Equity Sharing; Spread the Wealth and Spoil the Child?

Dark Helmet: “. . .  See there’s two sides to every Schwartz.” – Dialogue from Space Balls – a Mel Brooks film

As is the norm in my dealings with startups and emerging growth companies, the recent past has been filled with dozens of discussions about the concept of sharing equity.  This subject never seems to get old and it is increasingly apparent to me that there are really two different philosophies on this topic.  It never was that apparent to me until this past week when I had a discussion with one client on one night and another discussion the next morning with a prospect.  They were 180 degrees different and I realized it might make sense to shed some light on both points of view.

The first philosophy is what I call the “chicken in every pot” approach.  In this scenario, the key owner (or owners”) vision is that the company will reach unbelievable heights and as a result, the value will soar and every employee from administrative staff to key executives will become millionaires. The streets are paved with gold and all go off into the sunset carrying an enormous satchel full of money.  What a great vision and how emotionally rewarding it would be to enrich so many lives.

The second is what I call the “1% solution.”  Following this path, there is a more meaningful share of equity with the key people who drive the company.  In this scenario, challenging goals are set for exceptional leaders, they outperform the expectations and the economic rewards follow their success.  This is pay for performance at its best.  But, is one technique better than the other?  As with most things in life, I believe it depends.

I think the driving force behind a choice of approach is matching it with the culture of the company.  If one has a very inclusive, collaborative working environment where all believe that each person’s contribution is important, then the chicken in every pot approach fits.  While it can be successful, I see two potential downsides; one is that because there are so many participants and the pot is only so big, rewards for the key players may not be as significant and rewards for lesser players may not be perceived as meaningful. A second concern I have is since everybody gets some ownership (like a Holiday bonus) it is not seen as a motivational tool to drive behavior but just part of the standard compensation package.  Again, in a share and share alike environment, this may be a good fit.

On the other hand, if you have an organization where a small group of people are clearly seen as the leaders and drivers of the business, the 1% solution may be the answer.  The fear in this scenario is stirring up either the old “a few people are getting fat off our backs” syndrome or the even more concerning “us vs. them” attitude which can arise because of the disparity in rewards.  Rewarding the key players who get you to the goal line works in this case.

So, as Dark Helmet says, there are two sides to every Schwartz… Just make sure your equity sharing plan takes into account the DNA of your organization. That is the right answer.

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