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.
Entrepreneur Mentor and Startup Quarterback | Startups + Small Businesses + Home Businesses.
Specialties – Strategic Planning | Web Design | Digital Marketing|
Hans van Putten owner of 40parkLane,llc ran operations of his food manufacturing company for 17+ years building the Carolyn’s Handmade brand under the umbrella of 40ParkLane,llc.
After the successful sale of the food business, he took advantage of the years of strategic planning, operations management, web design, digital marketing and photography experience , to help startups, small businesses and home businesses and has been involved in a number of start-up ventures since.
Prior to founding 40parkLane,llc Hans worked for the Gillette Company for 10 years in various financial roles of increasingly bigger responsibility, leaving as Director of Business Planning for The International Group at Gillette HQ, Boston. Hans has an MBA (Marketing & International Business) from Aston University, and a BA in Business Administration from IHBO de Maere.