KITSAP/BUSINESS—Startups don’t need to pay high salaries because they can offer something better: part ownership of the company itself, Equity is the one form of compensation that can effectively oriented people toward creating value for the future.
However, for Equity to create commitment rather than conflict, you must allocate it carefully. Giving everyone equal shares is usually a mistake: every individual has unique talents and responsibilities and additional opportunity costs so that equal amounts will seem arbitrary and unfair from the start. On the other hand, granting different amounts upfront is just as sure to seem unfair. Resentment at this stage can kill a company, but there’s no ownership formula to avoid it ideally.
This problem becomes even more acute over time as more people join the company. Early employees usually get the most Equity because they take more risk, but some later employees might be even more crucial to a venture’s success. A secretary who joined eBay in 1996 might have made 200 times more than her industry-veteran boss who joined in 1999.
The graffiti artist who painted Facebook’s office walls in 2005 got stock that turned out to be worth $200 million, while a talented engineer who joined in 2010 might have made only $2 million. Since it’s impossible to achieve perfect fairness when distributing ownership, founders would do well to keep the details secret. Sending out a comprehensive company email that lists everyone’s ownership stake would b like dropping a nuclear bomb on your office.
Most people don’t want Equity at all. PayPal once hired a consultant who promised to help us negotiate creative business development deals. The only thing he ever successfully negotiated was a $5,000 daily cash salary; he fused to accept stock options as payment. Stories of startup chefs becoming millionaires notwithstanding, people often find Equity unattractive. It’s not liquid like cash. It’s tied to one specific company. And if that company doesn’t succeed, it’s worthless.
Equity is a powerful tool precisely because of these limitations. Anyone who prefers owning a part of your company to being paid in cash reveals a preference for the long term and a commitment to increasing your company’s value in the future. Equity can’t create perfect incentives, but it’s the best way for a founder to keep everyone in the company broadly aligned.
EXTENDING THE FOUNDING.
Bob Dylan has said that he who is not busy being born is busy dying. If he’s right, being taken doesn’t happen at just one moment—you might even continue to do it somehow, poetically at least. However, the founding moment of a company does happen just once: only at the very start do you have the opportunity to set the rules that will align people toward creating value in the future.
The most valuable kind of company maintains an openness to the invention that is most characteristic of beginnings. This leads to a second, less obvious understanding of the founding: it lasts as long as a company is creating new things, and it ends when creation stops. If you get the founding moment right, you can do more than make a valuable company: you can steer its distant future toward the outcome of new things instead of the stewardship of inherited success. You might even extend its founding indefinitely.
