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Art by Tamara Rees

Imagine being an associate veterinarian offered an investment opportunity in the practice by your employer. If the value of the business goes up, so does the value of your shares. Maybe you're offered a portion of profits in the form of periodic cash dividends. You'd essentially be like a business partner, a status that could secure your financial future.

As enticing as the pitch may sound, some lawyers and others with experience in the field urge caution before accepting.

The type of asset in question is a minority ownership stake, in the veterinary practice itself or in an entire chain of practices. Such stakes are being offered with increasing frequency to veterinarians, typically by large corporate consolidators that are struggling to hold on to talent.

"A good way to retain staff is by giving them equity as part of the deal because it links their financial security to the business's future performance," said Dr. Charlotte Lacroix, a veterinarian and lawyer in New Jersey. She is not a fan of the arrangements, warning bluntly, "They could be getting the equivalent of swampland in Florida."

Among the chief downsides to noncontrolling equity is that the asset likely is "illiquid," meaning it's not easily converted to cash. Its monetary value isn't necessarily transparent, and the veterinarian may have little control over the drivers of its value. And almost always, the asset comes with a strict noncompete clause, preventing the veterinarian from working anywhere near the practice for years, should they wish to move on.

A number of veterinarians and lawyers contacted by the VIN News Service worry that many practitioners are unaware of those and other potential pitfalls, which, they've observed, can be devastating, especially if particularly onerous conditions are woven into the fine print.

Offers of minority equity stakes are "absolutely flourishing," reports Dr. Lance Roasa, a veterinarian and attorney based in Nebraska. He's had to hire another associate to help advise on the dozens of such contracts his law practice has seen in the past 12 months alone. "They're being driven by consolidators, which, essentially, are marketing companies that happen to sell veterinary services," Roasa said. "And they're being marketed hard to veterinarians with one goal in mind, and that is to lock the veterinarian in. Period."

Will you ever see the money?

A minority equity stake is an ownership share of less than 50%. In a veterinary context, they also may be offered by a prospective buyer as an alternative to cash to a veterinarian selling their practice or to a veterinarian interested in sharing ownership of a practice in a joint venture. Equity offered to rank-and-file employees may come in any of several forms, such as a sign-on bonus, relocation bonus or performance bonus. Shares may come with a "vesting" schedule, meaning the veterinarian gains ownership of the shares only after working at the practice for a specified time period. The shares could be granted all at once or gradually over several years.

Lacroix's concerns about potential drawbacks of minority equity stakes are so strong that she gave a presentation on the topic at VMX, one of the world's largest veterinary conferences, held in Florida in January. She explained to VIN News that even once an associate's shares have vested, they might never have an opportunity to sell them. That's because most owners of practice chains are private companies that, unlike publicly listed companies, don't issue shares that can easily be bought and sold on stock markets. In other words, the shares are highly illiquid.

Shareholdings in practice chains can be cashed in during so-called recapitalization events, which may involve the company being acquired by another company or joining a public stock market through an initial public offering of its shares. Whether a recapitalization event occurs during a veterinarian's time at a company is beyond the veterinarian's control. And if they leave the company, they may lose the shares.

By happenstance, the trend toward offering veterinarians more equity has been accompanied by another trend: Soaring overhead costs and cooling demand for veterinary care are weighing on practice profits. Moreover, some consolidators are servicing heavy debt loads assumed when they paid astronomical sums for practices during the Covid-19 pandemic and associated pet boom, notes Dr. Darby Affeldt, a veterinarian and financial planner in Colorado.

"Literally, I just had a call with a client who sold their practice in 2022, kept a 25% ownership stake and continued working at the practice," Affeldt said recently. "Now, the practice revenues have gone down, and the cost of goods and labor has gone up significantly, so her shares are worth less than when she sold. And she's really burned out because even though she only owns 25% of the practice, the corporate isn't there with boots on the ground every day. The staff treat her like she's the sole owner. She's held accountable for all the decisions, but ultimately, she doesn't have control."

One potential benefit of owning minority equity is that the shares could generate dividends, otherwise known as distributions, which are paid out as frequently as once every quarter. Dividends are not a given. Company boards decide whether and how much of profits should be paid as dividends. Some may choose to invest all profits back into the business, including to acquire more veterinary practices.

Many equity contracts come with so-called repurchase rights, notes Anthony A. Mahan, an attorney focused on veterinary law. These allow the consolidator to buy back shares at nominal or predetermined prices before a liquidity event such as a sale to another consolidator.

"Many recent graduates and associates misunderstand these nuances, often viewing the offer as 'free equity' or partnership-like status without grasping the risks: forfeiture upon termination, lack of liquidity, strict noncompetes that can limit future opportunities, and potential tax hits at vesting or exercise," he said.

It's not that there are zero benefits for veterinarians, Mahan added. "For some, even minor equity can provide a sense of ownership, potential distributions, and alignment with practice success," he said. "In cases with strong growth or a future sale, it could yield meaningful returns. However, these upsides are often outweighed by the illiquidity and risks for most associates, particularly without a clear exit path."

Of particular concern, Lacroix and Roasa both said they know of instances in which veterinarians have had their employment terminated just before their shares were due to vest. VIN News also is aware of an associate to whom this happened. The person was unable to speak about it because their contract included a strict nondisclosure agreement.

In defense of equity stakes

In the cases cited by the lawyers, was the timing of the terminations intended to circumvent the equity payout? Neither attorney could say for certain.

Mike Payne, a lawyer in Texas who works with both consolidators and veterinarians, said that treating veterinarians with such apparent disregard makes little sense for consolidators — at least, not the well-managed ones.

Good veterinarians typically are in high demand, so their jobs should be secure, giving them agency over how long they wish to stay, Payne maintained. "I have never heard of a consolidator terminating a DVM — and certainly not a well-performing one — just to claw back their equity grant," he said.

For consolidators, allowing employees who have left the business to hold equity wouldn't be feasible, Payne said. "Otherwise, they could wake up in 10 years to find that they had given away half their ownership in a clinic to folks that no longer work at that clinic."

Payne generally has a positive take on minority equity stakes. "In my opinion, they are a mutually beneficial tool to help align the associate DVM and the practice owner, be it another DVM or a corporate entity," he said.

While acknowledging shares are illiquid, he said they can pay significant dividends: "The good news is that the grants often come with fully vested quarterly profit distributions from the date of the grant for the duration of employment."

He agreed that noncompetes are a downside of such agreements but said they're needed for the employer's protection. "An owner can't have a partner that has access to confidential information and then goes on to compete shortly after the breakup," he said.

The question is how extensive a noncompete needs to be. Roasa said he has seen noncompete clauses attached to equity ownership contracts that prevent a veterinarian from working within an entire state for up to five years or, even worse, within 50 miles of every practice the consolidator owns in the U.S. "You don't even know where all the practices are because you're signing a document today [and] don't know how many practices they're going to own, and where, in the future," he said.

Payne recommends that associates negotiate a narrowing of the restricted geography and shortening of its duration "to something that is generally manageable for them but still protects the ownership group."

Joint venture drawbacks

Lacroix and Roasa both expressed particular concern for veterinarians who, rather than establishing a practice on their own, form joint ventures with consolidators hoping to share the financial and administrative burden of practice ownership. Such arrangements often involve the veterinarian borrowing money from the consolidator to contribute their share of the ownership cost.

Joint venture arrangements, Roasa has observed, are sometimes pitched by consolidators out of the blue to associates whose names they found on practice websites or on LinkedIn.

"They make a lot of grandiose claims about veterinarians being a practice owner and 'You're going to be in control of your own destiny,' and they put them in a 15% or 20% or, at most, 25% junior position," he said. "Then they'll put these documents with hundreds of pages in front of them that are horrendous, for lack of a better way to say it. The veterinarian has no control whatsoever. At times, the veterinarian gives power of attorney to the majority owner to execute documents on their behalf. It's nuts."

Roasa has seen interest rates up to 7% on loans from consolidators to associates-turned-joint-venture-partners, plus a management fee charge of 4% to 7% of practice revenue. "And when you consider the majority owner is getting the majority of the profits on top of that, any distributions the veterinarian gets can be pretty small," he said. "They might not be making any money, especially in a startup practice."

As for veterinarians who receive equity as part of the payment when selling a practice, most sources contacted by VIN News agreed that they're in a better position because they get a hefty cash component, too — particularly if they sell when the market's hot. But that doesn't mean they won't encounter problems.

'Be very, very careful'

When Dr. Beth Fritzler and her husband, also a veterinarian, sold a practice in 2018 to a large consolidator, they took 80% of the sale price as cash and 20% as equity in the consolidator. Fritzler agreed to work at the practice for one year post-sale, and her husband agreed to stay on for three years. (She declined to name the consolidator to avoid breaching a non-disparagement clause.)

Two years later, the consolidator recapitalized with a new investor, and Fritzler cashed in her shares for a profit — but not without a lot of stress in the interim. "We went into it not really understanding what we were doing," she said. "I think it was much riskier than we thought at the time. And even though it came out OK for us, I would tell somebody now to be very, very careful."

One problem, Fritzler explained, was that she thought she owned shares in the consolidator but instead had something called "subscription units." A dollar value was put on each unit at the time of sale, and after that, Fritzler was left in the dark about the units' ongoing value or how well the business was performing.

"I had thought we would get statements from them every year or every quarter or something. Nope. And when I asked how the company was doing, they told us, 'Well, it's privately held and we don't have to divulge that.'

Moreover, Fritzler and her husband couldn't sell the shares whenever they wanted. "The only way we could sell them was when they recapitalized. We were very lucky, because they recapitalized when things were going well, and we got a good return on the shares. I don't think the company has done as well since."

Another source of frustration for Fritzler was witnessing how the practice was managed after the sale. She and her husband had done their homework on the buyer and even knew some of its senior managers. But shortly after selling, the company restructured its management, and a lot of new folks suddenly were in charge. "They got much more financially driven people in there and really changed a lot of how they were doing things," she said.

The number of veterinarians working at the practice is now less than half what it was before the change.

Doing your homework and holding your ground

Affeldt, the veterinarian and financial planner, said her veterinarian clients commonly suffer what's known as familiarity bias. "They make these cognitive mistakes by thinking, 'I'm familiar with this particular entity' or 'I still work here. It's my practice and it's always going to be fine,' " she said. "But that assumption can get us into trouble."

She generally encourages her clients to take as little equity as possible. "I think it's dangerous to leave a lot of your eggs in one basket," she said. "And that just goes back to a basic investing concept, which is diversification."

Affeldt said veterinarians may benefit from holding equity stakes, provided they do their homework to confirm that the consolidator is reputable and provided the value of the company remains stable or improves.

Roasa recommends veterinarians who are considering minority equity request that something called a "put option" be included in the contract. Put options give someone who's received equity the latitude to cash it in at a predetermined time — even at a predetermined price. "So what you're saying is that at, let's say, the five-year mark, if you exercise the option, the company will be forced to buy your shares," Roasa said.

He said equity stakes are more likely to work for veterinarians who fully understand what they're signing up for and have negotiated favorable (or at least reasonable) terms. They also should think carefully about their phase in life and the level of risk they're comfortable taking.

"Joint ventures, for instance, could work if the associate is where they want to live; they have family set down," he said. "When I'm working with someone who's selling their practice, and they say, 'Hey, the buyer wants me to take 35% equity,' I say, 'How do you feel about going to Vegas and putting $2 million on red? If that makes you feel good, if that's your risk tolerance, then go for it.' "

A refusal by the company offering equity to negotiate or heavy pushback during negotiations are red flags, Roasa added. "If they can't work through these things going into the deal, they're going to be horrible partners during the deal."

Lacroix agrees some equity arrangements are more palatable than others. "But what I'm advising associates is, take the cash bonus instead, because that's secure money."

And she reminds veterinarians that, in a tight labor market, they have negotiating power and should not be afraid to use it. "They can be such chickens," she said. "They just fold their cards so easily because they don't want to upset anyone or they think what they're asking for is unusual. But associates should never be afraid to negotiate anything. Ever."