Grooming Leadership

Equity. That little word inspires a range of emotions, from motivation to territorialism to profound pride. Sooner or later, most entrepreneurs--and their senior-level employees--have it on their minds.

The game goes something like this: You start a company and reach a certain level of success. Then you start wondering how you can inspire more accountability and keep your best people. At the top of that list of ideas is usually equity. At first glance, it seems free or even a net cash positive if you sell it, but, in fact, it's the most expensive thing your business owns. Even the most lavish bonus you can imagine for your top performers pales in comparison to the cost of ownership.

So why consider it? Think back to your days as an employee. Most entrepreneurs will admit that no matter how much they thought they cared about their jobs, it was only a fraction of the dedication they have toward their own businesses. Sharing equity with your top leaders gives your team something to work toward and ties them to the company like nothing else. Without equity, if the company completely tanks, the worst thing that can happen to an employee is they have to get another job. Owners don't have that luxury. Responsibility is a powerful motivator.

The Motivation: Are You Giving or Receiving?
I've seen companies share equity with great results. I've also seen others do it in haphazard--and in the end, costly--ways. I asked a few successful entrepreneurs for their perspectives, as well as some employees on equity tracks. Here's what I found:

Why entrepreneurs want to give equity:

• To deepen accountability in their next-level leadership
• To share the workload
• To increase growth by freeing up their time and creating incentives for revenue generation from others
• To build a future path for the company and a potential buy-out for the entrepreneur
• To keep the company's top talent

Why employees want to receive equity:

• To gain recognition for hard work and tenure
• To gain financial rewards, such as dividends, proceeds from selling the company and job security
• To gain the power to make decisions
• To gain the status and prestige that comes with being a partner

None of these responses probably come as a surprise, but what is apparent is the difference in motivation between the groups. Entrepreneurs want to give equity so their people do more; employees want equity so that they receive more. This is an important disconnect that must be addressed before any equity plan is in place. If you expect more from a partner, you must tell your targeted employee that from the outset. And employees must understand that partnership has responsibilities that far exceed what they've experienced to date.

So when do you consider giving equity? In my experience, it's not a matter of when but of whom. A common refrain in business is that everyone is replaceable. But in reality, some people aren't. Without them, the company would be changed forever. I compare it to "Lost Founder's Syndrome" in the technology industry--when investors take the founders out of a company to bring in new management, and it's as if the company stopped breathing.

When considering equity, think of those chosen few who are the heart and soul of your company. People come to work for them. Clients always request them. You lean on them for honest guidance. Giving equity should feel right. Anyone in the "maybe" category should be tabled for consideration later.

The Big T's of Equity: Trust and Tenure
The two factors most important in selecting a new equity partner are trust and tenure. Trust is obvious: Do you want your future tied up with this person? Do they live their life with the same ethics you do?

Tenure, however, is trickier. I've seen five to seven years as a guide for how long you want to work with someone before offering equity. Lots of things in life can change a person's performance and several years usually provide a good picture overall. Sometimes an entrepreneur may offer equity to someone from the outside. In this case, it goes back to the trust issue: How well do you know this person? And, most important, what do they have that you can't get from an employee?

Finally, it's an interesting paradox that often the people we most want to give equity to don't demand it. In my opinion, it's a character issue. The best people aren't afraid to prove themselves before asking, whether they're coming from inside or outside your organization. They are also prudent enough to evaluate you and the company in return to see if they want to be your equity partner. That's a sign of good judgment--an important quality in an equity partner.