Wednesday, May 4, 2011
In earlier blogs, I mentioned that it is important for businesses to “guard” company equity. While I still maintain that, at times, this is important, there are also times when it is critical that prospective investors and employees be rewarded with equity. Here are a few times:
Angel/initial round raises. Many entrepreneurs get so focused on company valuations (when there is not even a proven business model) that they lose out on investment capital due to company valuations being too high. In addition, entrepreneurs sometimes turn away investors because they think that they have raised enough capital and they do not want to dilute the company shares.
Employees rewards. Many company founders are stingy with stock options for employees. Again, they feel that they do not want to “dilute” the company value with option shares. What entrepreneurs fail to realize is that stock options tend to keep the employees dedicated. And, dedicated employees are usually the sole reason for a company’s success (or failure). I can think of numerous examples of companies that did not include employees in option rounds and ultimately failed.
I still maintain that companies need to guard equity in situations where a company is strong and profitable. However, for companies that are just starting out, founders may want to share the wealth – because 100% of zero is….zero!