Equity and Control

(Source Institute) #1

“It’s also how much ownership you are giving them, are you willing to give everyone a 25% share if they go in on this vision… if you only want to give them 1% you might have trouble getting them to execute your vision.”
-Teddy Ruge, Founder of Raintree Farms, Co-founder of Remit.ug and Hive Colab

Equity structures can make or break a company. The right incentives can motivate every member of a team to do their best, the wrong ones can motivate them to not do anything. There’s a lot at stake when you’re making these decisions – they will deeply affect the company in the future. Both Teddy Ruge and Edmand Sharita found equity structures at the core of their early failures, and later successes.

##The Risks of Equal Shares

“They were working and I wasn’t. I began complaining, struggles were beginning to come in, one thing that drove us was that we had a dream and were friends.”
-Edmand Sharita, Founder of Kamata, Africa Prize shortlist

Both Ruge and Sharita began their companies giving a fixed percentage of shares to their partners. Both slowly realized that this created a series of problems. For Ruge, he found that giving too little meant not getting the kind of time and energy he needed from them. For Sharita, giving equal shares meant that each partner didn’t have clear responsibilities. Without a boss at the top to direct things, it became more difficult to resolve disagreements or punish anyone for not performing.

“Because you are equal shareholders, it’s difficult to force them because you’re not their boss. I’ve had that challenge I think it depends on how you write your articles of incorporation. There needs to be a non-performance clause where you cede your shares.”
-Teddy Ruge, Founder of Raintree Farms, Co-founder of Remit.ug and Hive Colab

Sharita began Kamata with a group of friends. They all began with equal shares, as the company wouldn’t make money for some time, they needed to survive in the meantime. Their solution was to have Sharita work on the company while the rest of them worked other jobs to support him. Sharita saw that very quickly their motivation began to decline. With him working and them not doing very much while supporting him, resentments grew.

At this point, progress was slow and team members were arguing often. However, there was no recourse. There was nothing Sharita or anyone else could do to punish a team member who wasn’t performing. What’s more surprising is that these were old friends, but even those ties were not enough to overcome the bad set of incentives created by their equal shares in the company. But then Sharita attended a series of Source workshops in Accra and saw there was another way.

##Alternatives to Equal Shares
In Accra, Sharita learned about vesting. This system allows partners to agree in advance that their shares are earned over time, or based on performance. When he returned, Sharita explained that the value of Kamata, and thus the value of everyones shares, was dependent on their performance. He was decreasing the shares of the other partners in the company. What happened amazed even him. The motivation of the other partners increased significantly. Suddenly they had a strong incentive to work harder, so they did.

“It was done and guess what happened, it was as if I had increased their shares, because they knew if they did not deliver the little they had would go away.”
-Edmand Sharita, Founder of Kamata, Africa Prize shortlist

Now vesting may not be legally possible in many parts of Africa, but the idea behind it is more important than the legal structure itself. Building a team has to start with a serious discussion about expectations and incentives. Equal shares can be an excuse to postpone those important conversations. Equal shares often creates disincentives to work hard.

“I realized there’s more to team building than the product itself.”
-Edmand Sharita, Founder of Kamata, Africa Prize shortlist

Ruge turned to non-performance clauses and found similar results. When team members knew that they would lose their shares if they didn’t meet expectations, they met expectations.

“Your priorities might be different, so it might not be laziness but you just have different priorities.”
-Teddy Ruge, Founder of Raintree Farms, Co-founder of Remit.ug and Hive Colab

Control and equity structures often reflect the relationships between founders. If the founders don’t communicate openly expectations, share the vision, or have clear roles, the structures often reflect that and become overly simplistic.

Both Edmand and Teddy found that once expectations and incentives are clear, it’s easier to speak in those terms. If one partner feels they don’t have the right incentives to work hard on the project, they can start an open conversation about it. This depersonalizes this aspect of the team. Instead of talking about how one member is lazy, you can speak about expectations and incentives.

Can you relate to the stories we told here? How is your experience different? We’d love to hear from you. Your questions and comments are what will help us make better lessons in the future.