VESTED INTERESTS
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 orient people toward creating value in the future.
However, for equity to create commitment rather than conflict, you must allocate it
very carefully. Giving everyone equal shares is usually a mistake: every individual has
different talents and responsibilities as well as different opportunity costs,
so equal
amounts will seem arbitrary and unfair from the start. On the other hand, granting
different amounts up front is just as sure to seem unfair. Resentment at this stage can kill
a company, but there’s no ownership formula to perfectly avoid it.
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
company-wide email that lists everyone’s ownership stake would be like dropping a
nuclear bomb on your office.
Most people don’t want equity at all.
At PayPal, we once hired a consultant who
promised to help us negotiate lucrative business development deals. The only thing he
ever successfully negotiated was a $5,000 daily cash salary; he refused 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
born doesn’t happen at just one moment—you might even continue to do it somehow,
poetically at least. The founding moment of a company, however, really does happen just
once: only at the very start do you have the opportunity to set the rules that will align
people toward the creation of value in the future.
The most valuable kind of company maintains an openness to
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 create a valuable
company: you can steer its distant future toward the creation of new things instead of the
stewardship of inherited success. You might even extend its founding indefinitely.
THE MECHANICS OF MAFIA
S
TART WITH A THOUGHT EXPERIMENT
: what would the ideal company culture look like?
Employees
should love their work. They should enjoy going to the office so much that formal
business hours become obsolete and nobody watches the clock. The workspace should be
open, not cubicled, and workers should feel at home: beanbag chairs and Ping-Pong
tables might outnumber file cabinets. Free massages, on-site sushi chefs, and maybe
even yoga classes would sweeten the scene.
Pets should be welcome, too: perhaps
employees’ dogs and cats could come and join the office’s tankful of tropical fish as
unofficial company mascots.
What’s wrong with this picture? It includes some of the absurd perks Silicon Valley
has made famous, but none of the substance—and without substance perks don’t work.
You can’t accomplish anything meaningful by hiring an interior decorator to beautify
your office, a “human resources” consultant to fix your policies, or a branding specialist
to hone your buzzwords. “Company culture” doesn’t exist apart from the company itself:
no company
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