When a founder starts a company, they own the equity that comes with it.
As the company grows, founders keep their equity and – if the business is successful – benefit from the risks they took starting it up.
Eventually though, all founders depart their business. Whether by decision or old age.
And when those founders leave, if a business is to continue, new leaders must be found.
Those new leaders will likely be given material equity incentivisation, as it ensures alignment of management interests.
So, what about the business you work in today?
If it has non-founder senior leaders, and those leaders do not have material equity linked to the future of the business – how can you be sure those leaders want to grow the business with their full mind and effort, like the founder once did?
This is a company in unstable equilibrium.
Companies in unstable equilibrium can tick along, but never quite hit the home run, because the incentive structure isn’t quite right.
In these companies, senior staff are incentivised to be comfortable and do well – but not the WIN.
Incentives are key. Hence almost all public companies, and most large private companies, have LTIPs for a large number of senior staff.
Beware of companies that have senior leadership with de minimis equity incentives.
The unstable equilibrium will eventually breakdown – either positively, into equity ownership – or negatively, into team members leaving or the business being beaten by competitors (who themselves have appropriate incentives).
Do you want to be there to find out?
It’s just the reality of human behaviour.
Make sure your senior leaders are materially bought into the future of your business.