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.
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.