It’s the holiday season and that means pie. There is apple pie, pumpkin pie and even mincemeat pie. There are two truths about pie. First, no one wants to finish the pie so the final piece keeps getting smaller by half and half again until only a forkful is left. Second, when the pie is gone, it is gone. There are no “negative pieces of pie”. There are no pie I.O.U.’s. Once the pie is gone, the party is officially over. And, the best pies go pretty darned fast.
This is an issue that many companies, especially start-ups, have trouble with. I often work with companies that have eight or ten senior employees all of whom believe that 10-15% of the company is a reasonable request. This is especially true if it is a company that is unlikely to have at least a nine-figure value once things are settled. People do the math and realize it will take a big piece of the company to make the millions of dollars they aspire to. And, of course, they feel they deserve it.
Here’s the problem, there is always enough of a bad cherry pie to go around. No wants more bad pie. But, for companies the opposite is true. There is never enough low-valued company to go around. Everyone wants a huge piece to make up for the limited potential. This is often exacerbated when employees calculate “their share” while ignoring the portion held by founders and investors.
There is usually more than enough to go around if everyone understands how things work. The goal is to make a great pie, because even a tiny slice beats a huge slice of a bad one. The solution is early honesty and realistic expectations. It is critical to be up-front about the potential value of the company and the risks that are involved. Most importantly, communicate early, get professional assistance and put it in writing. Just like no great pie is baked without a recipe, your equity programs will fail without clear and specific documentation.
Dan Walter is the President and CEO of Performensation an independent compensation consultant focused on the needs of small and mid-sized public and private companies. Dan’s unique perspective and expertise includes equity compensation, executive compensation, performance-based pay and talent management issues. Dan is a co-author of “The Decision Makers Guide to Equity Compensation”, “If I’d Only Known That”, “GEOnomics 2011” and “Equity Alternatives.” Dan is on the board of the National Center for Employee Ownership, a partner in the ShareComp virtual conferences and the founder of Equity Compensation Experts, a free networking group. Dan is frequently requested as a dynamic and humorous speaker covering compensation and motivation topics. Connect with him on LinkedIn or follow him on Twitter at @Performensation and @SayOnPay.