Sunday, October 01, 2006

It's All About Equity

Got some great news on Friday. A friend of mine (and we already have an established track record of successful work integration together) extracted herself from her job last week, and wants to be a part of Livingston Communications. How cool is that?

Best part is she’s a brilliant, experienced Internet marketing person, and can really ground/direct the newly birthed WOMM/Internet marketing practice (yes, web language coming soon). Though income is needed, she knows it’s not guaranteed right now, but sees enough traction to believe, and can be flexible in exchange for a small piece of the pie. So I hope to get a letter together with the equity gift commitment on my part in the next week or two, vesting from her first anniversary through the second year. And Livingston becomes two full-timers.

This is a nice bridge: I figured a good value-added discussion for start-up fans would be equity strategy. Having received the bait and switch on equity in three different past entities, I can only tell you that equity makes for quite a contentious conversation.

First of all, everybody wants it. The desire to have equity is not logical to some extent, it’s fantasy. To be a part owner, to live the American dream, to call your relatives and friends to say, “I just got made partner!” This irrational desire for equity coincides with my past experiences as an employee.

Right now, any conversation I have with someone about working with me involves how they can become a partner. This is fine, as I have a reality based view of what my equity is worth… not much. The truth is five months in there’s enough to eat, but not enough to greatly profit. That means my valuations are still start-up specials. However, the upward trend is beyond the normal bell curve, and this will only get better. So people see the potential, and want a piece of it.

To get equity you must give something for it. Sweat equity in this case, plus bring to the table a valuable skill set that’s beyond mine. At the same time, I realize I don’t have full-time office space yet, bennies aren’t great, 401k are you kidding me? No, equity is the trade off.

Let’s talk what the equity is really worth. Hypothetically speaking, say its five percent. Another communications company decides to buy me at 1.5 million just as I am getting past 10-12 people. Our five percent equity holder gets $75,000. That’s not bad, but you’re not going to retire on it, plus you busted your %&^ for three years to get there. No, I think equity is a good trade off for a senior player’s retirement and bonus package in the early game.

Now, I had one experience where management offered me three percent, then wanted me to pay for it, didn’t give me a bonus for the holidays or a raise for one-year, never showed me the books, then jerked me around for months on fulfilling the paperwork while they tried to push me a) out of practicing marketing b) with the hope of getting me to produce more sales. They thought the promise of equity was enough to make me stay. Wrongo, buddy.

First of all, after a few months, I stopped believing they would ever produce the equity, and even if they did, the unsaid bait & switch was not worth it. Secondly, they overvalued their equity. Keep in mind, they were in the same business, where the usual sale is not much more than $2-3 million, if that. This is not Internet software for web 2.0, so we’re not talking great valuations. To me the promise of partnership was nice, but not everything these folks thought it was. I was already savvy to the real value of their equity. Three, I know how to get companies jump-started after four different start-ups in my career, two of which I was in some sort of BD role. That’s the problem with people that really know how to sell: They know they can do it for anyone, including themselves. One plus two plus three equals Goodbye.

Equity really equals control and a guaranteed percentage of profits. If you give someone too much equity you lose management of the company. My goal is to allow people to be a part of the game, but not give up the CEO role. Everytime I see this happen, it causes fights. Two or three controlling interest partners equals trouble. Someone has to be the boss. Therefore, I ultimately intend to keep 3/4 to 4/5 of my equity.

So my strategy is to bring the right people on board to grow this thing and offer great service. Equity is a means to achieve this worthwhile goal. I will make my legal arrangements up front so there’s no question about terms, or used car salesmanship with baiting and switching. There will be a reasonable period of time before vesting so we can all make sure it works.

Long entry, so no more for now. Monday’s quotes are:

“If brand value is diminished, equity is reduced and the magic equations that make tent-pole pictures possible begin to melt away.”
-Peter Bart

“The gambling known as business looks with austere disfavor upon the business known as gambling.”
- Ambrose Bierce

“This desire for equity must not lead to an excess of welfare, where nobody is responsible for anything.”
- Jacques Selors


Blogger Josh said...

Great post. I'm in a similar position in terms of discussing potential equity with a new employee. Nice to see your thinking laid out. Your transparency is impressive.

3:33 AM  

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