Over the course of my career, I’ve had the privilege of watching the ups and downs of quite a few companies born in Silicon Valley. We are in an era where founders have a unique opportunity for tremendous wealth creation. With such an opportunity comes significant responsibility; a duty to be selfless and shy away from instinctual greed.
It seems like every day we can open our devices and read news about another nine-figure valuation and the minting of another billionaire.
I also hear stories about entrepreneurs who I believe have taken their eye off the big prize by thinking small. The stories have a familiar ring to them in that they involve a founder or founders who keep most of the equity in the firm to themselves with the hopes of both becoming rich and maintaining control of their company. Even when they bring on investors, their focus immediately becomes about “diluting” their equity position.
What concerns me about these stories is that the founders seem overly focused on keeping control of what we might call the “equity pie,” where they want to control how big of a slice anyone else gets, rather than on the real opportunity ahead of them which is growing the size of the pie itself.
My point is that founders who are so focused on controlling, say, 90 percent of the equity in their company might not attract the best and brightest talent, let alone investors, they need to achieve the necessary escape velocity required to go public or become a viable acquisition candidate. And without that collective effort, that 90 percent of equity might just add up to $0 in the end.
This is a lesson that is near and dear to my heart. When I started Ariba with my co-founders, for example, many people — including my CFO — were shocked that I wasn’t taking more equity in the company at the start. After all, the CEO usually receives the lion’s share. But it was my philosophy from the start that it would never be just me that made that equity worth anything. We needed to create the best team if we wanted to truly make it as a company — which is exactly what we did.
But not everyone gets the logic of this message. In the early days of Ariba, we even lost a young engineer because he was focused on the wrong targets. The engineer, let’s call him Bob, had received a competitive offer from another firm. He told Ed Kinsey, our CFO, that unless he received 5 percent of the equity in our company, he was going to take the other offer.
To his credit, Ed was patient with Bob as he asked why Bob, who was fresh out of school and had little experience, felt like he was worth such a sizable stake in our business. Bob explained that the offer he received from the other firm was worth more money, so he figured receiving equity from us would balance that.
Ed agreed that Bob should receive some equity as a reward for staying, but it would be more like 1 percent, which was a very generous offer, rather than 5 percent. Bob fought back: he had it in his mind that he was worth the full 5 percent.
That was when Ed tried to explain the pie analogy: Bob should worry less about the percentage he owned than the value of the pie as a whole. Unfortunately, Ed’s message flew right over Bob’s head, so he decided to take the other offer and leave Ariba. A few years later, after Ariba had its own successful IPO, Ed decided to conduct a little math experiment: he was curious about how much money Bob had actually left behind when he turned down Ed’s offer. When Ed did the math, he figured that Bob would have made close to $30 million if he had taken his “measly” 1 percent offer to stay at Ariba.
The lesson when it comes to equity: don’t be greedy. Rather, keep your eye on the real prize — how you can help grow the size of the pie in a way that everyone wins.