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May 29th, 2017 Share: Share on Twitter Share on Facebook Share on LinkedIn

The Equity Paradox (Keep It and Give It Away)

I recently read this:

Startup founders generally have only ideas, charisma, and equity to work with. Ideas and charisma are cheap, but equity is expensive. To make a startup work, the founder has to divvy out parts of the business at just the right rate to keep everyone happy until the product is a success. Give away too much of your company too soon to a venture capitalist, to your co-workers, or even to yourself, and you risk running out of distributable shares before the product is done. And that probably means the product won’t be done. Ever.

This advice is what I tell entrepreneurs all the time — as all too often I come across founders who are not thinking strategically about their equity and either give away too much too early (a common trap are the folks who go from accelerator to accelerator, forking over 5–10% of their equity each step along the way) or hold on to it too tightly. As herein lies the paradox:

As a founder, your job is to keep everyone else happy by giving away your company. Give it away carefully, but give it away, because not doing so guarantees you will be the majority shareholder in a worthless enterprise.

As a founder, your function is to manage the distribution of your own holdings so that you end up with fewer shares but more wealth. The idea is to end up with a thinner slice of a thicker pie. Which requires strategic thinking and long-term planning.

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