Equity – Do I Need to Share?

Quote; “10 % of a watermelon is better than 100 % of a grape.”

 

I am not sure of the origin of this quote, but I have used it for years in discussing sharing equity.  The concept is simple, if you expand ownership, you in turn, will be able to expand your business.  Many years ago I saw this when a deli I worked for  expanded from one to two owners, which in turn, allowed for expanded hours each day and stayed open on weekends.                 This seemed to work.

piece-of-the-pie

The use of equity in my experience was a West Coast phenomenon that dated back to the 70’s.  Paying lower salaries for very qualified workers (nobody had cash) had to be supplemented by other economic rewards, and what better alternative than to offer a piece of the pie.  Stock options, restricted stock, phantom stock, etc. were all designed to broaden the ownership and get everyone working on the same page.  With more owners being rewarded based upon how the overall business performed, the potential for a larger pie was a very effective vision that was shared by all.

 

So, should you share equity?  Do you have to?  A lot of that depends on the nature of your business, the owners’ longer term goals, and perhaps most important, your culture.  How the equity holder will achieve liquidity is another major factor.  Consider the following scenarios:

 

1.  We deal with a number of accelerators in the NY metropolitan market.  Equity sharing, in the startup technology world, is a given and your ability to grow a tech business and attract people without equity awards is slim to none.  Liquidity is based on success (BTW, many don’t make it) and is easily envisioned with the IPO’s (Facebook) and strategic deals (Instagram) that we have all seen.

 

2.  Mature manufacturing, or service businesses, that I have served – especially family owned- face a different issue.  Many of those entrepreneurs have never envisioned sharing ownership with “outsiders”; it is assumed that other family members will take over. The thought of granting equity, and then buying out those holders when they retire, is a bit foreign to most. With the potential for liquidity being remote, equity is probably not a viable option.  In this case, we often use an “equity like” instrument.

 

The one major factor often overlooked in considering sharing equity of any type is your “culture.”  With the tech startups, this is part of the industry and most companies in this space embrace a sharing and open culture, which is almost to a fault, at times.  However, if you like privacy, don’t care to share or don’t encourage “ownership” in your team, equity sharing is not in synch with your DNA.  Trust me, potential economic rewards won’t trump culture and equity sharing will not help you achieve your goals – – in fact, your incentives may become disincentives.

 

So before embarking on a true equity sharing plan, check your culture and perhaps consider an “equity like” plan.  Failure to do so may result in taking a step backwards instead of furthering your goals.

Ownership Writes – The Purpose

“I am thankful for all of those who said NO to me. It is because of them I’m doing it myself.” – Albert Einstein

I have had a passion for entrepreneurs since I was young.  My first exposure to entrepreneurship was as a teenager working for a neighbor (Teddy) who, believe it or not, actually recycled cardboard in the 1960s.  The concept was simple.  Large stores and factories had to pay to have garbage removed including cardboard packaging.  Teddy took away the cardboard for a cost below what the garbage haulers were charging and took it to certain paper mills.  Virgin paperboard was at a premium so certain mills took used cardboard and used it to make non virgin paperboard.  Teddy also got paid for the cardboard he collected.  Ingenious and, trust me, Teddy was not attending MENSA meetings.  Everybody else I knew in the neighborhood had a job; Teddy had a business and that is where it started.

As time went on, I got to know more business owners.  I worked in delicatessens, as a painter, in factories and on Wall Street and always enjoyed understanding how businesses started and how owners were handling the issues they faced.  I remember talking to Teddy as we drove from stop to stop and finding out about all the things that were on his mind – – including asking me to talk to his son about joining the business.  (I think that was my first succession planning assignment – and it was a success).

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So, for 35+ years, I have been consulting with owners of companies at every stage of growth – – from startup to high growth to mature.  I realized early on at times owners just needed someone to talk to about what was on their minds.  (I will cover overcoming the loneliness of an entrepreneur in the future.)  I learned something from every one of them and started to organize my observations and use them in my practice while maintaining confidentiality.  People techniques, funding advice and most important of all, studying how owners dealt with their own unique world.  Very often isolated and misunderstood, I had the privilege of consulting, comforting and guiding them throughout my career.  It allowed me to develop tools, processes, tidbits, etc. to help them along the journey. There were a lot of successes and some failures; more than a few life lessons and some “Dutch uncle” advice but my goal was always the same; to help the entrepreneur to succeed.

My instinct was to collaborate with others to convey some of what I had learned, but I could not seem to get any takers.  So, true to Mr. Einstein, I decided to strike out on my own to share my thoughts; thus the idea of this blog was born.  I call it “Ownership Writes” – a name developed by my sister who is the pun master extraordinaire.  The name uniquely captures the purpose of this blog as only she could do.

I hope that over time I will be able to share some ideas, stories, lists or other insights that might help just one entrepreneur to move forward in some way.  As the Chinese proverb goes, “A journey of a thousand miles begins with one small step.”  My hope is for many successful journeys.