Along with the equity incentive plans, employees will enter into an equity award agreement that have their own restrictive covenants outside the ones outlined in the employee’s employment agreement10. Often these restrictions are for a longer duration of time, wider area of coverage, and encompass all locations that the corporation owns since the employee is now part owner. These restrictive covenants remain in effect for as long as the veterinarian owns the equity in the company, which as outlined above, can be for an indefinite amount of time. This puts veterinarians in positions where the anticipated monetary gain from the equity shares cannot be realized and leaves them bound to restrictive covenants that do not allow them to practice medicine easily. Veterinarians become tethered to the company by entering into an equity incentive agreement that was marketed to them as being a benefit, but in reality, is a method of control.
Many respected veterinarians are actively facing this reality. They are realizing that the upfront pitch of the equity shares and the grand plan corporations initially had is not coming to fruition and they are stuck in a very difficult place. They want to sell their shares but have no buyer for them and holding onto the shares binds them to non-competes that could prevent them from working many jobs. These circumstances emphasize the importance of proper representation when entering into agreements and to not take benefits at face value.
Conclusion
In conclusion, equity incentives are growing increasingly common in corporate offers and contracts. While the surface level appearance of these incentives is enticing, a closer look and understanding of all that goes along with them is required. The way the employer poses the offer is not always how the incentive actually plays out and employees need to weigh the risk/reward benefit of entering into these agreements. Employees must do their due diligence in analyzing these incentive offers to ensure they are aware of the terms they are agreeing to, with special attention to restrictive covenants being essential. Overall, equity shares as incentive compensation come with a lot of risk to veterinarians with often little to no reward in the near future.
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6. Fernando, J. (2024 November 15). Restricted Stock Unit (RSU): How it works and pros and cons. https://www.investopedia.com/terms/r/restricted-stock-unit.asp
7. Kvilhaug, S. (2025 May 08). Vesting: What it is and how it works. https://www.investopedia.com/terms/v/vesting.asp
8. Kenton, W. (2024 April 02). Equity compensation: Definition, how it works, types of equity. https://www.investopedia.com/terms/e/equity-compensation.asp
9. Allen, C.J. (2024, April 19). Consolidation concerns: What you need to know. DVM 360. https://www.dvm360.com/view/consolidation-concerns-what-you-need-to-know
10. Christensen, T. (2024, July 18). What you need to know about equity award agreements: Schaefer Halleen, LLC. https://www.schaeferhalleen.com/what-you-need-know-about-equity-award-agreements/
