Equity does not equal sense of ownership

Equity != Sense of Ownership

A lesson I learned the hard way in my first startup: Giving someone more equity in your company does not mean they will act more like an owner. Some of the best people I’ve hired had relatively little equity. But they took ownership. The painful part, is that I’ve given big equity stakes to people who didn’t end up acting like owners.

Entrepreneurs have to resist the urge to give someone more equity to make that person feel more like an owner. A sense of ownership is not linearly correlated to equity. It’s a binary property unique to that individual. For some people this is a very small amount of equity. For others, no matter the amount of equity they will never act as much an owner as others.

How employee equity and ownership really work

Implications

  • Find the amount of equity that makes someone act as much like an owner as they will act. This is more of an art than a science.
  • Everyone has a natural high and low amount of ownership they’ll feel. This is hard to change or move.
  • People who exhibit high levels of ownership are worth generous equity because they make everyone around them act like owners as well.
  • Good cultures reward this behavior. Founders and boards should give these sorts of employees additional equity grants as a gesture of thanks. It won’t make them act any more like an owner (after all, they’re getting the additional grant because they act like owners anyway) but it will send the right message to the entire company. This also makes it easy to start people off with lower equity packages and decide on the job who actually acts like an owner.

And for employees, instead of quibbling over small equity grants, find a company that rewards this sort of behavior and act like an owner. This will yield far more personal gain to you than a hard fought negotiation when you’re being hired.

3 thoughts on “Equity does not equal sense of ownership

  1. I think it’s more about finding the kind of people who can and will act like owners than it is about finding a certain amount of equity. Some folks act like owners with zero equity — reward them with some — and others will never act like owners no matter how much equity/money/whatever you give them.

    1. Michael, I mostly agree with you. Finding people who act like owners is key and some people won’t act that way no matter how much you give them. The only thing I’d add is that most people fall somewhere in between 0 and never. It may be that if you give them 0.5%, that is the psychological trigger they need to feel like an owner. For others it may be 1%. For some people even 5% isn’t enough.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s