We use the terms, equity and shares without a second thought. Their meanings are understood. There’s no need to reach for a dictionary. Or is there? If you are a founder of a startup, one with multiple employees, I suggest you give these two words a closer look.
First, a short, true, startup parable. I recently worked with a founder whose innovative product had been in development for quite some time. His team, working for next-to-nothing, had done so with the expectation of receiving promised, but still undefined, equity incentives. Despite numerous overtures, the founder made only token grants, totaling less than 1% of company shares in aggregate. Team members were promised that they “would be well treated,” but no further details were forthcoming. The situation festered . . . until the team mutinied, just before the initial test market was set to begin. Company credibility and years of work went down the drain.
For want of some shares, a company was lost.
While a full team mutiny is unusual, I have seen many startups lose key members for similar reasons, often at equally critical moments. Each situation was unique, but a common, founder-behavior-pattern was observed. Company shares were hoarded, with equity incentive grants postponed until a certain milestone was to be reached. “We’ll formalize everything when the fundraising round closes; trust me.”
A question of trust, or a question of math? Good programmers, salespeople, marketers and administrators have employment choices. They can readily calculate the opportunity cost of working for NewCo (lost salary, benefits . . .). If left without a means to estimate their exit-event proceeds, how can team members determine if their sacrifices are justified? In the face of such uncertainty, the best employees will leave. Founders fixated on company control may deem such exits to be disloyal or insulting but, more often, they are a predictable outcome of keeping employees in the dark.
So, lighten up. Founders, consult your dictionaries. Consider these definitions of the words, equity and share, meanings long since eclipsed by common Wall Street usage:
Equity: The quality of being fair and impartial
Share: To give a portion of (something) to another or others.
When a company succeeds, everyone should win. Be equitable. Share.
Mr. Dragone has spent the past twenty years as an acting/consulting CFO for a number of start-ups in a wide range of industries. Peter’s prior experience is that of a serial entrepreneur, managing various start-up and turnaround projects. He was a co-founder of Keurig.